Tuesday, July 31, 2007

US stocks tumble, housing and credit worries take the blame

Bizjournal.com: “Housing market hurts consumer confidence in Florida”
FxStreet.com: “US: Private Markets, Risk and the Housing Correction—July 2007”
Bloomberg: “US economy: consumer confidence jumps more than anticipated”
Bloomberg: “American Home Can’t Fund Mortgages, Shares Plummet”

By close of the markets today, US stocks had lost what gains were made earlier. The blame for these losses has been placed with the worrisome cost of credit and problems in the housing market.

Foreclosures on homes are rising, some 58% above rates earlier this year and more than 30% over last year’s rates. In the face of these numbers, and the fall of major mortgage companies—most recently American Home—the once-booming US housing market appears to be a thing of the past. And while consumer confidence in the United States remains high, the housing slump is beginning to undermine even that. Reports coming in from states like Florida and Arizona, both hard-hit by housing market troubles, indicate slowdowns in consumer spending.


Recall that the US housing market was the locus of an unprecedented boom in the late 1990s and early 2000s. Do you think that current housing market troubles are indicative of a natural correction in the market?

Was there something that the US could have done from the standpoint of macroeconomic policy to prevent the crash of its housing market and by extension the inevitable human suffering that results from losing one’s house through foreclosure or repossession?

Monday, July 23, 2007

Investment posts strong in Brazil

INFOBAE.com: "Brasil 'aspira' mas capitales que el resto del mundo"
El Observador: "Brasil registro en junio superavit en su cuenta corriente 696 millones de dolares"

Banco Central of Brazil today reported that in June it received the equivalent of 10.318 million US dollars in foreign direct investment. This figure exceeds the total foreign investment in the nation over the course of the first half of 2006. Reports emphasize that this disparity reflects the volatility of markets in a globalized economy.

By way of further comparison, foreign direct investment in Brazil during the first half of 2007 increased by more than 180% above investment over the same time period last year. Additionally, it appears that Brazil will sustain this momentum, as investment dollars continue to pour in during the month of July.

Brazil is the largest economy in Latin America. Investment dollars are being channeled toward building more plants in the nation to produce more goods. Wages remain comparatively low in Brazil compared to other Latin American economies.


Is the level of competitiveness that can be maintained by keeping wages low worth the loss in potential economic growth resulting from the related lack of consumer spending?

Monday, July 16, 2007

Latest attempts to finalize Doha Round faltering

Business Day (Johannesburg)— “Action Call on Doha Trade Round Logjam”
Reuters (Canada.com)—“U.S. says Doha risks being delayed several years”
AP (Lisbon)—“EU, Brazil try to relaunch Doha trade talks”

Since 2001, members of the World Trade Organization (WTO) have tried—and failed—to finalize a multilateral agreement on trade that has come to be called the Doha Round.

Currently nations are again negotiating over the Doha Round, with WTO officials asserting that if an agreement cannot be reached by mid-August, it will likely be another three years—or more—before a fruitful conclusion can be reached.

Reports indicate that the main difficulty in reaching accord is disagreement between the wealth countries of the north (e.g., United States, the countries of the European Union), and the poorer, developing countries of the south, led by India and Brazil. Observers have focused on ongoing talks between the Group of Four (Brazil, EU, India, and the US). Reports have been mixed on how these talks are progressing. On the one hand, the EU and Brazil appear to have come to an understanding, while the US continues to criticize Brazil for being inflexible on some issues.

Among the biggest concerns is agriculture. In particular, wealthy nations like the United States heavily subsidize the agricultural sector, which puts farmers in the developing world at a distinct disadvantage as subsidies keep the price of certain domestic commodities, such as corn, artificially low. Interestingly, the US has already been called to task before the WTO by other countries for this anti-competitive practice.

On the other hand, developing nations—perhaps understandably—are resistant to opening up their markets to heavily subsidized agricultural products from the north, fearing a complete shutdown of their own agricultural sector.


Do you think wealthy countries will be willing to reduce or eliminate agricultural subsidies in the name of free trade?

Is the provision of massive and anti-competitive subsidies antithetical to free trade?

Wednesday, July 11, 2007

China vows to improve food and drug safety, executes corrupt former official

The London Free Press: "China executes corrupt drug agency official"

Recently China has been beset by embarrassments and recalls associated with tainted food additives on both the domestic and international market. From melamine-tainted dog and cat food in the United States and Canada to toothpaste that has been recalled from Spanish shelves and banned in North and South America for containing thickening agent found in antifreeze, the world has begun to question the reliability of Chinese food and drug products. Perhaps most infamous was an antibiotic approved by the Chinese food and drug agency that was later found to be fake; this faked drug was linked with dozens of deaths in Panama.

But with the Olympics in Beijing just around the corner, the Chinese government has decided that these embarrassments must come to an end. The nation has pledged to closely monitor the food that will be fed to Olympic athletes to ensure not only that it is safe, but that it does not contain any additives that could result in a false-positive drug test.

As an indication of how serious the nation is about its food and drug safety situation, the government executed a former director of the agency who was found to have approved “fake drugs” for cash. Among the fake drugs he approved was the antibiotic linked to the deaths in Panama mentioned above.

It is not clear what else the government is doing to improve food and drug safety. A spokesperson for the food and drug agency stated "China is a developing country and our supervision of food and drugs started quite late and our foundation for this work is weak, so we are not optimistic about the current food and drug safety situation."


Many proponents of free trade and regional trade agreements express concerns that technical safety standards—for example, food and drug safety standards—could become a barrier to trade. What do you think should be the bar for drug and food safety in international trade? Should it be the standard of the importing nation? Should it be a standard set by an independent entity? How would it work and what would be the inevitable trade-offs?

Monday, July 09, 2007

France plans to march to its own drummer on EU budget discipline rules

Telegraph: "Sarkozy warns EU over budget plans"
Bloomberg: "European officials say Sarkozy must 'respect rules'"

French President Nicolas Sarkozy, who replaces Jacques Chirac, has tried to distinguish himself from his predecessor by adopting policies that are more free-market oriented and business friendly. However, Sarkozy’s plans also run afoul of EU spending rules—specifically those related to the budget discipline.

Sarkozy wants to implement a plan to cut taxes in France, despite the fact that the tax cut will leave deficit levels in the country too high to meet the French pledge to reduce its deficit to under 2% of the GDP (gross domestic product) by 2010.

The EU’s spending and budget discipline rules were originally drawn up in the 1990s to protect the strength and stability of the euro, which is the common currency used throughout the European Union, which is also referred to as the “eurozone.”

The Finance Ministers of member countries are urging France to abide by the rules in order to “shore up their credibility” but Sarkozy has insisted that budget discipline will happen on his terms, because it is good for growth and confidence for France, not because of prior commitments made to the EU.


Where should the line be drawn between national sovereignty and international commitments?

Does the fact that the EU countries have committed to using a common currency bind individual nations to abiding by agreed upon behaviors intended to protect the currency?

France is a powerful and comparatively wealthy member of the EU. Do you think that similar behavior (i.e., bending or breaking EU budget discipline rules) would be accepted if undertaken by newer and poorer members (e.g., Romania)?

Thursday, July 05, 2007

Canadian Finance Minister to Seek More Investment-Friendly Environment in Canada

Source: CanWest News Service--"Flaherty wants to tear down trade barriers inside Canada"

This fall, Canadian Finance Minister Flaherty will seek to streamline the rules that govern intra-Canadian trade. He voiced concerns that the current system, which is not based on any national standard but rather allows each province to set its own rules, serves to discourage new investment in Canada.

He implied that potential investors may not be not keen having to “deal with 13 regulators, 13 sets of fees, and 13 sets of rules—in a country that, after all, has less population than California.”

This position has met with some public resistance from the provinces who want to maintain their control over trade and therefore challenge the notion that Canada as a whole might benefit economically from, for example, a common securities regulator.

For discussion:

Is the commitment demonstrated by Canada and her provinces to this more pronounced version of what in the United States is called “federalism” out of step with, for example, the trend towards integration and harmonization demonstrated by the European Union?
Do you think Finance Minister Flaherty is correct in his assessment that Canada’s adherence to this system is hurting investment and therefore the Canadian economy as a whole?