Bloomberg: BRICs Biggest Currency Depreciation Since 1998 To Worsen
CNNMoney: Will China’s Real Estate Bubble Burst?
FT: China Manufacturers Face Fall in Demand
FT: Chinese Manufacturing Hits Nine-Month Low
FT: China Moves to Lift Property Market
FT: Chinese Property Market Rebounds
FT: Fate of China Property is Global Concern
HSBC: HSBC China Manufacturing PMI
National Bureau of Statistics of China: Sales Prices of Residential Buildings in 70 Medium and Large-sized cities in July
Reuters: China Factor Surveys Signal Economic Growth Easing into Q3
WSJ: Murky Outlook for Dim Sum Market
WSJ: Wage Rises in China May Ease Slowdown
WSJ: Yuan is Luring Bets of a Drop


China’s Economy Shows Signs of Strain

Recent economic indicators show that China’s economic growth was much slower than expected in the first half of this year, and analysts predict that gross domestic product (GDP) growth will slow again next quarter to somewhere below 7.5%—GDP grew 7.6% in the second quarter. Two important issues affecting the Chinese economy are: (1) increased government restrictions in the housing industry, and (2) decreased demand for Chinese products. These relatively poor economic numbers have led the Chinese government to engage in economic stimulus measures such as interest rate cuts and increased spending on investment projects.


Concerns about a housing bubble (rapid increase in housing prices) in China’s developed cities have led the government to clamp down on the housing sector by prohibiting purchases of second homes, toughening mortgage qualifications, imposing residency restrictions, and increasing down payments on property. The housing market in China’s most developed cities, where housing prices are high, accounts for only 25% of the market as a whole. In the rest of the country (the other 75% of the market), however, housing prices are relatively affordable. Yet, government policies designed to correct housing prices in China’s largest cities are discouraging developers from building houses in the rest of the country because the policies lower developers’ profit margins, particularly in rural areas. Moreover, people are discouraged from buying homes due to purchasing restrictions, and many investors do not want to purchase new real estate when property values are on the decline. Decreases in home construction and sales hurt the Chinese economy because property construction accounts for 15% of China’s GDP, and about 10% of economic growth last year is directly attributable to the housing sector. Furthermore, reduction in property construction has a domino effect upon other industries, including steel, heavy machinery manufacturers, and the energy sector.

China’s manufacturing sector already faces tough challenges because demand for Chinese products is decreasing. In the first half of the year, wages for Chinese workers went up 13% from last year, and analysts expect wages to double by 2015 from 2011 levels and triple by 2017. Companies must increase the prices of their products to account for these wage increases. Consequently, many foreign consumers now order these goods from other Asian countries where wages and prices are lower. For example, Euro zone, American and Russian demand for Chinese exports dropped 30% this year. HSBC’s purchasing manager’s index (PMI) (number that is calculated based on purchasing executives’ responses to questionnaires regarding new orders, output, employment, suppliers’ delivery times, and stock of items purchased) for China’s manufacturing sector was posted at 47.6 in August, its lowest level since March 2009, and down from 49.3 in July. Any number below 50 indicates that the manufacturing sector is contracting. HSBC also reported that new orders for goods had declined along with the number of manufacturing jobs. If low demand for Chinese products continues, many more Chinese workers will lose their jobs, which could strain China’s domestic market because these workers will purchase fewer goods.

The Chinese government is introducing various policies to help address the problems in the housing and manufacturing sectors. To help the housing sector, the government has been subsidizing the construction of millions of apartments. However, somewhere between ten and sixty-five million apartments remain empty due to the government’s purchasing restrictions. Chinese Premier Wen Jiabao has also promised to give exporters a tax rebate to help ease the pressure on the manufacturing industry. Furthermore, the government has cut interest rates twice this year, approved numerous investment projects, and lowered the amount of money that Chinese banks must keep on hand. Such measures should encourage lending and development projects. Many analysts also predict that the Chinese government will employ monetary easing policies such as lowering interest rates on loans even further and increasing the money supply. This will make Chinese exports more affordable on the world market because the value of the yuan against foreign currencies will decrease.

Gold: An Alternative Currency for U.S. States?

Sources:

CNN: States Consider Alternative Currencies of Gold and Silver

Forbes: Comex Gold Rebounds Strongly on Bargain Hunting as Outside Markets Also Turn Bullish

Forbes: Competitive Currency Devaluations Support Higher Gold Prices

WSJ: Gold’s Fall Draws Coin Fans

In the wake of the U.S financial crisis and the continuing European debt crisis, the price of gold has climbed to all-time highs and the slightest dip in prices creates significant demand. The recent financial turmoil has led governments, central bankers, and investors to turn to gold as a safe haven for investment and protection against volatile financial markets. After years of decreases in gold reserve holdings (gold held by a central bank or nation intended as a store of value), global reserves are steadily on the rise. Despite the high price of gold, concerns about the global economy continue to drive investor demand.

Some U.S. state legislatures are echoing the concern, as thirteen states are exploring the possibility of introducing gold and silver coin currencies as alternatives to the U.S. dollar. Four years of economic turmoil coupled with the threat of spillover from the European debt crisis has generated a lack of confidence in the U.S financial system leading several states to explore alternative currency options. Legislatures have taken this unusual step to protect local economies in the event of a collapse of the Federal Reserve or the U.S. dollar. The argument in favor of gold and silver coin currency is rooted in the value of the metals themselves rather than a paper currency which derives its value from the guarantee of the issuing country.

Although the U.S. Constitution prohibits states from issuing or printing their own currency, they are expressly permitted to make “gold and silver Coin a Tender in Payment of Debts." Last year, Utah became the first state to introduce an alternative currency by making gold and silver coins issued by the U.S. mint acceptable forms of payment. The law provides that the coins may be exchanged at market value, rather than the face value (for example, a $50 American Eagle gold coin is worth approximately $1700). Several states have since followed Utah’s lead and seven states are considering broadening the scope of alternative currencies by introducing legislation that would allow the use of any gold or silver coin to be tendered based on market value.

Proponents of the legislation point to ongoing economic problems, lack of federal intervention, and—although highly improbable—the potential breakdown of the Federal Reserve System. State lawmakers further cite their obligation to protect their constituents’ economic interests where the federal government is unable to do so. However, those opposed to the legislation claim that alternative state currencies would debase the U.S. dollar by decentralizing U.S. monetary policy-making decisions and shifting power from the Federal Reserve System to individual states. Opponents claim that states are not in a position to replace or compete with the U.S. Federal Reserve System, which is a highly-evolved, complex oversight mechanism of U.S. monetary policy. While the practicality and outcome of recent state legislation remains to be seen, the issue is one with broad implications for the U.S. economy and currency.

Democracy and Financial Crisis Management

Sources:

ABC News: Detroit Can Avoid Emergency Manager

Michigan Public Radio: 7 Things to Know About Michigan’s Emergency Manager Law

NY Times: Looking Up Detroit Faces New Crisis

State Bar of Michigan: Michigan Supreme Court Orders Briefs Filed in December on Emergency Manager Law

State of Michigan: Emergency Manager Law

WSJ: Humbled Flint Forced to Take State’s Orders

While many states in the U.S. have laws that provide for emergency management of local finances in crisis situations, Michigan is setting a controversial new standard. Michigan law allows an emergency manager to assume the responsibilities of locally elected officials when a city or school district runs out of money or experiences a financial crisis. Like many states, Michigan’s legislation was modeled after New York City’s Municipal Assistance Corporation (MAC), which was established in 1975 in response to the city’s debt crisis. In the event of a financial crisis, MAC provided for the establishment of an oversight board to control of municipal finances. What makes Michigan’s law so controversial is that, rather than an oversight board or committee consisting of several members, emergency management powers are given to a single individual. As states across the U.S. face economic difficulties, Michigan’s approach may have far reaching implications.

The State of Michigan has been hit particularly hard by the Great Recession, industrial job losses, and a declining tax base. Major employers have either slashed operations and jobs or left the state entirely. As a result, Michigan has experienced a decade of job losses and increasing unemployment rates. Currently, four Michigan cities are under emergency management: Benton Harbor, Ecorse, Flint, and Pontiac. The City of Detroit is also on the verge of financial crisis with a $196 million deficit.

In response to growing financial concerns, Michigan’s legislature expanded the emergency management system in 2011. The new legislation broadens the scope of emergency powers and allows the emergency manager to take over responsibilities normally reserved for elected officials. Voters, local officials, unions, and civil libertarians have taken issue with Michigan’s approach to emergency management, claiming it is unconstitutional and contrary to the democratic process. In addition to budgetary control, emergency managers are empowered to void or revise contracts, modify pensions and payrolls, renegotiate loans, and hire or fire local government officials. The argument in favor of a single emergency manager is based on efficiency, accountability, and responsiveness. A single manager can respond to problems quickly as meetings and board approvals are unnecessary, the manager is fully accountable for his or her decisions and cannot hide behind the guise of committee or board majority votes. In a state where multiple emergency managers are appointed, budgetary constraints can be a consideration. Emergency managers are paid officials and they also have the ability to hire a support staff. Thus, unless other jobs are cut, the emergency management team can be an additional payroll expense for the financially distressed city.

While the debate continues, Michigan’s governor has asked the Michigan Supreme Court to render an expedited opinion on the constitutionality of the emergency manager law. In the face of this financial crisis, a tug-of-war between efficient, centralized powers and the constitutional protections of democracy is being played out at the local, national, and international levels. The crisis-driven centralization of economic power and limitation of democratic process presents an issue without a clear resolution. Perhaps the Michigan Supreme Court will provide some guidance.

Monetary Policy Disagreement Plagues the FOMC

Sources:

Federal Reserve: Minutes of the Federal Open Market Committee on September 20, 21, 2011

Forbes: Split in Bernanke’s Fed Widens, QE3 on Deck, FOMC Minutes Reveal

LA Times: Federal Reserve Minutes Show 2 Policymakers Wanted Bolder Steps

WSJ: Fed’s Pianalto-Monetary Policy Alone Cannot Solve All Ills

WSJ: Inside The Fed Fight Over Bond Buys

The Federal Reserve (Fed) is in the spotlight yet again. Just weeks after announcing Operation Twist, the Fed’s most recent attempt to lower long-term interest rates by selling short-term government debt and purchasing $400 billion in long-term Treasury securities, the decision has come under intense scrutiny. While economists continue to debate the effectiveness of Operation Twist, it appears that the members of the Federal Reserve Open Market Committee (FOMC) intensely debated the issue among themselves during their September 20 and 21, 2011 meeting. The minutes of the meeting indicate much disagreement among FOMC officials over what action, if any, the Fed should take to boost the economy. The dissention among FOMC members underscores the difficulties in implementing monetary policy measures in the current economy and the lack of consensus on how to address the U.S. economy’s problems.

The FOMC is the monetary policy arm of the Fed. All seven members of the Federal Reserve Board of Governors serve on the FOMC and five of the twelve Federal Reserve Bank presidents serve on a rotating basis, with the exception of the President of the Federal Reserve Bank of New York who is a permanent member of the committee. Though the FOMC only has twelve voting members, all Federal Reserve Bank presidents attend FOMC meetings and participate in discussions. Immediately after each meeting the Committee issues a single policy statement summarizing its outlook and policy decisions; however, the minutes of FOMC meetings are not published until three weeks after the conclusion of the meetings.

The minutes from the September 20-21 meeting are receiving so much attention because the FOMC is close to exhausting its available economic tools after repeatedly intervening unsuccessfully in the economy. Although differences of opinion are not uncommon within the FOMC, the minutes show the highest level of dissent among committee members in past twenty years, and reflect the conundrum in which the U.S. economy remains. The minutes reveal that three committee members dissented because they felt the Fed has done all it can and further intervention will hinder recovery. At the other end of the spectrum, two committee members felt the Fed should do more than just implement Operation Twist.

While the U.S. economy faces challenges not seen since the Great Depression, the stalwarts of U.S. economic decision making seem to be suffering from an identity crisis. The lack of consensus within the FOMC as to its proper role may undermine consumer confidence and fuel further recessionary fears. However, the diverse opinions of the divided committee may result in more creative solutions and better decision-making.

Wall Street Protests Part of Global Trend

Sources:

Economist: The Revolution Will Not Be Liberalized

Forbes: Occupying Wall Street from Liberty

NPR: Occupy Wall Street Gets Union Backing-Approval Rating Tops Congress

NYT: As Scorn for Vote Grows, Protests Surge Around Globe

Reuters: More Than 700 Arrested in Wall Street Protests

WSJ: Hundreds Arrested on Brooklyn Bridge

Across the globe citizens are taking to the streets in mass demonstrations with a wide spectrum of themes: from political and social repression, human rights, corruption, high unemployment, and discriminatory economic systems. The trend has resulted in significant governmental and political reform in Arab and African nations and now U.S. protesters have taken aim at the world of high finance—Wall Street. The Wall Street protests, organized by a group called “Occupy Wall Street,” point to the Tahrir Square protests in Egypt that recently toppled a decades-long dictatorship as their inspiration.

Members of Occupy Wall Street cite a host of gathering calls including income inequality, high unemployment, corporate greed, and suppression of the democratic process. On Wall Street in New York City, home to some of the world’s largest investment banks and financial firms, protestors are entering their third week of rallies, sleep-ins, and marches against the perceived corruption of Wall Street firms, corporate influence over the political system, and other social injustices. Despite the lack of a single cohesive message, the Occupy Wall Street movement has been spreading across the country to places like Boston, Seattle, Ohio, California, and Pennsylvania with rumors of more protests in other cities in the works.

Some observers are calling Occupy Wall Street a ‘national movement’ similar to those that have occurred in other parts of the world like Libya, India, Israel, Spain, and Greece. Libyan citizen movements resulted in the overthrow of an entire decades-old regime, Indian activists are exposing government corruption, and Israeli demonstrators continue to protest political and income disparities. In Spain, where the unemployment rate of 21% is the highest in the developed world, demonstrators are challenging the government to do more to ease economic suffering. In Greece, the harsh spending cuts the government has implemented to continue receiving bailout founds from the International Monetary Fund and European Union have resulted in violent riots, social unrest, and even an increase in suicides. The common theme among all these groups is a collective lack of confidence in their governments. Although the U.S protests may appear less cohesive—and some critics claim less compelling—than these global protests, they represent a resurgence of activism not seen in the U.S. since the Vietnam War.

The low costs of social networking sites, access to governmental information mapping applications, and web-based organizational tools that make mass communication fast and efficient have helped make the massive protests around the globe possible. People around the world can now hear rally cries from protestors in any country instantaneously. Although the causes for these grass-roots efforts vary widely, a common theme is apparent. Citizens feel their governments are ignoring their concerns, so they are taking to the streets in a desperate attempt to revive the democratic process. To date, the impact of global protests has been profound, but it remains to be seen if Occupy Wall Street will result in any substantive reform.

Uncertainty in the U.S. Employment Situation Continues

Sources:

NYT: Bank of America Confirms Plans to Eliminate 30,000 Jobs

NYT: Bigger Economic Role For Washington

U.S. Dept. of Labor: Employment Situation Summary

U.S. Postal Service: News Release

WSJ: GOP Balks At Taxes TO Finance Jobs Plan

WSJ: Post Office History For Sale

Since 2007, Congress has passed three stimulus bills aimed at reviving the ailing economy: a $158 billion tax cut package in 2008, a $787 billion stimulus plan in 2009 and a tax cut and unemployment fund extension plan in 2010. While these packages have forestalled major job cuts, none of these measures have been successful in appreciably reducing the unemployment rate, which remains persistently high at 9.1%. In response, President Obama unveiled a $447 billion job creation bill that was quickly met by partisan opposition and more job losses.

Several major U.S. employers recently announced plans to layoff significant numbers of workers. Bank of America announced a plan to cut 30,000 jobs over the next “few years” as part of a $5 billion cost savings initiative. After cutting 30,000 jobs in 2010, the U.S. Postal Service eliminated an additional 7,500 positions last month in an effort to chip away at its $9 billion debt. The book retailer Borders cut 10,700 jobs and pharmaceutical giant Merck eliminated 13,000 positions. Even the U.S. Army has had to cut back—earlier this year it announced plans to eliminate 8,700 positions.

The continuing economic slowdown has forced companies to search for creative ways to save money while trying to preserve as many jobs as possible. For example, the U.S. Postal Service is redefining large aspects of its business model. It is reducing its overhead expenses by selling its real estate in favor of operating out of third-party retail locations like grocery stores and pharmacies. Similarly, Bank of America views its short-term workforce reductions as necessary to ensuring long term-growth and workforce stability.

President Obama’s plan calls for the creation of new jobs and a reordering of fiscal priorities to help get the U.S. economy back on track. During periods of high unemployment the demand for consumer goods and services declines as fewer people have extra money to spend, production slows due to the decreased demand, and businesses ultimately lose money, which forces them to cut jobs to save money and reinforce the negative economic cycle. President Obama believes that the government can break the cycle by spending money to spur consumption and thereby force companies to increase production, which theoretically requires those companies to hire new workers who become new consumers that spend money and establish a positive cycle of growth. Economists estimate that President Obama’s plan could add 100,000 to 150,000 jobs per month over the next year to lower the unemployment rate by a full point. Opposition to Obama’s plan is rooted in the belief that the government has already tried similar stimulus measures with little success. Notwithstanding the partisan political debate over Obama’s Job Act, many economists believe that stimulus packages and further intervention from the Federal Reserve are ultimately necessary to prevent the economy from falling back into a recession.

Spain’s Economic Woes Lead to Historic Reforms

Sources:
Economist: The Golden Amendment
Economist: Spain’s Economy: A balancing Act
El País: Congress Passes Constitutional Reform on Deficit in Historic Vote
Time: Spain Caps Its Debt
CIA World Factbook: Spain’s Economy

Last Wednesday, Spanish lawmakers overwhelmingly passed a constitutional amendment (referred to as the “golden rule”) aimed at placing a cap on the country’s future deficits. The legislation came in response to statements by German Chancellor Angela Merkel and French President Nicolas Sarkozy who jointly demanded that all Eurozone countries who wish to receive bailouts pass such “golden rules,” though Spain is only the second country to do so (Germany is the other). Although Spain has not yet needed a bailout, the global financial crisis hit the country’s economy hard. Currently the country has an unemployment rate of 20.89% and a budget deficit of 9.2% of its gross domestic product (GDP)-- more than three-times the Euro-zone limit.

The Spanish Senate approved the amendment just eight days after the lower house first started debating the rule. Such urgency was meant to send a strong message to the world that Spain would not need a bailout. The “golden rule” does not set a specific target cap on the country’s future deficits, but merely requires the legislature to pass a law setting what the actual deficit cap will be. An accompanying law, set to take effect by June 30, 2012, will set the actual deficit cap at 0.4% of annual GDP starting in the year 2020. Under the constitutional change, every level of the government – national, regional, and municipal – must limit its budget deficit to the set cap, except following natural disasters, recessions, or other extraordinary emergencies. Even in those situations, the lower house of parliament must approve any additional deficit. The constitutional reform also requires Spain to reduce its total accumulated debt, the results of many years of deficits, to within the European Union limit of 60% of GDP. The “golden rule” amendment will become part of Spain’s constitution unless 10 percent of either house of parliament votes to hold a referendum on it in the next 15 days.

It is difficult to predict how the amendment will affect the country in the short-run since it will not take effect until 2020. Spain’s finance minister, Elena Salgado, stated that, in the mean time, the government will continue working towards its goal of reducing the deficit to 6% of GDP by the end of this year, and to 4.4% of GDP by the end of 2012. With experts predicting the Spanish economy will grow by only 1.3% this year, it will be difficult for Spain to meet these targets, but Spain has no other choice if it wishes to avoid economic ruin.

Efforts to Increase Tourism in The Bahamas Have Met Some Obstacles

Sources:
The Bahama Journal: PM: Time For Action
The Tribune: Hotels Suffer 6.1% Percent Revenue Decline
The Tribune: Kerzner Chief: Rising Cost of Travel to Nassau Must Be Addressed

On April 25, 2011 Prime Minister of the Commonwealth of the Bahamas, Hubert Ingraham, addressed the residents of the nation’s capitol, Nassau, on the island of New Providence. Prime Minister Ingraham made this public address in response to the overwhelming residential and business complaints of the capitol’s residents and business owners to the New Providence Road Improvement Project (“NPRIP”). The project which has sought to modernize the 300 year old city of Nassau, includes the installation of new water mains along the city’s main roads in order to provide residents and tourists with improved water quality and water pressure. Additional road work includes improvement in water sewage and electrical upgrades for the residents and tourists of the city. The project also includes the extension of roads to newly created “open green spaces” and the Government High School. Completion of a grand four-lane highway that services major attractions and sectors of the island, such as popular tourist beaches and the airport, is also part of the program. However, the scope and ambitious nature of the project has began to wear on the residents and business owners of the affected areas, making it difficult for them to traverse to and from work and for customers to access businesses. In his address, Prime Minister Ingraham, assured residents and business owners that future construction of the NPRIP project will only occur during the off-peak hours of 7:00 p.m. to 5:00 a.m. However, the Prime Minister also made clear that construction efforts were a ways off from completion and would require the continued patience and support of Nassau residents and business owners. Besides providing the residents of Nassau with basic infrastructural needs, such as water pressure and improved electrical upgrades, Prime Minister Ingraham states that the modernization and aesthetic upgrades of the city, are needed to improve the tourist industry of the island, which accounts for 50% of Bahamian employment.

At the beginning of this year, the Central Bank of the Bahamas said the islands hotel industry saw a 6.1% decline in revenues due to low occupancy rates and low average daily room rates. Early assessment of the decline, accredited much of the revenue decline to bad weather following the Christmas season and the absence of a “Companion Fly Free” program previously offered by the Ministry of Tourism and member hotels during the months of January and February. Hotels quickly coordinated to re-implement the offer to travelers and saw an improvement in the subsequent month of March and April. However, whether or not the totality, or even the majority, of the decline in hotel revenues can be attributed solely to bad weather and the absence of a travel deal, has come into question with a recent discovery on airline service to The Bahamas.

President of the company that owns the Atlantis hotel in Nassau, George Markantonis, has recently spoken out about the dramatic increase of flight cost to The Bahamas from major origin points like Miami and LaGuardia as well as the dramatic decrease in the number of flights servicing The Bahamas. Flight costs in comparison to 2010, have increased by 28% for January, 41% for February and 27% for March. Additionally, the combined number of flights from all airline carriers servicing The Bahamas, has decreased by 16.3%. Kerzner International, the company that owns the Atlantis hotel in Nassau, is now planning to meet with airlines servicing The Bahamas to discuss the issue. Thus far there has been no comment by The Bahamas Ministry of Tourism on the issue, but with tourism generating 50% of Bahamian employment, it can be expected that one will issue soon. Whether the efforts made by Kerzner International to increase flight accessibility to The Bahamas, or the modernization efforts of Prime Minister Ingraham’s NPRIP project, will improve the tourist economy of Nassau is yet to be seen.

Possible Conflict May Arise Over Jamaica’s Stand-by Agreement with IMF Over 5% Tax Cut in Fuel

Sources:
Jamaican Gleaner: IMF Open to New Standby Agreement with Jamaica
Business Content Jamaica: Jamaica Shaves 5% Off Controversial Gas Tax
Business Content Jamaica: 1.2% Decline in Jamaica’s Economic Growth

On April 12, 2011, the Jamaican government successfully avoided protest by opposition party, the Peoples National Party (“PNP”). The PNP, had originally scheduled the protest to oppose the Jamaican government’s implementation of a 15% tax increase on fuel. Consumers had already been hit hard by the international increase of fuel prices and the 15% tax increase would have only increased costs for cash-strapped consumers. Currently Jamaican motorist pay more than $4.40 per gallon for gasoline. The 15% tax increase would have sent the price of gasoline to over $5.00 per gallon, something the PNP was unwilling to accept. In response to the possible protest, the Jamaican government agreed to reduce the tax by 5% and successfully quelled the party’s protest.

Although the Jamaican government avoided the immediate fear of political protest, reducing the fuel tax has only created another imminent fear for the Jamaican government. The 15% increase in tax fuel was one of the conditions negotiated in a medium-term economic stand-by agreement with the International Monetary Fund. This agreement between the Jamaican government and the IMF provides the Jamaican government with a 3-year $1.27 billion dollar loan in order to help the government implement new economic reforms and cope with the global downturn. However, the agreement comes with conditions and clearly states that the Jamaican government must meet certain markers and goals for ensuring greater fiscal discipline. One of these markers included increasing cash supply through increased taxation, which the 15% fuel tax increase was supposed to be a part of. The 5% decrease assented to by the Jamaican government, will now force them to explain an unexpected budgetary cost of 3.5 billion Jamaican dollars (roughly $41 million U.S. dollars) to the IMF. It is clear from the terms of the stand-by agreement with the IMF, that Jamaica faces possible legal sanctions for failing to meet these markers. Already identified as a government with a “terminal point problem,” or a problem with failing to meet financial and structural markers, the Jamaican government is unsure if this decrease in tax fuel will have a legal affect for the country. However, in the February review of the agreement, IMF technocrat Trevor Alleyne said the IMF is working with the Jamaican government to ensure that resort to legal sanctions is avoided.

Although some support the stand-by agreement between the IMF and the Jamaican government, critics point to Jamaica’s 1.2% GDP contraction in the 2010 year as an indicator that the reforms imposed by the terms of the agreement are not stimulating growth. Alleyne contends that increasing GDP was never the major goal of issuing the loan, but providing insurance for banks in case of a sharp demand for loans during a debt exchange shock, or fallout, was. Maintaining the economic confidence of companies is crucial toward the growth of the country, Alleyne stated.
However, when a sharp GDP contraction in Jamaica’s September quarter, did not send companies running to the bank for cash bailouts, critics viewed the loan as an attempt to swindle the Jamaican government into paying interest on a overly excessive loan, since $950 million of the $1.27 billion loaned by the IMF had been allocated for such a shock. Alleyne contends that the loan was created to prepare Jamaican banks against the worst possible scenario, not as a reflection of the IMF’s belief that the worst case scenario would actually happen.

Despite criticisms of the loan, the Jamaican government will continue to work with the IMF to make improvements in their fiscal planning. If nothing else the existence of the loan will encourage much needed cheap budgetary support from the World Bank and the Inter-American Development Bank.

Issues Over the Expedition of the Panama Trade Agreement with U.S. Emerge

Agweek: Trade Agreement Moves Forward
U.S. Dept. of the Treasury: U.S., Panama Sign New Tax Information Exchange Agreement
Hispanically Speaking News: U.S. and Panama Finalize Tax Information Exchange Agreement
Iowa Pork Producers Association: Panama Trade Agreement Ready for Congress
Quad-City Times: Trade Agreements Would Boost Iowa

On April 18, 2011, Panama successfully alleviated United States’ concerns about completing a new free trade agreement between the two countries. Primarily, Panama’s full ratification of the Tax Information Exchange Agreement allowed the Office of the United States Trade Representative to generate a trade agreement that can be presented to Capitol Hill for ratification. Panama’s signing of the Tax Information Exchange Agreement basically assured the United States government that there would be transparency in the tax information they exchange and that the United States would be able to enforce their tax laws, especially with respect to bank accounts in Panama. Further Panama has also taken measures to assure the United States of its increased commitment to strengthening its labor laws and enforcement. All of these actions clear the way for Congress to seriously begin drafting and ultimately implementing a new trade agreement with Panama.

However, despite the readiness of both Panama and the United States to enter into a new trade agreement, the U.S. administration is waiting on two other pending agreements with South Korea and Columbia. Ron Kirk, a United States Trade Representative, explained that while the administration wants the agreements approved, it also wants to consider elements of the Panamanian trade agreement in connection with other possible trade agreements. Specifically the administration is concerned about the possible impact of less expensive imports from these countries and the affect it will have on employees of domestic manufacturers and service firms, who have traditionally lost jobs with the influx of cheap imports. The administration considers this a primary concern under the Trade Adjustment Assistance program, which has sought to reemploy workers who have lost their jobs or have suffered decreased wages and hours due to increased imports.

However United States farmers and agricultural and pork producers have pushed for the administration to quickly produce and initiate a trade agreement with Panama and others in order to expand their exporting base. Among the supporters of an expedited trade agreement with Panama are the American Soybean Association, the American Farm Bureau Federation and the National Pork Producers Council. The support of these organizations makes sense considering the United States exported more than $450 million in agricultural products to Panama in 2010, double the amount it exported in 2005. Additionally, according to some economists the Panama trade agreement will add 20 cents to the price of each hog on the market and expects that pork exports to Panama will increase by about $16 million per year. However the number of jobs created in the pork industry by this agreement, is estimated to be only 200.
Whether the increased exporting profits made from the Panama Trade agreement will be able to compensate for possible job losses due to increased cheap imports, is a heavy concern for the administration, and one they have determined requires careful and slow consideration. However, as the U.S. administration halts on implementing a trade agreement with Panama, Panama has already entered into several other trade agreements with Chile, Singapore and Taiwan. The fear among supporters of an expedited trade agreement between the U.S. and Panama is that by the time the U.S. decides to enter into an agreement with Panama, other exporters will have a competitive advantage over U.S. firms.

Are Improved Economic and Political Relations in the Near Future for Cuba and the United States?

FT: Cuba Libre
FT: US-Cuba Ties Grow but Politics Remain Prickly
Washington Post: Maryland Contractor Alan Gross Draws 15-Year Sentence in Cuba

In the aftermath of the global financial crises, Cuba has struggled between its Communist ideology and the need to craft a sustainable economy. Hard hit by the food shortages and increased oil prices and a sobering national debt of $20 billion, President Raul Castro, has made some radical economic and political reforms, all of which point toward a more market based economy and a more democratic government.
Some critics have balked at the depth and scope of the economic reforms implemented by President Castro, wondering whether they will lead to nationwide unrest and protest as citizens make the transition from government funded payrolls to a more market based economy. The reforms include cutting more than 1 million workers from unemployment benefits. The expectation is that those persons cut from unemployment will find jobs as private farmers or in small start-up businesses. Currently the state employs 85 %of the 5 million people in the Cuban workforce.

Additional economic reforms include measures to end state administration of companies in favor of regulation through taxation. The hope is that this will increase foreign investment in “special economic zones.” Additionally, the state has relinquished state land to more than 140,000 small farmers to grow and sell their produce in small roadside kiosks, a practice that would not have been allowed more than a year ago. The government has also issued roughly 200,000 self-employment licenses, resulting in the crop up of small business along Cuban city streets.

Although these seemingly democratic and market based reforms have been made, critics contend that the intent behind them is convoluted. President Castro himself said these reforms were made to ensure the very survival of the “revolution” and a Communist ideology. Whether these reforms will actually allow a Communist ideology to persist, or usher in a new political and economic era for Cuba is yet to be seen. Whatever the result, the outcome will undoubtedly play a role in U.S.-Cuban relations, which have remained strained since the Cold War.

However, independent of this outcome, or perhaps in response to the promise of a less strained relationship between itself and Cuba, President Barack Obama, has made reforms toward making the trade embargo on Cuba more lenient. Last year, the United States exported roughly $366 million in food to Cuba, making Cuba the fourth largest source of United States food exports and comprising a third of Cuba’s annual imports. Additionally 70,000 United States citizens are now allowed to enter Cuba for “educational or charity purposes.” However despite the more relaxed political and economic reforms made by both sides, the formation of a healthy and well-meaning relationship between the two countries is still a ways off.

This is perhaps best demonstrated by the recent arrest and conviction of US aid worker Alan Gross. Gross entered Cuba under the more lenient reforms allowing US citizens to travel to Cuba for “educational and charity purposes.” Barely able to speak Spanish himself Gross went to Cuba on behalf of his employer, Development Alternatives, which had won a $6 million government contract to “promote democracy in Cuba.” Most of his work consisted of distributing computers and satellite equipment to Cuba’s Jewish community. He was found guilty by the Cuban court of working on a subversive United States’ project to undermine the country’s communist system. The result has caused United States’ diplomats to issue a warning to Cuba, stating that bilateral relations will not improve while Gross is detained. Whether the more lenient reforms made by both countries towards each other will actually lead to improved relations, or to more episodes for contention, as demonstrated by the Alan Gross situation, is yet to be seen.

In Trinidad Unions for Public Service Employees Strike Over Government Wage Increase

Sources:
GuardianMedia: Need to Stabilize Economy, Encourage Growth
Trinidad Express Newspapers: Dookeran: Wage Bill Will Increase to $8 Billion
Guardian Media: Delays at Port of Point Lisas
Guardian Media: Oil Slips on Japan
Guardian Media: OWTU Members Turn on Labor Minister
CNews: Labor Leaders Debate State of the Unions
Guardian Media: Agriculture Faces Declining Production, high Food Prices

Protests continue in Trinidad as public service employees united with the Public Service Association to reject the 5% wage increase offered by Chief Personnel Officer, Stephanie Lewis. Originally, the Public Service Association (“PSA”) requested a 60% increase, while the Chief Personnel Officer Lewis only offered a 1% increase. The gaping disparity between the two figures can be attributed to three major factors. One is consideration of core inflation over headline inflation by the government, second is the rapidly increasing food prices in Trinidad, and third is a provision in Trinidad’s Industrial Relations Act that only adjusts wages to account for inflation every three years.

Headline inflation measures the rate at which the cost of living rises while core inflation measures total inflation excluding the price of food and energy. It is common for governments, not just Trinidad’s, to use core inflation as a better indicator of domestic inflation, since food and energy prices are highly volatile and subject to rapid decreases or increases due to weather or political crises. Usually in the long run, headline inflation and core inflation average about the same increase rate. However, in the past ten years, headline inflation has increased at a consistently higher rate than core inflation. This disparity is attributed to the rise in cost of oil per barrel from $20 in 2002 to roughly around $100 today. Consequently, this has raised the price of shipping and food imports into Trinidad, which has led to higher food prices in grocery stores.

Currently in Trinidad the headline inflation rate is at 12.5%, mainly spurred by food inflation which was at 29% just this past December. However, core inflation, which excludes food prices and which the government gives higher priority to, only increased by 4.7%. While food prices in Trinidad and Tobago have been consistently rising over the past 5 years, food prices peaked this year due an exceptionally large amount of flooding that lowered domestic agricultural supply and forced greater dependency on expensive food imports. Food prices further increased in the past few months due to the political unrest in major oil producing countries like Libya and Saudi Arabia. Additionally a recent discovery of $33 million worth of marijuana in two shipping containers in Trinidad’s major port, Port of Point Lisas, has led to more thorough checks of incoming containers, causing delays in offloading cargo. The delays lead to higher storage cost of goods at the port and will further raise the price of those goods in grocery stores.

In the face of these dramatic food increases, Chief Personnel Officer Lewis’ offer of a 1% wage increase was viewed by critics as disrespectful and deceitful. In an attempt to find a compromise and end the unrest of public service employees, the CPO made a reoffer to the PSA of a 5% increase. Again, given the extreme and increasing rate of food and goods, critics viewed this meager increase as further disrespect. In response to the CPO’s reoffer, labor unions in the public sector began striking. Finance Minister, Winston Dookeran, has appealed to unions to accept the offer by stating that a 5% increase for all public sector employees will mean that salaries and wages account for 19% percent of the government’s annual budget. Any further increase would hamper growth and create instability for the economy and government. However, labor leaders debate Dookeran’s theory on increasing wages. Senator David Abdullah, also President of the Federation of Independent Trade Unions, states the government should not be afraid to run a deficit to increase wages given the current economic conditions for consumers. He states that though there may be an initial deficit, income will return to the government through increased activity and spending made possible by the wage increase.

In an effort to avoid future disputes between labor unions and government, employment law specialist Lennox Marcelle advocates revision of the wage increase law in the Industrial Relations Act. He says that only reviewing for wage increases every three years inevitably leads the government to consider only current economic frailties, rather than the economic conditions as they existed during the previous three years. He states that review for wage increases should occur annually to ensure that wages are based on the “economic conditions of their respective periods.”

Fuel Prices Set Off a Chain of Protests and Strikes in the Dominican Republic

Sources:
WTO: Trade Policy Review Body - Trade Policy Review - Report by the Secretariat - The Dominican Republic – Revision (IV. Trade Policies by Sector)
EIU: Dominican Republic Regulations: Hydrocarbons Law is Finally Passed
Dominican Today: On Fare Hike Threats, Dominican Republic’s “Owners” Again Get Major Perks
Diario Libre: Gasoline Sales Will Be Suspended Today by Anadegas
Diario Libre: Government and Anadegas Sign Agreement
Dominican Today: Most Fuels Will Cost More
Dominican Today: Unions Propose Talks to Raise Minimum Wage and Beyond
El Nacional: Dicen Arreciarán Protestas el Lunes
El Nacional: Suben Todos Combustibles Menos GLP; alza 0.80 a 3.7

This week, President of the Dominican Republic, Leonel Fernandez, met with transport business and union leaders to address their resolution to increase transportation fares in response to the rising price of fuel. In an effort to dissuade transport union leaders from increasing fare prices, President Fernandez promised a bill amending the Hydrocarbons Law. The bill would identify new sources of funding for transportation workers’ benefits, including a propane gas subsidy for workers that did not already have one. Transportation leaders agreed to keep the current transportation fares if the President kept his side of the agreement.

Whether this agreement will continue to suffice for transportation unions is yet to be seen. Just days after the agreement between President Fernandez and the transportation unions, gasoline retailers (under the union “Anadegas”) began striking to protest the failure of government to raise gasoline prices. Under the Hydrocarbons Law the Minister of Industry and Commerce sets and adjusts the price for hydrocarbon fuels (including gasoline) according to the fluctuating price of oil in the international market. However, gasoline retailers contest that this formula for setting prices fails to account for domestic inflation, which may not correspond with the international price of oil. Gasoline retailers point to the number of gasoline retailers that have gone out of business in the past 10 years as an indicator of how the current prices for gasoline and other fuels are insufficient to cover their operating costs, placing them on the verge of bankruptcy.

The number of gas stations in the Dominican Republic has declined from 768 to 640 over the past 10 years. In contrast, businesses offering Liquid Petroleum Gas (“LPG”), an alternative fuel for vehicles, has grown by 200%, from 320 locations to 925. This increase for LPG providers is attributed to an increase in the number of vehicles that use LPG instead of gasoline. In response to the strike, the Ministry of Industry and Commerce agreed to meet with the gasoline retailers’ union. The following Friday, the Ministry of Industry and Commerce announced that beginning Saturday, February 12, there would be a price increases on every fuel except LPG, including diesel. Although the propane subsidy promised to the transportation unions by President Fernandez will not be affected by the price increase, since propane is an LPG fuel, the diesel subsidy already given to transport workers may be devalued by the price increase on diesel fuel.

Yet, just as President Fernandez and the Ministry of Industry and Commerce avoided a transportation price hike and the continued strike of gasoline retailers, a national strike over the country’s minimum wage seemed to loom ahead. Undoubtedly encouraged by the increase in fuel prices, peasants, bus passengers, and various union organizations say they plan to protest to demand a corresponding increase in the minimum wage.

Just days before the gasoline retailers’ strike, the National Salaries Committee (“CNS”) had refused to set a minimum wage higher than RD$8,465 (roughly US$225), although the Dominican Republic Central Bank stated RD$10,407 was the salary needed to cover the cost of basic staples. Further, labor unions proposed a wage increase larger than the amount stated by the Central Bank, to compensate for an anticipated price increase in fuel and other staples. Before an agreement could be reached, the announcement on increased fuel prices was released. It is yet to be seen whether the demands of labor unions and others for an increase in the minimum wage will be met with as much success as gas retailers achieved this past week.

Discussion:
1) Should the National Salaries Committee raise the minimum wage to the amount stated by the Central Bank? If so, should the increase go beyond the amount stated by the Central Bank to compensate for price increases and inflation?
2) Should the Central Bank be trusted to set the price for minimum wage? Likewise should the Ministry of Industry and Commerce be trusted to set the price for hydrocarbon fuels? Or should the decision for setting both the minimum wage and price require an input from affected unions?

Ivory Coast Faces Unrest as Gbagbo Refuses to Step Down From the Presidency

Sources:
African Union Website: AU in a Nutshell
NY Times: Defeated Ivory Coast Lender Moves to Seize Banks
Bloomberg: Ivory Coast Rivals Preparing for War, Kenyan Prime Minister Odinga Says
NPR: Ivory Coast Leader Tries to Seize Regional Bank
NY Times: Ivory Coast: Incumbent Seizes Utility
NY Times: Diplomacy Again Falls Short in Tense Ivory Coast Standoff

In an election on Nov. 28, the Ivory Coast elected challenger, Alassane Ouattara, the winner of its presidential race. Since the Election Commission announced Ouattara the winner, the incumbent president, Laurent Gbagbo, has challenged the results of the election, claiming voter fraud. However, the United Nations certified the results, and nearly all foreign governments have recognized Ouattara as the rightful winner. The results of the election, coupled with many people believing that Gbagbo will refuse to step down from the presidency, have caused unrest within the nation. World leaders worry that both sides of the political rivalry are preparing for war.

The United Nations has reported that there have been at least 271 people killed in violent clashes following the election. The Human Rights Watch recently accused Gbagbo-loyal militia and security forces of targeting, murdering, and raping Ouattara supporters. Witnesses report that Gbagbo’s security forces either willfully ignored or joined militia forces in murdering Ouattara supporters. The Gbagbo administration and its allies deny any association with the incidents.

Recent events indicate that Gbagbo is unlikely to step down peacefully. This week, Gbagbo ordered that the regional central bank’s offices be seized. Prior to the bank’s seizure, Gbagbo was operating without government funds; in December, the Central Bank of West African States, a bank that groups several Western African countries’ treasuries, denied Gbagbo access to the nation’s accounts and made it necessary for him seek Ouattara’s approval before the bank would allow withdrawals. Without approval, Gbagbo will not be able to pay for, and therefore control, the nation’s military and security forces and civil servants after the end of his legitimate term. Following the seizure, the Gbagbo government ordered local bank employees to follow its instructions, rather than those from the bank’s headquarters in Senegal. The bank protested the seizure and immediately ordered the offices in the Ivory Coast to shut down until further notice. The following day, Gbagbo ordered the seizure of the country’s electric company.

Gbagbo’s refusal to step down from power, along with his seizures, suggests an unstable future for the Ivory Coast. Other African countries are working hard to prevent the Ivory Coast from civil war. Recently, the African Union, an organization that provides a forum for African countries to discuss matters of common concern and that helps the continent effectively promote its own interests, appointed Kenya’s prime minister to mediate the crisis. The African Union, which consists of 53 nation members, has temporarily suspended the Ivory Coast’s membership and urged Gbagbo to transfer the presidential powers and office to Ouattara immediately. The European Union has prohibited almost all trade with the Ivory Coast in order to pressure Gbagbo to end his presidential term. Meanwhile, the Economic Community of West African States (ECOWA), a group of 15 Western African countries whose mission is to promote economic integration through the region, has threatened to use force to remove Gbagbo from the head of state if he refuses to leave. Many West African heads of state are currently lobbying both the U.N. and the United States to back ECOWA forces if such action is needed to oust Gbagbo.

Discussion:
1. Should the U.S. back ECOWA if force is necessary to oust Gbagbo?
2. What else should other African countries do to persuade Gbagbo to step aside for Ouattara?

The Countries of the “Northern Triangle” Rise as the New Launch Pad for Drug Distribution in Central America

Sources:
The Economist: Organized Crime in Central America: The Rot Spreads
The Economist: El Salvador’s President: So Far, So Good
Federation of American Scientists: U.S.-Mexican Security Cooperation: the Mérida Initiative and Beyond

The Central American countries of El Salvador, Guatemala and Honduras have in the past two years risen to the forefront of the war on drugs. With harsher crackdowns on the drug cartels in Mexico, the cartels have looked to launch their drug supplies from nearby locations with less police pressure. The major source of cartel pressure in Mexico has come from the Merida Initiative, a “counterdrug and anticrime assistance package” launched in 2007 between the United States and Mexico. The Merida Initiative has provided a total of $1.8 billion in the form of arms and police training for various countries throughout Central America and the Caribbean, and $1.5 billion of this funding has gone directly to counter the drug cartels in Mexico. Ten years ago this would have been a good strategy given that Mexico was the largest “staging post” for drug distribution to the United States. However, with the recent pressures placed on the cartels in Mexico, they have simply moved south into the countries of Honduras, El Salvador and Guatemala. Over the past ten years these three countries have simultaneously grown into the major launch pad for drugs imported from Columbia and Venezuela into the United States and have achieved the highest rates of murder in the world. As such, these countries are now notoriously known as the “Northern Triangle,” a region fraught with poverty and violence.

The “Northern Triangle” has been fertile ground for the Mexican drug cartel— many point to the dire poverty of these countries as the major reason. The average income in these countries is near $2,700 per person, barely a third that of Mexico. Amid the global financial crises, El Salvador’s economy shrank by 3.6%, one of the biggest drops in the region. The country is not expected to reach its pre-recession norm until 2012 because its economic growth is largely dependent on the growth of the United States, which has been slow. Considering the $2.1 billion worth of drugs, arms, and cash seized earlier this year in Guatemala, equal to roughly the same as 5% of the country’s GDP, it is not hard to see why many in financial distress have looked to join with one of the few lucrative ventures in their countries. Mexican mafias, “Zetas” and “Sinaloa,” have found willing and lethal new recruits to ferry drugs, extort, and kidnap, in the countries’ 70,000 street youth gang members known as “Maras.”

Honduras’s Attorney-General Roy David Urtecho, recently stated “Maras” were seeking “to establish themselves as legitimate traffickers instead of street-level thugs.” The 2009 coup in Honduras broke cooperation efforts with foreign states and suspended foreign aid into the country, aid and cooperation necessary to combat organized crime, making Honduras an easy target for increased trafficking. In 2009, 154 drug trafficking flights were logged, up from almost none in 2005. Add to this the assassination of Honduras’s top anti-drugs official in 2009, which seems to have been a Sinaloa hit, and the prospect of these countries freeing themselves from the drug trade appears grim. However the recent adaptation of social, verses militant approaches to countering drug trafficking, may be the solution these countries have been looking for. President Funes of El Salvador initially took a hard-line approach to the drug trade by ordering the army into the streets and banning gang membership, but the effect of this tactic tapered. However, Funes was successful in building other social programs in the country, an approach that could indirectly diminish the strength of the cartel. El Salvador, for example, now has free basic education, and disadvantaged children are given school uniforms and shoes. This year an additional 22,000 children have enrolled in school, which means 22,000 fewer children are likely to become “Maras.”

President Obama appears to believe in the same “social” strategy for curtailing the drug trade. As the term for the initial Merida Initiative draws to an end, President Obama has proposed a new “four-pillar” strategy. Although the first two pillars consist of much of the same tactics as the original initiative, the last two focus on “(3) building a 21st century border between the United States and Mexico, and (4) building strong and resilient communities.” These last two pillars seek to increase the secure flow of people and goods between the United States and Mexico and to improve conditions in cities prone to cartel violence through social programs and alleviating poverty. Although initial implementation of the last two pillars will largely be in Mexico, hopefully the combined efforts of presidents from the United States, the countries of the Northern Triangle and Mexico will give this strategy greater success than initiatives of the past.

Discussion:
1) Given the assassination of drug officials in Honduras in 2009, are efforts to counter drug cartels by ordering armies and police into the streets a good strategic approach to the problem, or does the approach just lend to more violence?
2) Can social programming be justifiably funded by and through the Merida Initiative, an initiative specifically started to counter the “war on drugs?”

One Year After Earthquake Reconstruction for Haiti Looks Slow

Sources:
BBC.com: Haiti PM Criticises Post-Earthquake Rebuilding Efforts
TheWashingtonPost.com: Foreign Aid Keeps the Country from Shaping Its Own Future
CIRH.ht: Interim Haiti Recovery Commission, Mission Statement
CNN.com: Charges Filed Against ‘Baby Doc’ Duvalier in Haiti
Economist.com: The Year of Surviving in Squalor

Ten days ago marked the one-year anniversary of the 7.0 earthquake that rocked Haiti, killed an estimated 250,000 thousand Haitians, and left over a million homeless. The international community responded by pledging $5.8 billion toward the reconstruction of Haiti. However, one year after the earthquake, not much has changed since that devastating day. Nearly one million Haitians remain homeless and are living in tents sprawled across the nation’s capital, Port-au-Prince. If anything, the situation has worsened given the cholera outbreak that claimed the lives of more than 3,000 Haitians and infected more than 150,000 others. The nationwide rioting following the failed December 2010 elections and the recent return of former Haitian dictator, “Baby Doc” Duvalier, only highlight the Haitian government’s inability to cure current problems and free itself from past problems.

Haiti’s unstable government has deterred investors and donors from investing in the country because they dont know if the funds will be properly managed and allocated to areas that need it most. The unstable government has earned it the moniker “Republic of NGOs,” connoting how investments into Haiti bypass the government and go directly to support NGOs in the country.

Many blame the unstable government for why over half the pledged aid has not been delivered to the country. Thus far, the majority of outside funding has gone to pay the country’s debt and not for reconstruction efforts. In an effort to speed reconstruction and build investor confidence, the Haitian Government created the Interim Haiti Recovery Commission (“IHRC”) by presidential decree on April 21, 2010. Co-chaired by Haitian Prime Minister Jean-Max Bellerive and former U.S. President Bill Clinton, the goal of the IHRC is to develop a reconstruction plan for Haiti by assessing the needs and investment priorities of the country, coordinating reconstruction efforts, and allocating donor investments accordingly.

Unfortunately many criticize the IRHC’s action plan as “more of the same” old policies focused on making Haiti a source of cheap labor in the region and reducing protective tariffs on imported goods—policies Haitians claim failed to work for the country in the past. Critics further allege that although the IHRC is comprised equally of both foreigners and Haitian members, Haitians are largely left out of planning reconstruction policies. Without incorporating Haitian people into the creation of a plan for reconstruction, many believe foreigners will encourage policies that continue to fail. However, some see signs of hope. Pamela Cox, a World Bank official who sits on the IHRC, claims that although IHRC efforts toward reconstruction should have started earlier, reconstruction is indeed happening and the economy has “held up.”

Discussion:
1) IHRC member and World Bank official, Pamela Cox claims that the commission has made progress toward reconstruction. Given that nearly 1 million people are homeless and living in tent shanty towns, should Haitians continue to trust the commission to provide actual and substantial reconstruction for the country?2) There has been rioting in the country over the December elections. Should funding and aid continue to bypass the Haitian government and go directly to NGOs while the state of the government is so precarious?

The Cost of the Fannie Mae and Freddie Mac Bailouts

Sources:
The Financial Times: Fannie & Freddie ‘Could Cost US $363bn’
BBC News: Freddie Mac and Fannie Mae Bailout ‘To Double’
The Wall Street Journal: Fannie, Freddie Elicit Grim Forecast
The Wall Street Journal: Regulator for Fannie Set to Get Litigious
Wikipedia: Fannie Mae

Some of the United States public has recently criticized the Federal Government over the bailouts of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are mortgage finance companies that operate within the United States. Fannie Mae and Freddie Mac provide a secondary market for mortgage loans. They buy mortgages from big U.S. banks, totaling billions of dollars. Fannie and Freddie then repackage the loans and sell them to investors with a guarantee. The majority of investors believe that there is an implicit federal guarantee of both Fannie Mae and Freddie Mac’s securities, and in the event of a default the Federal Government would intervene. Fannie Mae and Freddie Mac were severely affected during the global financial crisis; they sustained massive losses on the delinquent and defaulted mortgages which they had underwritten.

In 2008, in the midst of the financial crisis, the Federal Government set up a conservatorship for the entities, meaning that the Government pledged to subsidize Fannie Mae and Freddie Mac, enabling the entities to whether the crisis. In return, the entities promised to pay 10% dividends on the subsidized funds. The Government subsequently poured around $148 billion into Fannie Mae and Freddie Mac.

Last February, the White House’s Office of Management estimated that the U.S. Treasury would have to provide another $160 billion to Fannie Mae and Freddie Mac in order for them to stay afloat until 2019. The White House noted that in order for this figure to be accurate, the U.S. economy would have to continue to recover from the financial crisis. However, by this August the Congressional Budget Office had already increased the estimate of the needed federal subsidies to around $390 billion. This week, the Federal Housing Finance Agency (FHFA), Fannie and Freddie’s regulator, stated that the lowest amount possible that the entities would need is an additional $221 billion. The FHFA also stated that in the worst-case scenario, Fannie Mae and Freddie Mac would need around $363 billion. The actual amount of funds the entities will need largely depends on the strength of the economy and many other factors, such as interest rates, unemployment rates, and the housing market.

As Fannie Mae and Freddie Mac try to stabilize their operations and regain their independence, there may be repercussions for the banks that caused many of Fannie and Freddie’s problems. The FHFA subpoenaed some of the financial institutions this July, trying to discover exactly how much information the banks had on the mortgages they sold to Fannie and Freddie. The FHFA then selected a well-respected law firm to investigate whether a lawsuit would be successful against the banks for selling toxic loans to Fannie and Freddie. A suit would likely allege that the banks breached promises to Freddie and Fannie about the quality of the mortgages they were selling to the entities. If the FHFA can show that the banks breached their promises to Freddie and Fannie, the court would force the banks to buy back the loans at their original value, leading to the recovery of billions of dollars. If the FHFA is successful in its lawsuit against the major banks, it could open the door for other investors to pursue similar claims.

Discussion:
1. Why do the amounts of funds the Federal Government estimates Fannie Mae and Freddie Mac need greatly vary?
2. Besides opening the door to similar lawsuits, what would be some consequences of Fannie Mae and Freddie Mac bringing a successful lawsuit against major lending financial institutions?
3. Should the U.S. Government continue to provide Fannie and Freddie with funds? What would happen if the Federal Government decided to terminate the funding