Critique on Fear and Uncertainty take Toll on Spending

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

I found both this article and the critique extremely interesting. I liked the way the original blog touched on the idea of the “wealth effect.” This concept seems very relevant in this article and it was extremely crucial that the blogger write about it. It makes perfect sense that when people have more money to spend they are more likely to invest it in other ways than just normal banking.

One thing that came to mind for me while reading this article was the concept of risk. I know we talked about risk mostly when dealing with interest rates, which also seemed very relevant to this article. When people have lower more money they are more likely to invest in thinks that are riskier but have more of a payoff if Murphy’s Law isn’t at play. An example of this is a trust fund. Many times people who have more money can contribute to something riskier such as a trust fund which is much riskier because in turn you are turning your money to a stranger to handle but the rate of interest that could possible be tacked on to your original sum is the real benefit.

Another idea the blogger touched upon was the idea of confidence or the idea of making more conservative decisions based out of fear. I mean it really makes sense that in an unbalanced economy it is difficult to have faith and put money into an economy that has possibly destroyed you financial standing and or someone you know. I found this quote interesting “almost a third saw a loss greater than an entire year’s income.” To me that seems so extreme but it is certainly believable. The current recession, as defined by the bureau of economic affairs as two or more consecutive periods of decrease, is one that seems to have affected so many who usually are unaffected by recessions. Personally my father was laid off during the recession and I know first hand this idea of fear of spending. My parents made a lot of financial decisions based on fear. They pulled money out of trust funds and put most of it in normal savings accounts for risk of losing money.

Lastly I’d like to touch upon the graph that the blogger didn’t quite touch upon. I think it can be seen as a definite positive that the graph seems to be increasing. From 2009 to 2010 there was a certain drop but then a definite rise. Like many of the reports we observed in class it seems our economy is increasing which is really exciting!

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

The Federal Reserve is every smaller banks “big brother”. In the economic crisis of 2008, the Fed loaned to banks and lenders all over the world to help keep them afloat. Not every bank borrowed a lot of money. A small bank in Florida borrowed only $1,000 and paid it back the very next day. Other banks were not so fortunate, and borrowed millions. Recently, the data of the discount window was published. It showed how often every bank borrows and how much they borrow. I do not agree with the name of the bank being published. This will discourage the banks from borrowing, possible when they are in a serious crisis. The data is good to look at, but it should be anonymous, and maybe just the country of the bank. Many banks, large and small, need these loans to help as a safety net, and they will be discouraged to do so. If the larger banks don’t borrow from the Fed, then it makes it impossible for smaller banks to borrow from the larger banks. The Fed offering a discount rate to the commercial banks is really a benefit for both the smaller bank and the Fed. I think the original post should have included how not every bank can get a loan. In the article it stated that a small Vermont companies and other places across the country have good credit and still weren’t able to receive a small loan. They continue to loan money to those big banks that are billions of dollars in debt. I am assuming this is because they are a bigger bank and they must provide for smaller banks but it just doesn’t really make sense to me why they would loan to someone who already is in debt either from them, or from another bank, when there are smaller banks all over who just need a safety net. Overall I think the original post was a good summary of the article. I would have liked to read more about what the author of the post thought. It was a good overview of how the Fed works with the discount window, definitely not how they work otherwise. I don’t think the discount window should be published with bank names. This will cause discouragement in borrowing all over the world and will end up hurting the Fed in the long run because no one will be borrowing from them so they cannot get any interest back. http://www.nytimes.com/2011/04/01/business/economy/01fed.html?_r=3&adxnnl=1&ref=business&adxnnlx=1302879730-vT5TgyflLJNB22enXRhS9g

Critique: Fear and Uncertainty take a toll on spending

I agree with the majority of the points in this blog. A huge reason that the economy is taking so long to recover is because of the lack of money the people of the country are putting back into our economy. This could be caused by several very valid reasons. The baby boomer generation is the one that has seen the most drastic change in the economy and it is understandable why the number of people who are retiring in their 50's has greatly decreased. With uncertainty in the economy the marginal propensity to save greatly outweighs the marginal propensity to consume. Although the disposable income of households may be greater now than in recent years due to their current savings rate, people are not looking at their disposable income as "safe" to spend.

The main thing holding consumers back from being comfortable with spending money is the uncertainty in the economy. The target being the baby boomer generation once again. There have been many ups and downs in the economy lately that even when things start to look up for a short period of time, there is still a great deal of skepticism amongst households. If there is once area that people will be cautious and conservative it is when dealing with their money. There needs to be a longer period of stability in the economy before we will really start to see the money circulation start to steadily increase. Like stated before, even though the average wealth of households has generally increased in the last 18 months, the spending has not increased. This is another perfect example of basic fear in the economy.

The majority of people obviously lost money in the recession due to various reasons. The losses came from bad investments, losing money because of banks, and lack of knowledge about the recession. It was stated in the blog that the people who actually gained wealth during the recession were more likely to have an increase in their savings rate. They said that they felt the need to save more for emergencies and unexpected expenses. This is technically the opposite of the wealth effect. This is probably because the ones who gained money were able to witness the terrible times that the people who lost a great deal had to experience. This making them more cautious because they simply did not want to have to go through that themselves.

Critque- Why does money have no value?

Why does money have value?

Benjamin Holler

I agree with the author of this article and in the blog, money really has no value. This has been true since the 1971 when Nixon got rid of the gold and silver standard. Before money was backed by something to help keep the economy stable, but now there is nothing, it could be looked at as worthless if we all got together and got rid of the demand. As I am a history major I saw this same thing during the Weimar Republic in Germany just before World War II. As we learned in class at this point in Germany history there was hyper-inflation which made money worthless and people tried to get rid of it as fast as possible. The Weimar Republic tried everything to get the money to hold to something, even creating a whole new currency.. Almost everything failed until the republic but land value behind the money. This in the sense is the same thing as the gold standard but with a section of land. This for the people of the country gave them faith in the money, even though the government lied about the value. The government in Germany would never sell the land but no one questioned it. This barely helped the economic situation in Germany and only until the Weimar Republic fell and the preparations of war came did the country get out of the trouble. If we all decided as citizens of the United States to not accept the dollar and do not demand at all, we will see money disappear because there is no backing to make the dollar worth anything. The article and the author of the blogs goes into saying inflation is related to the response of the people to the money. The people do not believe in the money and spend it right away, and then business will change prices several times a day to keep a profit. This is almost like a snowball effect, which can be devastating for everyone. This issue is still in today’s decision in the United States. Senator Ron Paul sought to change the law in 1971 for Americans to go back onto the gold standard. He even ran for president behind this fact. In all I believe the author of the article and the blog have valid points that everyone should be aware of, we as a people need to see this problem that could arise before something happens.

Critique: The United States Housing Bubble

Critique: The United States Housing Bubble by Jack Dings

I chose to critique this article mainly because after the first time I read through Jack’s entry on it, I quickly felt like his response sounded like an article summary from one or two years ago. This is mainly because he begins by explaining why and how the market crash began. I found this strange because the short article that he chose to write his blog on does not mention the “.com era”, for the article is mainly focused around explanations as to why housing prices dropped so much in February of 2011. Jack also mentions that the United States is now recovering from the housing crisis. While this may be true, this is not what the msnbc article discusses. The article is based around economist’s frustrations on the continuous plummeting of sales for previously owned homes in the United States. February marked the lowest of lows in nearly nine years for sales of these homes. Even when just compared to February of last year, the sales of previously owned homes dropped down 2.8 percent. Jack seems to use his previous knowledge when explaining the housing crisis and fails to touch on the major points of the article.
There are many interesting points of the article that Jack fails to touch on. I find the quotes from Tom Porcelli, the chief U.S. economist for RBC Capital Markets, and David Carter, the chief of the investment office at Lenox Advisors, helpful in explaining what can be expected in the future and what can be done to put an end to the housing issues. Porcelli explains that due to the imbalance in supply and demand within the housing market, we cannot expect any positive outcomes or end to the crisis for at least a year. He also makes a somber prediction that he expects another 5 to 10 percent drop in home prices over the next year, causing a drag on the economy (and GDP) overall. This will only continue to bring our economy down while the lack of selling and purchasing homes negatively affects mostly all components of gross domestic product. Carter’s comments suggest that recovery can possibly be anticipated sooner than Porcelli may think. He sees a potential turnaround in the market due to the recent increase in better affordability. Carter suggests that as affordability hopefully continues to increase, the market’s recovery can be expected. However, he does also touch on the fact that employment must improve to better the economy; even with the recent positive events having to do with affordability.
Overall, I found that Jack’s biggest mistake was failing to make the main points of the article the focus of his blog entry. Looking passed this, he does a good job at using economic vocabulary and terminology. Next time, I would suggest that he pays closer attention to the structure of the article he uses.

Critique of "L.L. Bean Free Shipping"

The blog I chose to critique is on the article titled, “L.L. Bean offers year-round, no-strings attached free shipping.” This article discussed the news that in order to get an edge on its competitors, L.L. Bean has decided to offer no shipping charges on any purchases no matter what the cost. The company decided to do this after years of researching the effects of free shipping on their profit margin. One way that the marketing officer evaluated the possible result of free shipping on consumption was by examining the rate that online customers decide not to continue with their choice after seeing the shipping fees. With this examination, they discovered that nearly three quarters of customers discard their online shopping cart after seeing the shipping fee. Another way the article said that the company evaluated the result of their decision to offer free shipping was by testing occasional free shipping. This test revealed that this promotion set well with the customers. It is important for companies to listen to the customer demands in order to increase their consumption. Over the last year, L.L. Bean saw a 5.8 percent gain in sales from the free shipping offer. The company is hoping that the increase in sales by the quantity of products demanding from L.L. Bean will offset the shipping costs that it now has to pay. I agreed with many of the things the person who wrote this blog said. Consumption is a very valuable part of Gross Domestic Product and even though this is just one company, it is still a contributing factor to the national number. She made a good point when she said that the L.L. Bean products being a substitute good for other goods that are not supplied by companies offering free shipping. If someone is deciding between two of the same products that are the same price except for the fact that one of them has a shipping fee, the person will choose the one without the shipping fee. With the quantity demanded of L.L. Bean products increasing, the money supply will start to increase and the company will reap the benefits of its no shipping offer. Once other companies see the company’s gain from this offer, they will then start doing the same thing in order to keep in competition with them.

L.L. Bean offers year-round, no-strings attached free shipping

Critique of L.L. Bean Free Shipping Article

In thinking about L.L. Bean’s decision to offer free shipping, no matter the order size or type of good, makes perfect sense for their retail business model which is based primarily on taking orders from their catalog, phone orders, and more recently internet based orders. Unlike most retailers that depend on reaching the public by operating hundreds of stores nationwide, Bean continues to stick by its original business model, which emphasizes high quality outdoor goods merchandised through its catalogs and online store front. Though Bean will experience higher shipping costs, it seems clear that the benefits of achieving higher sales and continued avoidance of operating in a multi-store retail environment will far outweigh these costs.

In addition Bean should earn increased goodwill from its customer base. If three quarters of consumers are abandoning their online shopping carts due to the lack of free shipping, clearly the market has spoken that paying for shipping costs on top of the costs of the good being purchased is more than a mere annoyance. Considerable sales are being lost for a reason that the company can control. By making this decision Bean removes a major obstacle to achievement of a sale. Most likely Bean will account for this increase cost in the pricing of its goods.

Since 1912, Bean has been operating on this mail order shipping model to achieve national and international sales. The article mentions that Bean uses UPS for its shipping services. Presumably, with an expected higher volume of shipments, Bean will try to negotiate lower shipping costs in return for the higher volume in order to manage the overall cost increase that the company expects. If UPS were unwilling to negotiate on price, Bean would always have the option of exploring what competitors such as FedEx would offer on substitute pricing.

In terms of the original blog, I agree that the customers will be happier with the free shipping. However, I am skeptical of whether or not the consumer will truly avoid paying for the cost of shipping. Unless Bean can manage its contract with UPS (or some other firm) it will be eating into its profit margin. While it is possible to achieve as much if not greater profitability on a smaller profit margin provided that sales increase efficiently, I suspect L.L. Bean might build in some of these higher costs in the pricing of its goods. I also agree that from going the free shipping route that L.L. Bean now does have a one up on other businesses. Customers will more often than not always go with Bean assuming that other competitors do not follow suit because no one wants to pay higher prices.

To an extent Bean is responding to zappos.com. It will be interesting to see if internet and mail order based retailers jump on this band wagon of free shipping meaning that Bean’s competitive advantage could be short lived.

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

Ned Feldmann