Tax Revenue Snaps Back

The most recent recession has made a huge impact on all state and local governments, with many hard decisions having to be made. However, now some new decisions have to be made because of the current lack of federal funds that were available the past few years. Even still, state and local tax revenues have almost reached its peak from back in 2007. This can be attributed to the slowly healing economy as well as the tax increases during the recession. During this tough time, some fiscal policies were put into place in order to keep the economy afloat. A fiscal policy is defined as a government's program with respect to the purchase of goods and services and spending or transfer payments and the amount and type of taxes. For this article, the last part of this definition will be more prevalent. During the latest recession, the government implemented some tax increases that were to help the ailing economy. They did just this. In 2010 alone, the raising of taxes made for a boost in the state revenue of 12.3 billion dollars, or about 2%. Also helping with the state's struggles, state income tax revenue jumped 10.9%, and the sales tax showed an increase of 1.9%. These two increases, the income tax and the sales tax, have the more steady paychecks and stock-market gains to thank for their success. However, even with these positive increases, the states are not out of the storm just yet. Not only are local governments hurting because of the falling house prices affecting the property tax returns, but they are now la king the federal government support they received in the last few years. For the past two years, state governments have been relying on the nearly 150 billion dollars worth of federal stimulus to stay alive. This resource has not been depleted. Because of this, state authorities now have to consider cuts that would have happened two years ago had it not been for the federal support. So, even though things are beginning to improve slightly for the states, the cost of local and state government has risen faster then the overall inflation and thus causing difficulties for the states to get back on their feet. Having so much negativity attacked to the current economy, the good news remains this: state and local government's tax revenue has nearly snapped back to its peak reached several years ago. This is just one sign that the economy is beginning to revive itself and that states and localities are beginning to take steps towards sustainability. http://online.wsj.com/article/SB10001424052748703461504576231072013545188.html?mod=googlenews_wsj

Keynesian method

This cartoon created by Barry Deutsch is a perfect example of Keynes economic theories. It argues that private sector decisions are sometimes not the best in terms of outcomes, because of this Keynes advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.

Many are opposed to the Keynesian method, which includes banks, large corporations and “Wall Street Rocket Scientists” (Krugman New York Times, 9/2/2009). They cite that if you use Keynes method of deficit spending of the government’s budgets to stabilize the economy will lead to higher unemployment and inflation. Another opposing argument is that while at one time government stimulus was needed in a time period of the Great Depression, today’s economy is too advanced and diversified for stimulus money to be effective as it was during the Great Depression. We, governments and industry, understand the issues which caused the depression and we have the “know how” to avoid the same pit falls.

So many are in favor of little government involvement in the economy and will argue against Keynes until their method slips and begins to fall like the “American Guy” in the cartoon. As he falls, he holds up his hand and looks for Keynes to help him out. Figuratively this is exactly what our country as well as the world economy does during a downturn. Monetary policy is adjusted constantly to help stimulate financial lending and currency exchange of other countries to help stimulate your countries exports. When the economy is growing nobody in our capitalist society wants any government involvement, until the economy takes a significant downturn. We then collectively hold out our hand for the governments help. In comes Keynes and his theory of using government stimulus to stabilize the economy; extended unemployment benefits, low interest rates, government spending.

An example of this is our most recent recession, where after almost 30 years of sustained economic growth, with a continuation of less and less government involvement. Banks with less government regulation and control looked to continue to expand profits. They began to write higher risk loans, poorly regulating themselves and reach a threshold of collapse. Some would argue, this is capitalism and bad businesses, should fail. The situation in 2008 was so widespread, it had halted the flow of cash through the credit market and if allowed to fail, all of the major bank would have come crashing down. So, as in the cartoon, the major banks held out their collective hands for $700 billion dollars. Right behind the banking industry, came the auto industry with GM and Chrysler looking for a bail out.

Has Keynes stopped the second Great Depression or only pushed it further downstream? If we look at the past two years, it seems the stimulus has allowed the economy to start to recover or at least slowed the failure. Time will tell if the economy will recover completely, but the signs are positive, unemployment is slowly being reduced; housing purchases are no longer declining. The outlook seems brighter than in 2008, but the federal deficit hangs over like a dark storm. The answer lies within the balance of pure capitalism and Keynes.

http://www.leftycartoons.com/regarding-the-ongoing-irrelevance-of-keynesian-economics/

http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=2&_r=2

The Fed’s Crisis Lending: A Billion Here, a Thousand There

During the economic crisis of 2008, the Federal Reserve loaned billions of dollars to various banks and lenders in order to keep them afloat. One such lender was Eudora Bank in Eudora, Arkansas that received $400,000 during this time period. While the Fed was concentrating its efforts to bail out the big banking corporations, some central banks were making similar loans to smaller banks in communities in their counties. Not all banks required such a bail out. Some smaller banks, such as Howard Bank near Baltimore borrowed as little as a thousand dollars just as a safety net in case the crisis got worse. One big problem during this crisis was that some of the banks that received the Fed’s loans went bankrupt anyways. One such example of this was a small bank in Southern California that failed even after receiving a six million dollar loan from the Fed. Recently, the Fed and central banks released, to the public, a complete list of banks that borrowed from the Fed using its discount rate loans, the oldest emergency loaning program for banks.

The discount rate, for the most part, served the big banking corporations such as Bank of America and Citigroup, but during this crisis the discount rate loans were also open to smaller banks, which usually have to rely on other banks and the central banks for loans. Other emergency services were created to deal with the situation, but they only helped bail out banks in the state of New York. Due to the outrageous amount of banks that lined up for a bail out, the Fed set up an order in which the banks received their loans. One day, October 29 2008, the Fed gave sixty banks loans that ranged from $1,000 to $66.5 billion, of which at least ten went bankrupt. These numbers are unnaturally high since the weekly average of loans the Fed gave out between 2003 and 2006 was less than $50,000. Also, having to borrow from the Fed is usually considered a sign of weakness in a bank.

This article shows how the Federal Reserve runs. It also shows how it handles national crisis and tries its best to keep the entire banking system working the way it should. More than likely the Fed lowered its discount rate during these times to try to increase borrowing and expand the money supply any the economy.

http://www.nytimes.com/2011/04/01/business/economy/01fed.html?_r=1&ref=business

Another Year of Living Dangerously

http://www.economist.com/node/18440781

In the midst of instability and turmoil, the global economy has suffered as a result of the problems in the Middle East and the catastrophes in Japan. The fallout from these two events alone have caused initial damages to the global economy not just in fiscal terms, but also in the long-term in relation to the doubt, fear and insecurity felt by investors and consumers. The level of global output is of great concern. With doubt and insecurity comes a loss in aggregate demand (AD), which is the total or aggregate quantity of output that is willingly bought at a given level of prices, other things held constant (432). With the hit to aggregate demand, the decrease in output, or aggregate supply (AS), which refers to the total quantity of goods and service that the nation’s businesses willingly produce and sell in a given period (377) will doubly affect the global economy.

In Keynesian terms, the decrease in overall supply is not as important as how it has affected the demand of consumers. Even though Japan has steadily been declining in terms of its global output, it is still the third largest economy in the world. So, rather than focus on the loss in production, it will be important for world leaders to increase consumer confidence and find available markets in other locations and possibly look to the expansion of markets that include substitute goods, or goods that serve that same purpose but are produced elsewhere (92). Though were the crises in Japan the only concern, that plan may have a greater effect; however, oil is still a very popular commodity with no real substitute on the market and the upheaval in the Middle East shows no sign of abating. It would seem though that this might be the best time for investors to not become concerned with the Middle East and instead turn their capital toward markets of alternative energies and possibly prevent the sort of catastrophe that the events in the Egypt and Libya have created.

Furthermore, it is important that the manufacturers affected by the loss of production in Japan don’t overreact to the crisis and reduce their workforce in anticipation. With the economy finally in some sort of recovery and the majority of the crisis over, it is important that we don’t overcompensate for these events and cause more damage. We need to allow the economy to take its course and monitor the unemployment rate before corporations decide to take action and take back all the progress that has been achieved over the past several months. Ultimately, it is important that the reaction and policies taken by central banks and governments not be too severe in either direction to prevent a fall out in the event of over expansion to compensate or preventing the momentum of the economy to build as result of fear and uncertainty.

Fear and Uncertaintly Take Toll on Spending

http://www.thefiscaltimes.com/Articles/2011/03/27/Fear-and-Uncertainly-Take-Toll-on-Spending.aspx

This article explain one reason why the economy may be taking so long to recover. The beginning of the article talks about how Baby Boomers are extending their retirement age and are much less likely to take any risks with their money. They are very unsure about how or when the economy is going to recover, leading them to save more and spend less. We talked about saving and consumption in class. In order to boost the economy we need individuals to put more money in the economy. But people are very nervous to put their hard earned money into an economy that is on the rebound. They feel that saving there money is a much more secure decision.

The recent recession and downturn of the economy has seemed to leave quite the scar on consumer's confidence. The confidence of again, the baby boomers seemed to be hit pretty hard. The article says many of them faced great losses and are now making decisions mainly based out of fear. A majority of them have increased their retirement age by at least a year since 2007. This shows their uncertainty in the future of the economy. The article also states that even though in the last 18-months there has been an increase in household wealth but it is still much lower than pre-recession periods. This again comes from consumers want to save more than consume.

An interesting point the article makes is that a majority of the baby boomers lost as much as years income when the market was hit but there was also a portion of them who gained from the recession. But yet when interviewed they all had very similar answers. The families felt they needs more money saved to deal with emergencies or other unexpected events. This increased the saving rate. Remarkably, the families who gained during the recession because even more cautious than those who lost money.The article also hits on the idea of the "wealth effect"; which is when households see an increase in their assets which causes an increase in their consumption. We also talked about this in class; it makes sense if you have more money you are more likely to spend more money. But because the economy is so shaky people are doing the exact opposite.

February Inflation

Spending by United States consumers rose in February resulting in an eighth consecutive month of spending increases in the country. After looking closely at the numbers though it is apparent that things are not as good as they sound. Many Americans are reaching into their savings to cover higher costs of goods especially when it comes to energy and food prices. This past January spending rose 0.3 and in February that number increases to 0.7 percent. To go along with that inflation also increased, the notable point here is that it increased at the fastest pace it has since June of 2009. After inflation numbers were added into the equation we notice that spending was really only up 0.3 percent for the month of February. Economist Paul Dales was quoted as saying “The data provide yet more evidence that higher prices are denting economic growth.” The prices of goods in this country continue to rise and that is forcing many Americans to tap into their savings to cover the increased costs. During the final three months of last year consumer spending was increasing at its fastest rate in four years, but due to the continuing increased costs of energy and food many consumers will have to divert their excess spending to cover the increases in these areas. The cause of the inflation increase last month is due primarily to the increased food and energy cost that faced consumers last month. According to the Commerce Department, personal consumption expenditures price index (PCE) increased to 0.4 percent. This is the most rapid that the PCE has moved since June 2009 when it was 0.3 percent. If the PCE figure is recalculated for February and energy and food are removed from the equation the rate was only an increase of 0.2 percent. The difference in these figures can really help us see how much the increase in the cost of these products are affecting consumers. The Federal Reserve is ready to jump in and help combat continued inflation if things start to get out of control according to Chairman Ben Bernanke. On average Americans only had a 0.3 percent increase in their incomes in February compared to the 1.2 percent increase in January. Many economists had expected that number to grow but it just did not work out that way for most workers. Between that and the increase in the price of goods many people are struggling even more than they were before causing many to tap into what savings they have to combat the continuing increase in prices. There are not many positives that can be found when growth of consumption is greater than the increase in savings.

Tyler Lackey

http://www.foxbusiness.com/markets/2011/03/28/consumer-spending-rises-07/

Japanese Banks: Home and Away

The Economist published this article on February 24th, 2011, prior to Japan’s earthquake and tsunami crisis, which occurred on March 11th, 2011. The article describes the relationship between Japanese banks and businesses, and the banks’ desire to take their business abroad. What makes this article interesting is thinking how it would have changed if written later.

Japan is home to three megabanks, Mitsubishi UFJ Financial Group (MUFG), Mizuho and Sumitomo Mitsui Financial Group (SMFG). All three banks are doing very well (MUFG has deposits of $1.6 trillion and currently is the worlds second largest bank). The issue Japanese banks are facing is a problem a person could only dream of; the banks haves tons of money, they just don’t know how to spend it.

Much of banks profits come form interest gathered on investments made to people or companies. The Japan’s banks aren’t the only ones who have found success; Japanese companies are sitting on a pile of wealth described by The Economist as a “hoard of around ¥200 trillion” ($2.45 trillion). Nearly half of Japanese firms have more actual cash than they do debt. Despite having so much money to lend, Japanese banks are having difficulties finding investment demand, which can largely be attributed to;

1. Japanese firms dislike Japanese banks after the 1980’s when the banks convinced bosses to take out loans they were not in need of.
2. When Japanese firms are in need of financing, more often they look to the market for assistance rather than the banks.
3. A majority of Japanese banks’ business is domestic (Japan’s volume of loans taken out has been declining for 14 months).

With money to spend, Japanese banks are looking for business in foreign markets, but continue to find their efforts stubbed.

The Basel Committee of Banking Supervision is an organization featuring members from around the world and is in charge of establishing global regulations for banks. In response to the Global Financial Crisis, the Basel Committee released its latest package of regulations, “Basel III.” Under Basel III, banks considered “global systemically important financial institutions” or G-SIFIs (applicable to Japanese magabanks) are required to hold more equity verses liability than before (increase in the Required Reserve Ratio). This increase puts Japanese banks’ plans to move abroad in a chokehold.

Also, in an effort to soften the blow from the Global Financial Crisis, the Japanese government forced Japan’s banks to comply with a new fiscal policy, which placed a moratorium (legal suspension in repayment of debts owed) for three years. Before Japanese banks can continue to move abroad, they are first going to have to work through some problems both globally and domestically.

My thoughts after the earthquake and tsunami crisis:

Upon reading this article, I felt that the relationship described by the article WAS completely true and accurate. At the same time though, in light of the recent tragedy, I feel a disaster of this magnitude, is something large enough to alter this relationship between firms and banks. The reason why I feel this is because now there is an investment demand (something lacking before). Firms and people across Japan now find themselves needing to rebuild lives. Loans will be needed and banks are begging to give them. Though the article makes several quality points, because of Japan’s new need to consume verses save, I’d like to argue that had this article been written 15 days later, it would have spoken a much different relationship and plan of action for the future.

http://www.economist.com/node/18233464?story_id=18233464

GDP Growth, Matt Kline

Title: US GDP Growth in Fourth Quarter

Posted By: Matt Kline

The United States saw a rise in national gross domestic product, or GDP. GDP is the market value of all final goods and services that are provided within a country, in this aspect, the fourth quarter (September, October, November and December). This is great news for our country, because of the previous recession; there is always a slack in increases of the GDP. A recession is defined as a significant decline of economic activity lasting more than a few months. This is great news because economists only believed for the GDP to close at 3.0 percent, but it finalized at 3.2 percent. The reason for the slack after the most recent recession was because the government tries to stimulate the economy by increasing government spending and cutting taxes. This usually gets us out of a recession, but after the recession, the government usually peaks. We are then in the expansionary phase of the National Bureau of Economic Research (NEBR) cycle phases.

I believe that this is a really good start for our country. We have seen vast unemployment in the past year, and if we can get our economy to turn around, hopefully more jobs are to follow. Our government needs to find a balance of government spending and a steady price with taxes so the consumers are more willingly to spend savings money if they know the economy is stable. This is hard for the United States economy to do alone, because of oil prices in the Middle East, we cannot control their prices, therefore consumers become weary of prices of oil, that would limit our consumers spending and slow down our economic recovery.

The Federal Reserve has also been aware of the rise in economic growth; they played their part by putting more money into circulation, which stimulates demand. They usually buy bonds from the U.S Treasury, which puts more money into circulation. The Federal Reserve can also cut the amount of money that banks must keep on hand, the reserved requirement ratio (RRR). When the make this ratio smaller, then more cash can circulate through the process quicker than when the banks must hold onto more money.

Altogether, the economy expanded at 6.7 percent, the last time that happened was 1998. Consumer spending accounts for almost two thirds of spending grew 4.0 percent in the last three months of 2010. It was much faster than the 2.4 percent rate from 2006. The consumers are a large part of our economy, if they do not spend their money, then the government must spend more to stimulate the people, which still hurts the economy even more.

Hopefully the United States economy can become stable again. After the past year’s results and rises, it seems like we are coming out of a recession and are in the expansion phase. Hopefully it is a slow and long process before we reach the peak of expansion, because after the peak, comes the downfall again. Although we never know how long we could have the economy at its peak, I would rather be continually expanding than at the peak of our abilities.

http://in.reuters.com/article/2011/03/25/idINIndia-55879620110325?pageNumber=2

Did the New Deal Work?

By Matthew Bandyk

Posted: April 11, 2008

My article is on the New Deal that was made by President Franklin Roosevelt in 1930s. Even though the article was written in 2008, I feel the ideas on why the author wrote it is still valid for this class. The point the author brought and the overall theme of the article is the idea of government spending to help out the recession that they were in, and if it worked. The recession that the United States was in was Great Depression. The article goes into depth trying to discuss what other economics from today believed about the New Deal. There was research done in 1995 where 51% of the economics agreed that the New Deal did somehow help the economy and the other 49% agree that the New Deal prolonged the depression. We will never know if it did work because of World War II which ended the depression.

This article and the event is important still and needs to be discussed more. It is vital that not every believes the same thing, but yet how we run the United States today is from what President Franklin Roosevelt started. President Roosevelt brought the New Deal as the start social programs that we still is being seen and used today.

The article then goes on to talk about how the gross domestic product fell in 1933 to $635 billion and only to rebound to 1940 to $1 trillion dollars. So it shows that the New Deal slightly improved the economy over the years before the war started. For the unemployment after the 1920s the United States saw the unemployment rise to 24% during 1932, but only slowed to around 17% to 1940. One reason for this what we talked about in class is the idea of business are afraid to employ new people because they do not know if the economy is fixed or just going to fluctuate back down again. It would cost the employer more money than it is worth to hire and then let go again. To fix this unemployment, President Roosevelt formed huge organizations such as the Homeowners Loan Corp., which would employ mass amount of employed people and did.

Another idea came from this plan and was discussed and hailed by economists that were told in this article was the idea of social security. Even know we as students or at least I do not see this is a good idea in the long run, because of how we determine Social Security not being around enough for this generation to be used. It was great for the time in the Great Depression just to help people out who were starving. This would just add to the government spending which affects the United States GDP.

http://money.usnews.com/money/business-economy/articles/2008/04/11/did-the-new-deal-work?PageNr=2

How Worries of Inflation is Pausing the Fed’s Decision Making

http://www.nytimes.com/2011/02/27/business/27view.html?sq=monetary%20policy&st=cse&scp=2&pagewanted=print

For the last few years, it has been no secret that the economy and, more specifically, high unemployment rates in America have been alarming. As we learned in chapter 24, the Federal Reserve is expected to conduct monetary policy, maintain the stability of the financial system, supervise and regulate bank institutions, and provide financial services to banks and the government. However, recent debate between the monetary policy makers at the Federal Reserve have been limiting the Fed’s ability to properly address the economy’s issues and fix them.

It is safe to say that no one wants to see inflation occur and everyone wishes to lower the unemployment rate. Recent divides within the Federal Reserve about the causes of inflation have slowed their efforts to put an end to these two major issues. Parts of the monetary policy makers believe that inflation rises when unemployment is low and vise versa. The other half believes that “inflation could bite us at any moment” and that it has nothing to do with employment. Thus, we come to the conclusion of quantitative easing. This is when monetary expansion is put into place when the federal funds rate is close to zero. Quantitative easing helps support the economy by lowering long-term interest rates. Lower interest rates cause the investment demand curve to shift outward, also causing more spending and major purchases of durable goods like cars and household equipment. This increase in investment has a huge positive impact on gross domestic product (GDP = consumption + investment + government expenditures + net exports). Another impact that quantitative easing has on GDP is through net exports. When American interest rates are lower, this causes money demand to decrease therefore also lowering the value of money within foreign exchange markets. Quantitative easing is a main topic that most of the Federal Reserve agrees can help stimulate the economy.

So if quantitative easing is proven to help the economy, where is the debate? The argument continues and goes back to the fear of inflation. While some argue the policy would not cause inflation due to the weak economy, others stand strong saying an increase in growth will end up with a huge increase in inflation.

While the debate continues, I can see the argument from both sides. However, I do find it confusing as to why some of the Federal Reserve is so concerned about inflation. While I realize inflation is not favorable, one would think that the Fed would be more concerned with the current issues within the economy. Regardless of even the most drastic consequences of monetary policy, I think the Federal Reserve needs to stop this “fight” and find a policy to agree upon before unemployment rates rise even higher.

Economic-Political Currency

http://www.loc.gov/rr/print/swann/herblock/images/s03458u.jpg

This political cartoon incorporates many aspects of what we have discussed in class so far. It points out the lack of trust we have had in our administration, the struggling GDP levels, the current debt our country is in, and the lack of worth our currency has.

The cartoon shows a "3 dollar bill," which obviously does not exist with George Bush on it. Although, Bush is no longer our president, this is a great example of the lack of trust this country had in him and the rest of the country's administration. Putting the president's face on a fake bill is clearly not a positive thing. Under his face it says, "Read my lips," basically mocking the lack of validity in the public announcements or statements he made.

On the bill it says GDP .92. Nominal GDP is the value of all good produced within a country. The United States imports so many more good than we produce that our current GDP is not very high at all. Obviously .92 is a bit or an exaggeration but the number is still very low. Improving the countries GDP could potentially help a significant amount is eliminating some of the debt we are currently in.

The bill also says "No new taxes ever." The promise of either no additional taxes or lowering of taxes has become a more prevalent statement made by administration. Not adding or lowering taxes may not always be a good thing. It can be used as an expansionary policy that encourages spending in the economy. If these tax cuts are not permanent than the increase in disposable income is not long term so people may still be hesitant to spend it.

The fact that the bill is worth three dollars which is not an amount of paper money being printed is undermining the value of the U.S. dollar. The economy has been struggling, which, we have learned can cause the value of a dollar to also struggle. So much money is being printed that the value continues to drop all the time.

The 4 trillion dollar debt the United States is also printed on the cartoon three dollar bill. Our total expenditures are through the roof relative to the amount of money we are making on exported goods.

This cartoon expresses several topics we have discussed in class. Most of them being negative but still demonstrating the issues the country is currently having with debt, GDP, and lack of trust in our administration. All of these problems are recognizable but are not easily fixed.

L.L. Bean Free Shipping

http://www.usatoday.com/money/industries/retail/2011-03-24-ll-bean-free-shipping.htm?loc=interstitialskip

L.L. Bean has announced that they are giving in to customer demand and are going to have free shipping at all times. This is a big deal for customers but also for the company. Customers will be happier because overall their purchases will be cheaper because they don’t have to worry about the shipping price. The company might initially be against the idea because they are losing the money from charging shipping. The article stated that Steve Fuller, chief marketing officer of L.L. Bean, has been thinking about making this change for about three years. In the long run, this should produce more profit for L.L. Bean because they are now listening to the voice of their customers and now they are here to stay.
Customer demand is a big deal in economics. Consumption is ¼ of what makes up GDP. That is looking at the bigger picture for the U.S., but each company also has to break it down and determine which goods they will use. In class we discussed durable goods, nondurable goods and services. Durable goods are goods that last longer (generally 10 years) and nondurable goods are those that last less than that (food, clothes, etc). This relates to L.L. Bean because they have both durable and nondurable goods. Durable goods may include kayaks, carracks, tents, snowboards, luggage, etc. Nondurable goods may include clothing, shoes, etc. In order to keep selling, which means they can produce more, they need to listen to what the consumers what. If the shipping amount used to depend on how much you buy, it probably altered the mindset of some customers. I know I have wanted to order something before, but the shipping and handling was so expensive, I decided not to. There were a few customers in the article that said that is what they wanted (free shipping) and now they are going to be doing business with L.L. Bean for good.
L.L. Bean now also has a “one-up” on other companies that are still charging shipping. If a customer can get the same product for cheaper (because there is no shipping charge), then they are likely to get that product. L.L. Bean can act as a substitute for other products now because they don’t charge shipping. The customer is generally getting the same product, with a different label, but for a cheaper price overall. Those are the types of things that consumers look for in a company. They saw a 5.8% increase in sales last year so they are expecting an even greater increase now that they have granted the customers’ wishes and made the shipping charge $0.
This change in L.L. Bean will also likely cause their money supply to increase. They lose a small amount of money by not charging shipping on purchases, but they will get more customers, and those customers looking for a substitute, so in the long run they will have a higher profit. This will probably start a trend if other companies start to see that L.L. Bean is attracting a lot of customers.

Mets, Madoff, and Major League Baseball

http://www.nytimes.com/2011/03/02/sports/baseball/02wilpon.html?_r=1&scp=10&sq=mets%20bankrupt&st=cse

As a native New Yorker and a Mets fan, I instantly found this New York Times article intriguing. Since the time the Mets announced their financial issues I have been reading articles like these, however it’s quite interesting to look at this for a more economic and financial standpoint.

Basically, The New York Mets owners Fred Wilpon and Saul Katz are in an extremely poor financial standing. Wilpon and Katz invested money with Bernard L. Madoff, and due to his fraud are now also in poor standing. At this point the owners are trying to keep control of the Mets despite the one billion dollar lawsuit, because of speculation that they knew something about the Madoff scam.

One important economics concept is the concept of the business cycle discussed in chapter twenty-two. In our country we run on a cycle that is almost like seasons for our economy. There are four stages in this cycle. Peaks, where the economy is at its best. Then there is the contraction phase, where the economy is decreasing in worth. Then there are troughs, where the economy is at a low point. Lastly there is the expansionary phase where the economy is growing. The business cycle lasts peak to peak and can last anywhere from two to ten years. Right about now, the New York Mets are feeling the bouts of the contraction and trough phase of our business cycle. Much of the country is in a recession; a recession is just a decrease in the GDP for two or more quarters. By GDP is meant, Gross Domestic Product and that is measured by the following formula, consumption + investment + government purchases+ net exports= GDP. Basically this is just the money we are making on the home front.

Another concept is the idea of loans and investments. What Wilpon and Katz did back in the day was take a chunk of their money and invested it with Madoff. Madoff is now in jail because of his shady business behavior. How investments work, are you taking a certain sum of money and then you receive interest on that sum of money. The interest is determined by the interest rate, which varies depending on factors such as maturity, the risk factor, tax status, and other attributes of the loan.

Another place this idea of loans comes full circle in the “25 Million Dollar loan in November” extended from Major League Baseball. I saw this as almost a similar concept to the Federal Reserve System. In this system the federal bank watches over, and will help if necessary all the banks in its 12 regions. In a way Major League Baseball is comparable to the Federal Reserve Bank because they are watching over the teams in their league and helping them when necessary. Back in June, Major League Baseball helped the Texas Rangers with a somewhat similar crisis. In the article is argued that MLB will probably not extend anymore money to The Mets. The Mets are now looking to sell their team and want to receive the best price, however it will prove challenging to do this when they cannot borrow from traditional lenders and are in such a poor economic standpoint.

In conclusion although the standing of my favorite team is poor right now, I like to hope that like the business cycle their economic standing takes a turn for the better!