A Billion Here, a Thousand There (Critique)

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

(Critique)

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

The crisis with the Federal Reserve could have been resolved easily with some simple solutions. The Required Reserve Requirement (RRR) is put into place by the fed so they can control the amount of money the banks must have on hand. If they see that there is going to be a lot of withdrawals of cash from the bank, then they could have changed that percentage to be less, so less bank money could be invested, and more of their money must be kept on had for cash.

I do not agree with the Fed releasing the names of the banks that needed loans. That may have compromised the whole system. For example, if I was at my bank and heard they needed a loan, then I would take out my whole savings and go somewhere else. The Federal Reserve only loaned the bank so much amount of cash, so if all of their customers started to do that, then it would diminish the loan and put the bank out of business. They failed that way by not being as secretive as they should have been.

I do not agree with him saying that smaller banks should have to rely on larger corporations to bail them out. This is where the most trouble arises in America, when people cannot handle themselves. Borrowing from the Federal Reserve is a weakness, but can be easily solved in the future by investing a less amount of money until the bank can become stable.

What was failed to mention that very few of those banks that got loans didn’t pay the Fed back, because they could not sustain themselves and went out of business. The article says JPMorgan and Wachovia both returned their money the next day and banks like Bank of America took a month, but eventually returned it.

Giving out all of this money is not as bad as it seems. The Federal Reserve is trying to protect our money, so we should be grateful. The billions of dollars they say they have lent out, they have gotten back. It saved investors from going overseas to other banks and losing the business to overseas competitors.

This article is not the whole cycle of how the Federal Reserve runs. It only deals with the discount window data and how it divides loans to banks in need. There is nowhere else saying all of the other different processes they handle. This discount window is the last chance for banks to turn around, and is at the end of the line for the Fed to do.

Matthew Kline

Japans Banks: Home and Away Critique

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

The reason I chose to critique this article is because of the fact that if it was wrote a couple of weeks later, it would have severely change the thoughts as to what the three main banks should do as a result of the disaster that has occurred there recently . As mentioned in the original post the japanese banks are in question about what they should do with their tons of cash. They are in this bind because of previous sketchy dealing with Japanese firms, and because of the way the Japanese firms handle their own cash. Another problem holding Japanese banks from bringing their money to foreign countries is that the G-SIFIS are required to hold more reserve ratio, or more equity than liability. All of this is because of the new BASEL III regulations. Lastly the Japanese government has put on a legal suspension for debts owed for the next three years before the banks can move abroad.

As presented above, the Japanese banks have numerous obstacle before they can start spending there boatloads of cash. Interestingly enough though, as the recent natural disasters that have just happened in Japan, the banks might become the saviors of the country. If they approach this situation in the right way they could benefit greatly from it. With the tons of excess cash, and no where to spend it, the banks could use this money to loan to the government to help rebuild and clean up Japans destroyed areas. As a result from these helping the government could potentially release their suspensions on the bank which would then allow for the banks to bring their business to foreign countries. This is all hypothetical in that it depends on how the banks approach this situation and use it to their advantage. If done correctly this could also help the Japanese business in the sense that they know the banks will be more responsible in their dealings this time around instead of like before. With the new trust built between the too a great relationship could build and prosper so that instead of businesses using the market for financing they will tend to look towards the banks.

If I was a manager at one of these 3 major banks, I would not look at the natural disasters that just happened as completely bad for the economy, but it will take careful approach of the banks to use it to their advantage

POSTED BY
CONNER DUBOIS

The United States Housing Bubble

The United States housing bubble of the early 2000’s has led to the economic recession we are now finally recovering from. This bubble was created as a result from the dot.com boom of the 90’s and reached its peak in 2006. This is when housing prices reached their maximum potential, in early 2007 these prices began to fall and by the end of the year we had begun our dive into economic recession. The bubble collapsed as a result of many factors. During the boom financial institutions and banks were using securitization to finance mortgages. Securitization is when home mortgages are sliced and diced, then repackaged and sold as bonds on securities markets. This gave value to these mortgages and allowed banks to give out low interest rates. Another downfall of the housing market was banks giving out subprime mortgages. Subprime mortgages are mortgages provided to people for the entire value of a house on the basis of little or no documentation of their income or job status. This meant that banks were handing out mortgages to people who may not have been able to pay them off in the long run. In early 2007 these subprime mortgages and securities being sold equaled over a trillion dollars. This was fine as long as the value of houses continued to rise. Unfortunately this was not true, housing values fell drastically over this period. This was a result of the dot.com bubble burst, people lost money and jobs, which meant they were unable to pay their mortgages. The securities sold lost their value and effectively were turned into junk bonds. Junk bonds have little to no value as they are not backed by any sound financial product. Banks and financial institutions who had invested in these bonds lost a tremendous amount of money resulting in many of them to declare bankruptcy. This forced banks to tighten credit restrictions, reduce loans, and cut back sharply on new credit. This meant the average person faced many more obstacles in their attempt to finance their house. This gave an even lesser value to the bonds still on the securities markets. The Federal Reserve stepped in attempting to curb this spiraling downfall of the economy by lowering interest rates and extending credit. This is an example of expansionary monetary policy. However the value of stocks fell so sharply these could not keep up with the downward spiral. The United States Treasury and the Federal Reserve loaned trillions of dollars and bailed out financial institutions and banks this still was not enough to keep our economy from entering a deep recession in 2007 that we are now climbing out of.

http://www.msnbc.msn.com/id/42193084/ns/business-real_estate/?source=patrick.net#lead

Jack Dings

Critique of The Fed’s Crisis Lending: A billion here, a Thousand There

I picked this blog to critique because I enjoyed reading about the discrepancies between loans from the fed to large banking corporations and smaller local banks. I found it very interesting that Howard Bank in Baltimore only asked for a thousand dollar loan and still managed to keep from going bankrupt. This intrigued me, as the bank must have used very successful money managing techniques and smart banking tools to use that loan wisely. You also stated in your blog that out of sixty banks that received loans from the fed that sixteen percent of these banks eventually ended up committing bankruptcy. This is an alarming statistic as the fed clearly did not loan money smartly. To have ten out of the sixty banks go bankrupt clearly shows that the corporations receiving loans were not adequately evaluated prior to receiving their loan. The bank in San Diego that received a six million dollar loan is a prime example destructive banking techniques that obviously forced this bank into bankruptcy. The discrepancy of this loan compared to Howard Bank in Baltimore explains how the amount of money that was loaned was able to grow to such a high dollar amount.

Some of the points that I wished were included in your blog were how the fed evaluated which banks would receive loans. This would be an interesting tool to evaluate how successful the fed was in determining which banks would use the government’s money successfully and properly. Another interesting topic of discussion that could have been included was how the size of a loan to be granted was gauged depending on the size of the loan asked. It was interesting that Howard bank only asked for a thousand dollar loan but what if they needed more once the financial crisis turned for the worse? How would the fed determine if another loan would help the bank make a turn for improvement? These two tools of discerning loan significance would be a good measuring stick of how successful the fed was when they determined which banks would receive loans and if their loan size was appropriate. Overall I enjoyed learning about the loans that the Federal Reserve made to various banks across the country. It was an interesting statistic that sixteen percent of the banks that received loans ended up declaring bankruptcy. In the future the fed should take a closer and harder look at which banks will be bailed out and if the loan they receive will help the community these banks are located in.

Jack Dings

Critique- gdp growth in fourth quarter

The reason why i picked this to critique is because i found it interesting to see that the GDP grew. As mentioned in the original post it is difficult to raise national gross domestic product), or GDP because of the recession. As mentioned in the original article the economists estimated a wrong percentage amount instead of the GDP being 3.0 percent it finalized at 3.2 percent which shows that the GDP was greater and the United States did better in the fourth quarter even though it wasn't expected. As my peer mentioned in this article the government decided to increase government spending and to cut taxes, there are also other ways that the government can expand the economy (in the expansionary phase). One of the ways that the government can stimulate the economy is by figuring out a way for people to start spending more money. Either going shopping or buying more products. As my peer mentioned i also agree that this is a great start for the United States after a period with a reduction in employment and prices of regular things being at an all time high. I would also agree with the statement that my classmate said about jobs opening up, since the economy is growing this could also mean that there are going to be more jobs coming along with that. Overall the country would progress in kind of a rapid time. ONe of the things that his article mentions is the government maintaining a balance between government spending and a steady price with taxes, this is true in all ways because people need to trust the government and know that there isn't going to be a rapid change where everything could change and then the money that the people spent from their savings would be gone and they would be in financial problems. I thought one of the more interesting things mentioned in this article would be the fact that the student mentions about how the government cannot control the prices of oil for example which is a critical good that we need in our daily lives. Some of the products that we use every day are imports coming from other countries, and one of the negative aspects of that is that there is no way for the United States to control the prices, the other country is the one that sets the prices and we have to deal with that to get the good that we need. AS mentioned in the original blog post the Federal Reserve can play a very important role in economic growth like the reserved requirement ratio that the banks have to follow. Depending on this that is what "Creates" money in banks. This ratio is the amount of money that the banks have to have at hand at all times, if the ratio is less then that means that they can "create" more money by giving out loans. Overall this original blog was very interesting because it gave a deeper explanation about the economy especially explaining how the economy has grown and what exactly was the reasoning in it doing that.

Critique on-L.L. Bean Free Shipping

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

This article is about L.L. Bean providing free shipping for online purchases. The writer suggests that customers will buy more frequently with free shipping. She also mentions how important consumption is as part of the GDP equation and that included in production are durable and non durable goods which L.L. Bean provides. She also believes that L.L. Bean will have “one up” on its competitors because customers are more attracted to free shipping. Therefore, L.L. Bean acts as a substitute to other brand name products. She states that initially, the company will lose money due to the extra cost of shipping, but in the long run, it will do the company good because sales will continue to increase.

I agree with several of the ideas pointed out in this blog. L.L. Bean is listening to its consumers when it comes to the demand of free shipping. It is also good to suggest L.L. Bean is serving as a substitute to other companies. Though, they are now adding extra costs of shipping making their revenue go down initially, the increase in sales is looking promising. However, there are several things that could be making the demand for L.L. Bean increase besides free shipping. This new marketing strategy could also cause damage in their total profit which was not mentioned.

Quantity demanded has an inverse relationship with price and though L.L. Bean is removing a shipping cost from the customer, they aren’t technically lowering the price of the good. A customer may not buy they’re preferred brand online not because the actual product is cheaper, but because of free shipping. Also, with the recession, L.L. Bean may have moved to free shipping because consumers were no longer willing to spend the extra money on shipping with the lower amounts of income they were receiving. This is a good example of opportunity cost rising. People aren’t feeling that the product is worth the money being asked for it whereas if money wasn’t as tight, they may have been more willing to spend the extra cash.

So, sales for L.L. Bean have increased, but, as I said above, it could be due to the fact that we are coming out of a recession and income is slowly rising to the point where people feel more comfortable buying the luxury goods. Also, just because there is an increase in sales does not mean the company is making a profit. With the extra shipping expense, they’re total costs have increased and may be more than the revenue brought in. Hopefully in the long run, more customers will react favorably to the new no shipping benefit continuing to increase sales.

Lastly, a good negative point to the free shipping would have been to touch on elasticity and customer loyalty. Some companies do not have free shipping because they do not need it. They’re products could be more inelastic compared to L.L. Bean’s elastic products because people will purchase them whether they have to pay shipping or not. Also, loyal customers will still buy the product regardless of shipping costs because it is the brand they prefer. For many brand name companies it is the loyal customers who bring in the most revenue, not the bargain shoppers. Bargain shoppers tend to spend less because they are looking for good deals. So, in the long run, they could still be losing money instead of gaining more customers. Only time will tell.

February Inflation Critique

February Inflation Critique By Zach Barrett In the fox business article it talks about current inflation especially in the month of February. It discusses how for the 8th straight month household spending rose. This is true that it has slowly increased but, watch out for the problems that the increase in percent doesn’t take account for. With food and energy prices at an all time high Americans are struggling to pay for these necessities. Inflation of food and energy is a very complex problem to try to fix. One reason is the demand is always going to be high or almost inelastic because foods and energy are seen as necessities. In the 21st century one cannot go without food and electricity in their house. It is products that people will consume to survive in the world today. With prices rising and predictions on them to keep rising has forced millions of families to tap into their reserves or savings accounts to pay for bills and food. In February when this article was published gas was in the low 3 dollar range in Roanoke Virginia. Now it is closing in on 4 dollars and some people predict it to do nothing but increase. This puts another damper on American families without gas families can’t go to work, school, and proceed to do normal activities that one does. With people using their savings and not investing as much simply because they have no extra money is a problem. This can be defined as unexpected inflation. People were not prepared for food prices to almost double or extra money added to their usual energy or electric bill. One example the government could do is to try to enforce more powerful caps to stop the energy companies from going up so much. Without that a person has no option but to pay the bill even if it takes all their savings. Energy is an example of a product that is hard to find substitute products or companies. For example in the city of Salem there is only one place to get electricity and utilities from so their price is what you have to pay. Energy companies are the closest example of a monopoly in the United States. Food prices are hard to control simply because with increases in stuff such as fuel can spark an increase in price. When products get more expensive people have to raise other prices to compensate for it. With inflation rising more than individuals incomes will create a problem in the consumption of spending and saving. It is okay if products increase or inflate as long as people’s incomes rise at the same rate. Even though there was an increase in spending there is still many inflation problems that are hurting Americans making them spend the money they used to plan on saving. http://www.foxbusiness.com/markets/2011/03/28/consumer-spending-rises-07/ Reuters, . "Consumer spending up, inflation accelarates." foxbusiness . N.p., Published March 28, 2011. Web. 11 Apr 2011. .