Sunday, April 20, 2008

US Home Market

Sources: Bloomberg, USA Today

Is more bad news on the horizon for the struggling American home market? According to some experts, the bottom may not have fallen yet. Home sales dropped again in March, and sales of new homes this year are at a 13 year low. Homebuilders have cut construction orders and prices, and new home construction is at a 17 year low. Not only are orders down, prices have fallen. The national median home price dropped from $213,500 in February 2007 to $195,900 in February 2008. Foreclosures have skyrocketed 60% over the past year.

This is not all bad news, however. The drop in home prices has led some to jump back into the homebuying market. First-time buyers, foreign investors, and out-of-state purchasers are looking to purchase rental properties at low prices. Eventually, many hope to sell it later when prices rise again.

The high rates of foreclosure have also led to a slight uptick in some housing markets. Areas such as Charlotte and Detroit have seen increased homebuying due to low prices. Foreclosed homes in other communities, especially the areas that still have jobs, are attractive because of its low cost.

Question: What measures can the housing and banking industries take to instill some much-needed confidence in the US home buying market?

Nepalese Police Given OK to Shoot Olympic Torch Protestors

Sources: AP, CNN

The Olympic Torch is scheduled to process through Nepal in early May, on its journey up to the Himalayas and then to Tibet. It is expected that many Nepalese and Tibetan exiles will greet the torch bearer with protests, similar to those seen in London, Paris, and San Francisco. The Nepalese law enforcement officials have been given the green light to shoot any protestors if non-violent means of suppressing the protest fail. Police will be expected to first persuade protestors to leave. If that fails, police forces will arrest the protestors. If, however, those mans fail, police and soldiers “have been given orders to stop any protest on the mountain using whatever means necessary, including the use of weapons.” The United Nations and other international human rights groups have criticized the Nepalese for their usage of excessive force.

Chinese climbers are expected to take the Olympic flame to the top of Mount Everest, and between May 1 and May 10, climbers will be prohibited from scaling the summit beyond 6,400 meters. All other climbers will be searched, and “if anyone is found with anti-Chinese material their [climbing] permit will be cancelled and returned from the mountain.”

Question: If the protests become violent and bloody, what should the proper response by other nations be?

Tuesday, April 15, 2008

Sovereign Wealth Funds and Africa

Source: World Bank considers Africa ‘super-fund’

The World Bank’s private-sector lending arm is considering the use of sovereign wealth funds to create a super-fund to channel investments into Africa’s emerging markets. Lars Thunell, chief executive of the International Finance Corporation, explained the “fund of funds” as one way to encourage state-owned wealth pools to invest in African businesses. He emphasized that the fund is not designed to be aid; rather it is aimed at creating a new asset class, pointing out that frontier investments can often prove very profitable

World Bank President, Robert Zoellick, urged sovereign wealth funds to invest one percent of their assets in equity (valued at $3,000 bn) in Africa. The issue of sovereign funds remains controversial. Criticisms include concerns that a surplus of state-owned capital could lead to dangerous economic imbalances, the funds appear to lack transparency, and the fact that an increased investment seems to ignore China’s already substantial investments in sought-after commodity resources in Africa.

African economies are expected to continue to grow by 6.5 percent this year. However, the International Monetary Fund warns that there is a risk that foreign direct investment might weaken amid a global economic slowdown. This is problematic for Africa because private capital flows in 2006 emerged as the primary source of external finance for sub-Saharan African countries, quadrupling to $48bn between 2000 and 2006. Private equity and debt flows are estimated at $53 bn for 2007.

Mr. Thunell points out that a sovereign wealth funded ‘super-fund’ would focus more on much-needed projects, such as agricultural processing, as opposed to commodities and natural resources that are the primary focus of private investors. He describes sovereign wealth funds as an opportunity to invest at arms’ length, a situation he describes as particularly attractive for those funds who fear provoking a hostile public reaction.

World Bank, IMF Show Concern over Rising Grain Prices

Source: Riots, instability spread as food prices skyrocket

Riots continue to break out all over the world as millions of people struggle to keep up with the soaring costs of food. World Bank President Robert Zoellick warned that the surging food costs could result in “seven lost years” in the worldwide fight against poverty. Zoellick pointed out that in only two months, the price of rice has risen by nearly 75% globally, with even steeper increases in some markets. The price of wheat has increased 120 percent in the last year. To put these numbers in perspective, a 2-kilogram bag of rice in Bangladesh now consumes half of the daily income of an average poor family and the price of a loaf of bread has nearly doubled in countries where the poor already spend nearly 75 percent of their income on food. Zoellick emphasized that “this is not just about meals forgone today or about increasing social unrest; this is about lost learning potential for children and adults in the future, stunted intellectual and physical growth.”
Managing Director of the IMF, Dominique Strauss-Kahn, also weighed in on the rising cost of food, stating that “if food prices go on as they are today then the consequences on the population in a large set of countries…will be terrible.” He went on to add that “disruptions may occur in the economic environment…so at the end of the day most governments, having done well during the last five or ten years, will see what they have done totally destroyed, and their legitimacy facing the population destroyed also.”
There are a number of theories as to why the price of basic food stocks are increasing. Critics of the ethanol industry argue that because ethanol comes from corn, the emphasis on replacing certain fuels with an ethanol-based fuel is creating a new, unsustainable demand for corn. Former President Clinton, campaigning for his wife in Pennsylvania, stated that “corn is the single most inefficient way to produce ethanol because it uses a lot of energy and because it drives up the price of food.” Some environmental groups reject this criticism, citing rising fuel costs as having the greatest impact on consumer food prices.
Other suggested explanations for the increase in food prices include rising global demand from countries such as India and China who are in the midst of a population boom as well as “climate shocks” which are damaging food supplies in parts of the world. Says Columbia University’s Sachs, “You add it all together: Demand is soaring, supply has been cut back, food has been diverted into the gas tank. It’s added up to a price explosion.”

Questions for Discussion
1. Is the US focus on the production of ethanol from corn (an arguably inefficient and resource intensive process) a significant contributing factor to increased food costs?
2. What duty do governments have to develop sustainable agricultural practices as a means for controlling worldwide food prices?

Sunday, April 13, 2008

More Bad News for the US Economy

Source: Bloomberg, Associated Press

The US economy was delivered another does of bad news this week. February's trade numbers cast doubt on the one aspect of the US economy that was going strong: the trade deficit. The weak US currency had led to the slow shrinking of the trade deficit, but in February, the trade deficit spiked to 5.7%--the highest number since November.

While US exports increased due to higher demand of US-made heavy machinery, import levels rose to record highs in February. This was because more foreign-made cars, industrial machines, and pharmaceuticals.

Nevertheless, there is some good news in the trade report. The trade deficit with China dipped to the lowest levels in a year, and petroleum import deficits shrank for the first time in eight months. Furthermore, US exports increased in February and the American quarterly trade deficit has shrunk.

While trade news has been relatively positive over the past few quarters, the IMF is predicting that the US will experience a mild recession this year. The US economy has suffered from the housing crisis and a loss of jobs. February's negative trade report may be a product of what some economists have predicted: in light of the negative economy, trade will become less and less of a boost to the economy.

Question: Can the US imposes more restrictionist trade policies to better balance the trade deficit? If so, what could happen if other states also impose retaliatory trade

Taiwan and China Break the Ice

Sources: CNN, BBC

Chinese President Hu Jintao and Taiwanese Vice President-Elect Vincent Siew are prepared to meet on Saturday. This would be the highest level meeting ever between the two estranged states. This is an improvement in the icy relations between China and Taiwan that has dominated over the past eight years. Vice President Siew is a member of the Nationalist Party (Kuomintang, or KMT), and over the past eight years, the ruling DPP has antagonized China. Siew and his boss, President-elect Ma Ying-Jeou, have promised more close cooperation with China.

China, which claims sovereignty over all of Taiwan, refuses to recognize the newly elected Taiwan government. Instead, China refers to Vice President Siew as the "chairman" of the Cross-Strait Common Market Foundation. In official comments released by the Chinese government to Xinhua, the state run newspaper, President Hu called this meeting one of "historic opportunity" and for a potential of the improvement in cross-strait relations.

The meeting is expected to last twenty minutes. President Hu and Vice President Siew will meet in private during an annual economic summit in Hainan Province. This meeting is part of the KMT campaign promises to improve relations with China--in the hopes of bringing direct contacts between the two states. The KMT hopes to have direct flights, direct economic investment, and a peace treaty between the two states during this term.

Taiwan has been estranged from China since 1949, when the Communist Party of China established the People's Republic of China in Beijing. The formerly ruling KMT relocated to Taiwan. Since then, the two nations have taken distinctive routes of development. Taiwan has experienced virtual independence from China since that point. Along that line, these meetings have been criticized strongly by the pro-Independence Democratic Progressive Party (DPP). DPP legislator, Trong Chai commented that while Taiwan "must understand the position and ideas of the other side...The other side should respect the fact that Taiwan is an independent, sovereign country. Mr Siew didn't receive that kind of treatment." Other DPP critics have claimed that while good relations would promote good short-term economic relations, this would be the first step to the loss of Taiwanese sovereignty.

Question: The KMT hopes improved relations will lead to a peace treaty. Under what circumstances, if any, will the two states reunite?

Monday, April 07, 2008

IMF calls for global action to address credit crisis

Source: IMF head calls for global action on turmoil
Dominque Strauss-Kahn, IMF managing director, has called for government action on a global level to address the credit crisis, warning that a failure to act may result in market turmoil that could seriously impact world growth. In an interview with the Financial Times Strauss-Kahn said “I really think that the need for public intervention is becoming more evident.” Strauss-Kahn described the need for government intervention as a “third line of defense” to support sound monetary and fiscal policies in the securities market, housing markets and banking sector.
This call to action comes only days before world finance ministers and central bank governors are scheduled to meet in Washington, D.C. for the spring meetings of the IMF and World Bank. Policymakers plan to discuss the credit crisis at these meetings. Until now, monetary authorities (including the US) have relied on increasingly aggressive measures to support market liquidity but not directly intervened in the financial system. The exception to this rule was the recent rescue of Bear Stearns last month.
In recent months, finance ministers and central banks have considered the possibility of increased intervention. Most policymakers, particularly those in the eurozone and the US, do not support broad intervention at this stage, but the comments of Mr. Strauss-Kahn promise to place pressure on them to act. Last week the Institute of International Finance, an association representing big banks, said that there is a “growing case” for government intervention.

Mr. Strauss-Kahn also silenced criticisms that the credit crisis is largely a US problem, noting that the “the crisis is global” and the “so-called decoupling theory is totally misleading.”

Later this week, the IMF plans to release its global economic forecasts. These forecasts are not optimistic, as the downside risks underlined in the last world economic outlook have now materialized. Mr. Strauss-Kahn attributed this downturn, in part, to the inability of central banks to combat the growth risks posed by high commodity prices. The analysis suggests that the US and other countries that account for an additional 20 to 20 percent of the world economy are in the position to provide fiscal stimulus if required. However, other countries, including most in Europe, are not in such a position.

Questions for Discussion
1. Is government intervention the way to correct the credit crisis?
2. In advocating for increased government intervention, Mr. Strauss-Kahn suggests that the 'decoupling theory' is misleading. Is this assessment correct?

Sunday, April 06, 2008

Second Stimulus Package in the Works

Sources: CNN-Money, MSNBC

To alleviate the current US mortgage and housing crisis, a bipartisan measure is under debate in the US Congress. The measure, which receives high marks from mortgage bankers but some measured criticism from housing advocates, may be set for a vote sometime next week. The $15 billion measure contains a wide variety of measures designed to help struggling homeowners cope with the increased cost of their home mortgages. The bill, in summary, allows homeowners to refinance high-interest loans, as well as providing tax breaks for homebuilders and other tax benefits for homeowners and homebuyers.

Some specific provisions are designed to alleviate homeowner debts. The Federal Housing Association has agreed to insure $400 billion in loans, if lenders make them more reasonable to borrowers. Second, bankruptcy judges can now adjust mortgage debts. Third, states can now offer tax-free bonds that will subsidize refinancing. Fourth, buyers who purchase distressed homes will receive a tax credit. Fifth, many owners will get a tax deduction for the property taxes they have already paid. Others measure include grants to local and city officials to purchase foreclosed homes, additional money for loan counselors, and more transparency in the borrowing process.

Mortgage bankers praise the package. According to the chairman of the Mortgage Bankers Association, “A more modern and effective FHA, mortgage revenue bonds for state housing finance agencies, additional money for counseling - these are all things that will be of great help to struggling homeowners." Conversely, housing advocates claim that the package does not go far enough, and adds in generous perks to homebuilders.

Question: Is the $15 billion price tag on this measure "worth it?" The US is already saddled with staggering debt, a troubled economy, and two expensive wars--will the $15 billion price tag simply create more long-term problems?

Rice Prices Skyrocket

Sources: MSNBC, International Herald Tribune

Rice prices have skyrocketed in the last year to the tune of 68 percent. Several factors have contributed to this. Fertilizer, pesticide and fuel prices have been very high. Storms, abnormal weather, disease, and floods have cut production. Net exporters such as Vietnam and Egypt have halted exports. All of this has cut the supply on the market, and without a matching decrease in demand, prices have soared.

This would seem to not pose much of a problem for rice farmers, but rice farmers are not seeing additional profits. According to one Vietnamese farmer, fertilizer, insecticide, and labor costs have doubled. Furthermore, a large proportion of rice farmers are actually net rice purchasers because they consume more than they produce. More importantly, many rice farmers have no means of storing their rice, and must sell right at the harvest—when prices are the lowest because supply is plentiful. So during the non-harvest season, individuals must purchase the rice at the higher costs.

The high rice prices have caused some unrest in various Asian countries that depend heavily on rice as their food staple. Protests have already begun in the Philippines. A Philipino worker has stated that his “family will go hungry” if prices rise any further. Moreover, the Phillipines is facing what has been called a “perfect storm:” rising rice prices coupled with a US economic downturn that reduces remittances. Nevertheless, for many poor Asian countries, there is some good news on the horizon. Prices are expected to stabilize once states like Uruguay, India, Indonesia, Vietnam, and Brazil harvest their rice and increases supply on the market. Domestic measures such as a crackdown on price-gouging, price manipulation, and hoarding have been instituted to keep rice prices somewhat reasonable.

Question: Many of these rice price problems have been caused as a result of poor infrastructure. If an adequate infrastructure, such as irrigation and genetic engineering of rice plants, can be established--production will increase. An increased supply will result in a drop in prices. How will smaller rice farmers be affected by this?

IMF calls for a focus on housing markets

Source: IMF urges greater focus on housing

The IMF is the latest international governing body to encourage central banks to pay greater attention to housing markets when setting interest rates, challenging the view that monetary policy should avoid trying to soften variance in property prices. The IMF’s comments appear in an analytical chapter in the most recent World Economic Outlook which, among other things, suggests that many European countries are becoming increasingly susceptible to a housing market crisis.
The IMF estimates that house prices are 30% above their fair value in Ireland, nearly 30% overvalued in the Netherlands and the United Kingdom and more than 20% overvalued in France. Although the fund found that US house prices were only a little more than 10% overvalued, it noted that the US market was vulnerable to credit conditions, and might overshoot on the way down. In addition, the fund noted significantly increased residential investment in Spain, Denmark, France, Italy, Finland and Belgium. IMF Chief Economist Simon Johnson, in an interview with the Financial Times, noted that “house prices in quite a few countries look overvalued relative to fundamentals.” Whereas the IMF does not forecast a housing price crash in any of these countries, Johnson points out that “asset price correction remains a risk” particularly in the event of a tightening of global credit conditions.
The IMF’s new view of the role policy makers should play with respect to the housing market is in line with that of a growing number of economists, including central bank officials, who think that monetary policies should see to reduce the amplitude of asset price cycles by trying to spot bubbles in the making and “lean against the wind” with policy. However, this policy contrasts with that of Alan Greenspan, the former Federal Reserve chairman, who thought it was difficult to both spot asset price bubbles and imagine raising interest rates sufficiently to stop a bubble from developing. However, new research from the IMF suggests that there appears to be a big “financial accelerator” operating through housing markets in countries with highly sophisticated mortgage lending practices. Additionally, the IMF found a greater link between monetary policy and house prices, but did not go so far as to recommend that central bankers target house prices.

Questions for Discussion
1. The IMF continues to advocate increased government intervention to correct recent financial downturns. Is government intervention the proper remedy?