Friendship is hard

Today during the Whirled Trade Organization's meeting in Lexington, we learned just how difficult it is for important issues to get resolved. The most eye-opening moment was when we debated a resolution for a half hour, only to have it voted down immediately after entering voting procedure. I had done Model UN a lot in high school, but I had only ever represented countries. It was interesting to see how different it is to be representing an interest group because their goals are so single minded. As GM I was obviously expected to have opinions about the resolutions that were relevant to the automobile industry and free trade, but I had to keep in mind that corporations try to be as neutral as possible so that they don't alienate any potential costumers. I had always hated people who abstained from voting because I thought that their abstention was a product of their lack of research, or because they just really enjoyed messing up a vote. Representing a corporation meant that the majority of my votes were abstentions; there was no way that 1 person can represent a whole company in something as divisive as GMO's or international policy. It was hard not to put in my own opinions and stick with a corporate script, but having this different perspective relieved a lot of the pressure and allowed me to really enjoy the insane debates that took place without pressure of having my vote actually count.

GM Position Paper

As evidenced by the US Korea Free Trade Agreement, GM is an adamant supporter of free trade. It provides an opportunity to sell to markets that haven’t been previously reached. In 2009 South Korean automakers sold 500,000 vehicles to Americans, while US auto companies only sold 6,000 in South Korea. In 2013, however, Koreans bought 156,497 American cars, which can be seen as a success for free trade. Obviously GM has faced some tough times, but with the progress we’ve seen since the bailout, we’re excited about the prospects of free trade and being able to introduce our timeless and dependable vehicles to a new type of international consumer. This loyalty to globalization and increasing its efforts means that GM whole-heartedly agrees with points I, II, V, VII. GM thinks that banning non-tariff barriers would be the best way to encourage free trade because it makes sure that the playing field is equal for all automobile companies.  It’s important for everyone involved in the automobile industry to acknowledge the need for innovation in order to meet the changing global demands. GM has put a growing emphasis on electric vehicles like the Chevrolet Volt and Spark, with the Volt being the world’s first modern range extended electric car, in addition to the clean turbo diesel in Chevrolet Cruze. These smaller car options have sold incredibly well over seas, which would be impossible if there were NTB’s in place to stop international companies from coming into these markets. The international community needs to embrace free trade so that all different types of industries can have room to grow. With free trade, GM can not only increase their sales but also help foster international development by creating jobs in countries that were hit by the Great Recession. GM has been successful in opening factories in countries like Korea, Mexico, India, and Venezuela, which make it cheaper for those countries to buy the cars that they want from GM. GM, however, cannot support IV, because the automotive industry relies on subsidies in order to help the progress of important areas like electric vehicles. Subsidies provide incentives to buy electric and clean diesel vehicles. If the electric car market fails this early, there the future of clean fuel will look bleak because future car providers won’t want to risk their profits even if it’s for the good of the environment. Many countries need these subsidies in order for the automotive industry to even exist. China subsidizes their local automakers in order to create an auto industry that could potentially be a rival to German and American automakers. In 2013, 22 publicly traded Chinese auto makers received 4.59 billion yuan ($736 million), which was up 76% from 2011. BYD, which is backed by Warren Buffet is a major contender in the electric car and battery business and needs these subsidies in order to remain relevant in the Chinese economy after it’s net profit dropped 90% from 98 million yuan to 12 million yuan. Stopping subsidies will only harm the auto industry, which will then means that free trade won’t be able to expand as fully as it can. GM cannot support the proposal to stop subsidies, but we’re confident that a steady compromise can be reached that recognizes the importance of environmental inspired financial help.

*Disclaimer: GM has no official position on GMO's, and thus cannot provide an opinion on III*

Foreign aid shouldn't be seen as a controversial topic, but it tends to be. No one agrees that just throwing money at a problem makes it better, so why do we take this approach with countries? There have been many failures when it comes to foreign aid, and people use that as an excuse to argue for the end of foreign aid. As William Easterly points out, the reason that foreign aid fails is because the countries that fail don't have good existing policies in place to help allocate the aid that they receive. Most countries that get the aid are failures, but Easterly comments that they aren't called failures because the integrity of the foreign aid program would be compromised if the public knew how much foreign aid is unaccounted for. Governments and NGO's need to be more selective in giving aid in order to create a system where countries will be rewarded for their dedication to progress. Selectivity may seem cruel, but countries begging for money is even crueler because it debases their people. As this picture from Humans of New York points out, it's horrible to demote a whole country to their aid status because what they need is some faith and investment. Aid doesn't always work, and there needs to be something more than a one size fits all policy, but there's hope for every country with the right amount of legislative change.

The Banker's New Clothes

The Banker’s New Clothes does something kind of incredible. It manages to explain banking in plain English, with examples that anyone can understand. While the Great Recession seems likes something that can be explained rather easily, the aftereffects and actions we must take to prevent the next meltdown might not seem so people friendly. Even better Admati and Hellwig are able to cut through the financial jargon and rhetoric in order to show people why Wall Street isn’t working, and why we aren’t taking the necessary steps to fix it. The Banker’s New Clothes starts with a quote from former French President Nicolas Sarkozy criticizing banks for taking the risks that led to the financial meltdown. If Sarkozy felt so strongly about this, one could infer that France then took the incentive to crack down on banks and their risky lending behaviors. Admati and Hellwig are quick to point out their hypocrisy; because French banks have been a major focus of concern in the European crisis since of they have very little equity and a lot of short-term funding. This was one of the reasons why Dexia, a French-Belgian bank, had to be bailed out twice in 4 years; their equity was less than 2% of their assets after the first bailout which was depleted after September 2011, and was then unable to deal with the Greek Crisis in October leading to the second bailout.  Admati and Hellwig become very critical of these situations because they know that it could’ve been prevented. Banks continue to argue that any regulation is “expensive” and would diminish their growth. Admati and Hellwig see this a bugbear saying, ““When bankers complain that banking regulation is expensive, they typically do not take into account the costs of their harming the rest of the financial system and the overall economy with the risks that they take. Public policy, however, must consider all the costs and not simply those to the bankers” Admati and Hellwig see this and the new “regulations” as the apt named Bankers New Clothes, which stems from the story The Emperor’s New Clothes. This is what Admati and Hellwig say has been happening in the banking world, the new so-called regulations are leaving banking naked, but no one is courageous enough to say anything. Admati and Hellwig propose to break up big banks, because they reach a point where they’re unmanageable and inefficient since they’re more subject to governance and control problems. Retail banking in Germany, deposits and small-business lending, is dominated by banks that are active only locally, in particular savings banks in public ownership so they weren’t hit as hard during the crisis. It was only the public banks that suffered and became a liability in the economy.

Part of the reason this book is so successful is because it takes banking examples and uses the example of a woman named Kate to explain them. For example, if Kate buys a $300,000 house and her down payment or initial equity is $30,000, a subsequent drop of 10 percent or more in the value of the house will wipe out her entire equity and leave her underwater. By contrast, if Kate invests $60,000 as a down payment, she will lose her entire equity only if the price declines in value by 20 percent or more; otherwise she will continue to have equity in the house. A bank usually only has about 5% equity so any drop in the value of assets really endangers the bank’s solvency.  What bankers don’t like about capital regulation, though, is that it’s “expensive” the manner I quoted before. These liquid assets don’t acquire interest, so the banks see it as a loss, but in reality it would incentivize investment because the risk that would usually be on the creditors and taxpayers would now be on the bank. This book’s views might be seen as rather controversial, especially to bankers, but I think that their controversy will lead to a more open discussion on compromise that will incentivize people to learn more about the economy and stop their fear of confronting Wall Street.

Tuppence

The first memory I have of figuring out the financial system was while watching the movie Mary Poppins. The children's father, George Banks, works at Fidelity Fiduciary Bank, and he tries to get Michael to invest his tuppence in the bank. Michael refuses to and inadvertently causes a bank run.

In class, we haven't had much of an opportunity to discuss what panics are, or how they happen, but this clip gives us a pretty good picture of what it would look like. As Krugman explained in his book, when you put your money in a bank, the banks end up lending your money to others. They expect interest on the loan so that you get back your money and they get to make money on it. Banks do keep a fraction of the money in reserve, but not enough to give everyone their money back. A bank run says that everyone who has money in this bank asks for their deposits back at the same time, in which case could cause a bankruptcy because it runs out of cash in its supply and can't ask for the loans to be repaid immediately. Ben Bernanke states that the crash of 1929 was mostly attributed to bank runs because people were convinced that their money wasn't safe, so they pulled all their money out prematurely which caused the banks to collapse (a self fulfilling prophecy). People tend to be flighty and panicky when it comes to money, and as we've touched upon in class animal spirits is what helps drive the panics because their panic causes a domino effect. Japan and Korea are good examples of this animal spirit driven economy; during the Asian Crisis, people were pulling out from countries like Thailand, Malaysia, and Indonesia because of their weak banking system and economics uncertainty. Korea and Japan, however, had relatively stable economies that could've been untouched had it not been for western banks premature panic; they grouped all of Asia together and ended up being the cause of the Korean economics crisis. It's important to remember that no matter the perceived strength of the economy, finance is a game of chance. Things can come crashing down as quickly as they boomed, and panic will be the only response. 

Disinflation vs Deflation in the Current Economy

On a brief sidenote, in class we discussed inflation and deflation. While we agreed that both were bad, it was discussed that deflation was the worse of the two because no one would spend any money, since prices would be going down every day leading to total economic collapse. On a video from Bloomberg News, panelists discuss the disappointing week I discussed before and whether or not it would lead to deflation. Michael McKee from Bloomberg news says that it isn't deflation, it's disinflation which is the rate of inflation. This completely changes the landscape; deflation is obviously a greater cause for alarm than disinflation, but they both are a cause for concern. The panelists chalk this week up to market over reactions and that they expect Europe to bounce back. While Trish Regan smartly brings up the deflation of crude oil and lowering of energy costs/prices both Michael McKee and Monica Dicenso make it an opportunity for the consumer to turn around the market because they'll have more spending money, in this way firms (excluding energy firms) that aren't affected by exports will also benefit. As Trish Regan remarked, "It's like one big giant tax cut for everyone".
Bloomberg Video

A Very Bad Week

In the past week, Wall Street traders held their breath, hoping that a new recession wasn't in the cards. On Wednesday British and German stocks fell 3%, Greece fell 6%. Everyone's eyes then looked towards the US stock market. The indicators didn't look too good, retail sales, the producer's price index, and the manufacturing report were all disappointing. Interest rates on the 10 year bond fell more than 16% to an interest rate of 1.86. This type of volatile market is not a good sign for the global economy, with the Great Recession still fresh in everyone's minds. It's easy for the US to panic, but they need to remember their position among the world. Europe, save Germany, wasn't doing very well in the first place, and the Eurozone hasn't been able to recover from the Great Recession as well as the United States has been able to. The biggest elephant in the room, though, is Ebola. The Andrew Ross Sorkin wrote that it's almost impossible to model the economic consequences of this disease. In a normal model, it is assumed that the people are rational, but during an epidemic people's rationalities will be called to question, and an accurate model would be hard to make. The reason that the US stock market was so volatile in the past week also has to deal with the rise in the value of the dollar. As we discussed in class, this rise in value makes it more expensive for foreigners to buy American goods which will hurt net exports lowering GDP and the producer's price index/manufacturing report. This does hurt the economy, albeit just slightly. An upside to this lower price is the fall of gas prices, which means that consumers will have more money to spend. The US economy is stronger than the European's or Asian's, while this week has been a scary one in terms of markets, it'll go down as just another volatile week, not a major setback.
The New Republic