Michael Tabayoyon

Market Commentary

2010-11-22T10:46:00.000-08:00

©Advisors Asset Management and Stone & McCarthy. All Rights Reserved

The lame duck session of Congress will receive more than the usual amount of attention for a variety of reasons, not the least of which some important decisions have to be made. One key decision has already come and gone, at least temporarily, as the House failed to extend jobless benefits for about 2 million long-term unemployed workers. The bill will likely be taken up again, but passage before the end of the year looks quite dim at this point. Then there is the Bush-era tax cuts that are set to expire on December 31. Keep your fingers crossed that some reasonable compromise will be forged between President Obama's wish to extend the cuts just for those earning under $250 thousand a year and the Republicans' (with some Democrats on board) desire to extend them for everyone - but don't bet the house on it, unless it was foreclosed.
If a resolution on these two key issues is not reached in the lame duck session of Congress, things won't get any easier when the newly-elected version takes office in January. The point of this diatribe against gridlock is that the economy could be in for some rough sledding if politics trumps compromise in coming months. Admittedly, fiscal austerity is the mantra of the day, and deficit hawks are emboldened by the midterm elections. But the potential for higher taxes in the near term coming on top of a struggling economy is a pretty daunting prospect, to say the least. What's more, absent a sudden about-face in the House, the aforementioned two million unemployed workers who will become ineligible to receive benefits after November 30 will almost surely curtail spending.
Simply put, with the deficit-cutting bias firmly ensconced in Washington, the task of pump-priming the economy out of its lethargy rests solely with the Federal Reserve. Yet the Fed is under attack from several sources for its latest effort to stimulate growth with the implementation of QE2. As we discussed last week, foreign officials are leading the charge, asserting that the Fed is striving to engineer a weaker dollar to strengthen exports, thus promoting U.S. growth at the expense of other nations. That criticism, as we noted, lacks credibility for a number of reasons, including the fact that faster U.S. growth would not only lead to a stronger dollar but would also result in a greater demand for imports, which would benefit our trading partners.
But an equally misdirected concern is coming from domestic quarters, particularly from critics who assert that the heavy dose of monetary stimulus will inevitably lead to higher inflation or, at least, another asset bubble. The Fed, of course, is highly sensitive to this criticism, given its history of overstaying the course and widespread suspicion that it is now more concerned with promoting jobs than containing inflation. However, while it is fair to question the Fed's handling of recent asset bubbles, it has done a commendable job of keeping inflation in check over the past two decades; there is no valid reason to expect otherwise in the period ahead.
Indeed, there are more compelling reasons to fear a pernicious onset of deflation, given the huge amount of slack in the labor force, the lackluster demand for goods and services and persistent efforts by businesses to increase productivity. Chairman Bernanke can certainly draw on incoming data to back up his oft-stated contention that inflation is running too low for comfort. This week, for example, the government came out with its consumer price index, and the picture is hardly that of pending runaway inflation. In October, the underlying inflation rate, as measured by the year over year increase in the core CPI that excludes volatile food and energy prices, slipped to an annual rate of 0.6. That was the lowest since at least as far back as 1957, when data for this metric was first compiled.

The headline CPI, which embraces the entire basket of goods and services including food and energy, stood more comfortably above the zero threshold, coming in at an annual rate of 1.2 percent. However, this merely returned the price index back to its July 2008 level when it registered 219.1; the October index actually stood a tad lower, at a seasonally adjusted 218.9. Keep in mind though that households are less equipped to afford the cost of goods and services than they were then. The unemployment rate, at 9.6 percent, is 4 percentage points higher than it was in mid-2008, households have suffered a devastating $7 trillion shrinkage in net worth, and more than one in five homeowners owe more than their homes are worth.
From our lens, it is hard to see how the Fed's $600 billion bond purchase program will ignite an inflation outbreak in the foreseeable future. Instead, the risk is that the QE2 strategy won't provide the oomph needed to close the gap between the economy's actual and potential output capacity, nor the job growth needed to narrow the intolerably high unemployment rate. Underpinning this concern is the notion of a liquidity trap, which may short-circuit the transmission of the Fed's ambitious asset-purchase plan. What this notion says is that the Fed's liquidity injection is winding up as excess reserves in the banking system, rather than as loans to households and businesses. Simply put, the Fed's operation is akin to pushing on a string. No matter how much liquidity is available to lend out, and no matter how low interest rates fall, households and businesses will not step up the demand for loans in the current uncertain economic environment.
That said, it has to be remembered that monetary policy works with lags, and the additional stimulus provided now should eventually work through the economy in time-honored fashion. Even if the Fed's actions do not impart an immediate spending boost, they do influence financial conditions - both positively and negatively. Despite some harsh criticism of quantitative easing, there is no denying that it has had a positive effect on the financial markets. True, bond yields have not declined much but stock prices have moved solidly higher since August, when the Fed chairman indicated that QE2 was coming. That has a positive influence on confidence and wealth, both of which encourage increased spending behavior.
Indeed, there are glimmers of hope that the economy is emerging from the soft patch it sank into over the spring and summer months. The upbeat jobs report for October was perhaps the most telling piece of evidence that things are looking up. Without faster job creation and income growth, the spark needed to launch the economy out of the aforementioned liquidity trap will not be lit. To be sure, a one-month spike in payrolls is not convincing evidence of a trend, and all eyes will be focused on the November jobs report due on December 3. But consumers seem to be behaving with more confidence in job prospects.
That was clearly evident in this week's retail sales report. In October, total retail sales jumped 1.2 percent, well above expectations and the biggest increase since March. True, the major thrust came from the volatile auto sector, where sales surged by 5 percent. But the sales gains were broadly based and have to be viewed as an encouraging omen for the upcoming holiday shopping season. Excluding autos and the price-driven sales at gasoline stations, retailers enjoyed a solid 0.4 percent increase in revenues, lifting the total 5.2 percent above the level of a year ago. That is the strongest annual gain since December 2006, a full year before the onset of the recession. Of course, the October increase is measured against a weak base of twelve months earlier, when the economy was in the early stage of the recovery.

But it's the momentum that matters, and it does appear that consumers are reopening their purse strings, portending the first respectable holiday shopping season in three years. That bodes well for manufacturers, as new orders should pick up and spur production, something that may already be underway. Industrial output was unchanged in October, but only because mild weather cut utility output. Manufacturers increased production by a solid 0.5 percent during the month, lifting the annual increase to 6.1 percent. That's much weaker than the 9 percent year-over-year increase posted last May, when inventory rebuilding was in full swing and having a major impact on industrial activity. But the setback that was expected after the completion of the inventory cycle is turning out to be much milder than thought. What's more, if consumer demand continues to hold up in the months ahead, retailers may well decide to add to their stock of merchandise, leading to more orders and a second wind in industrial activity.

What recent data tell us is that the threat of a double-dip recession has faded considerably compared to the fears being expressed over the summer months. But it's a far cry from avoiding a recessionary relapse to an outbreak of inflation, which should not be used as an argument against the Fed's $600 billion asset purchase program. There are risks to what the Fed is doing; the massive expansion of its portfolio will at some point be a problem when the time for a tighter monetary policy comes into play. Just how this is handled will require a lot of thought and luck, as the prospect of unwinding a $3 trillion portfolio of bonds could have a highly disruptive effect on market psychology, not to mention interest rates. But that's an issue for down the road; the challenge now is to make sure the recovery stays on track.

Current Financial Crisis - Jeff Hummel et al

2009-01-28T10:43:00.000-08:00

A bit more technical is David's and my Briefing Paper on "Greenspan's
Monetary Policy in Retrospect: Discretion or Rules?", published by the
Cato Institute. You can find it attached, or you can go to a link at:

http://www.cato.org/pub_display.php?pub_id=9756.

George Selgin posted a critique on the Mises Institute blog:
http://mises.org/story/3200. David Henderson and I then cross-posted at
Liberty & Power (http://hnn.us/blogs/entries/57562.html) and EconLog
(http://econlog.econlib.org/archives/2008/12/our_response_to.html) our
detailed reply to Selgin's critique.

I've also posted on the current financial crisis at the Liberty & Power
blog. The three most important are:
"Paradoxes of Paying Interest on Reserves"
http://hnn.us/blogs/entries/58090.html
"Causes of the Crisis" http://hnn.us/blogs/entries/56772.html
"Recent Fed Machinations" http://hnn.us/blogs/entries/56095.html

Other related posts of mine are:
http://hnn.us/blogs/entries/49791.html
http://hnn.us/blogs/entries/53544.html
http://hnn.us/blogs/entries/55083.html
http://hnn.us/blogs/entries/55621.html
http://hnn.us/blogs/entries/56004.html
http://hnn.us/blogs/entries/56184.html
http://hnn.us/blogs/entries/58464.html
http://hnn.us/blogs/entries/59123.html

I will be continuing to post at Liberty & Power:
http://hnn.us/blogs/4.html?id=1721.

*********
Jeffrey Rogers Hummel
Department of Economics
San Jose State University
P.O. Box 4644
Walnut Creek, CA 94596
(925) 926-0807
jhummel@gguol.ggu.edu

Regulation of Hedge Funds

2009-01-01T11:07:00.000-08:00

Michael W. Tabayoyon on The Public Regulation of Mutual Funds, and Hedge Funds

The public regulation of hedge funds is of utmost importance since many regulators and congressional committees have targeted them in this current “credit crisis”. Investigations into Bernard Maddoff's Hedge fund also raise many questions about Private Regulation D Investment holding companies. In this paper we look at the history of regulation, the mutual and hedge fund, arguments for tighter regulation of hedge funds, and how hedge funds have become exempt from regulation.

A History of regulation and the current crisis.

According to Sergey Francois the securities Act of 1933 was aimed at securities issuers and Compliance with SEC filing and registration requirements for securities, compulsory transparency, management, holdings, fees, expenses. Securities Exchange act of 1934 was aimed towards brokers and changed the maintenance of detailed records of trades to avoid conflicts of interest in executing customer orders as well as trading on its own account; costly reporting requirements. The investment advisors act of 1940 was aimed at mutual funds and it changed the Registration as an investment company. It engaged restrictions on leverage fees, and Investment diversification rules. Mandatory disclosure, required distributions to equity owners each year. It required a majority of disinterested directors on board of directors. The blue skies laws were established at the state level to maintain integrity of markets. In 1996 the Clinton Administration engaged the national securities markets improvement act.[1] This was passed and it amended the previous acts. In the first 3 months of 2008 the Treasury department has been talking about improving the financial markets once again. The financial industry is vast with a wide array of consumers and participants. The financial markets main use is a system of intermediation that helps savers and borrowers accomplish their goals. [2]

Hedge Funds and Mutual Funds

Publicly held companies, such as mutual funds, are comprised of smaller stakeholders. These funds, with many more investors, are required to keep their passive shareholders updated on their investment performance. These are managed investment companies with stakeholders that are not involved with the investment decisions, but only capitalize the fund. Since there are so many passive investors, the managers of the mutual funds have become responsible to make profitable decisions that will benefit the company and their investors. The variety of mutual investment companies are a product of a healthy market. Hedge funds are a smaller set of investment companies that have traditionally been established on and offshore of a domestic economy. These funds target high net worth investors and not thousands of small net investors. They have not been required to maintain transparency of their financial statements to the public. An increasing number of institutional and private investors have started investing in hedge funds and are seeking higher risk adjusted returns, and greater portfolio diversification and more protection from risks associated with the end of an aging bull market. Some common myths say that hedge funds not only offer huge returns, but they also appear to have the ability to undermine central banks and national currencies and even destabilize international capital markets. Many hedge funds aren’t hindered as much in sec registration, by the investment company act, and investment advisors act.

Arguments for regulation

Schroder’s investment management CIO says hedge funds need more regulation. In An interview with Financial Times, Mr Alan Brown said “Hedge funds should expect their behavior to be scrutinized more closely, and could be brought into the regulatory net most asset managers are already in, he said. "And rightly so, as they become more open to smaller investors.”[3]

Treasury Representative Henry Paulson interview with Kim Landers ABC News said More power for Fed in historic Wall St overhaul. His blueprint for reform would give the Fed the power to examine the books of any financial institution, banks, hedge funds and private equity firms that might pose a threat to the stability of the financial system."It will focus on whether a firm's or industry's practices threatened overall financial stability," Mr. Paulson said. "It will have broad powers and the necessary corrective authorities to deal with deficiencies that pose threats to our financial stability."There will also be a single regulator for the nation's banks and credit unions, and mortgage brokers will have to be licensed for the first time. The US Treasury's blueprint mentions Australia as a possible model.[4]

The financial regulatory structure in the US is badly outdated. Dr Nariman Behravesh is the chief economist with Global Insight, a forecasting firm. And he makes that claim that this financial overhaul has been in need for some time now."You could argue that Wall Street brought this on themselves, but I think change was overdue and there has been a lot of talk about regulatory restructuring in the United States," he said. "I think this crisis has hastened that need and has created an urgency about this reform right now.“[5]

Policy and Regulation Discussion- Pros and Cons

Hedge funds are of particular interest in regulation since they have grown in use recently. The assets in hedge funds grew %27 in the first quarter this year indicating their growing importance in the financial investment market. [6] They believe that the current financial crisis could be eased if hedge funds were “more transparent” and if they disclosed investment information. The tricky thing about hedge funds is that they are capitalized by few very wealthy owner managers, and not many small investors. But more recently this has changed. Now hedge funds are opening their investments up to more share holders and this has complicated things. Some hedge funds have begun to act more like mutual fund companies. Policy makers face problems with the players on financial markets. Some say “the railroad laws are written in blood”. As we saw before in the history of financial regulation, many of these acts were engaged because of certain “market failures”. Economists disagree and say that problems in financial systems are the result of government interaction. So if the government would let the market determine its own path, in the long run, there would be greater stability. Regulators and the creation of transparent financial regulation say that financial crisis leads congress and regulatory committees to enact and enforce policy that will facilitate a stable financial system.

The $ cost of regulating financial markets in United States is something to consider. Howell Jackson says ”The United States, for example, spent nearly $6 billion on financial regulation in 2004 and employed more than 43,000 staff members, which is equivalent to 133 staff members for every million people in the population.[7]

Howell Jackson’s research spoke about the benefits of regulation: “several years ago, I attempted to summarize the goals of financial services regulation in the United States. At the time I contended that regulatory intervention in this field was designed to produce four distinct social benefits, with the relative importance of the benefits varying somewhat across different sectors of the industry: 1. Protection of General Public 2. Elimination of Negative Externalities from Financial Failures 3. Advancing Various Equitable and Redistributive Goals 4. Promoting Certain Aspects of Political Economy”[8]

Howell Jackson identifies the goals and benefits of financial regulation.

“1. Protection of General Public. In certain contexts, this goal is defined as the achievement of the level of protection that fully informed and fully rational investors, depositors, and insurance policy holders would choose for themselves; a hypothetical contract approach to regulation. Other times, this objective is cast in a more paternalistic light, imposing absolute protection on the general public without regard to their preferences.”(Jackson)[9]

2. “Elimination of Negative Externalities from Financial Failures. The most prominent sort of negative externality is the elimination of systemic shocks to the economy that financial crises could precipitate. A variant of this objective is the elimination of the costs that society would bear if members of the general public suffered losses from financial institution failures and then demanded ex post compensation from public resources.”(Jackson)[10]

3. “Advancing Various Equitable and Redistributive Goals. Though present in a smaller share of financial regulations than the preceding two objectives, equitable and redistributive objectives are undoubtedly present in some areas of U.S. financial services regulation. In banking, for example, some regulations steer lending into particular markets to enhance economic development or to promote certain activities; in insurance regulation, some degree of cross-subsidization between insurance pools is mandated to advance social goals independent of (and sometimes at odds with) solvency concerns.”(Jackson) [11]

4.” Promoting Certain Aspects of Political Economy. Finally, some aspects of financial regulation reflect political compromises. Longstanding barriers to the geographic expansion of banks are one good example, but so are restrictions on commercial activities of financial holding companies and certain aspects of SEC capital market regulation.”[12](Jackson)

Even with the benefits of regulation defined it is difficult to measure them. Howell Jackson’s research finds that an estimated $6billion is spent on financial services regulation per year and an estimated 43,000 people are employed in financial regulation in the United States. Many believe that the Securities and Exchange Commission is justified since it promotes integrity and stability in financial markets. This is true in the case of investments where many people participate with little or no contact to direct actions of the Investment Company or sole company. The case of the hedge fund is different of course if the hedge fund remains a hedge fund and does not begin to take on the characteristics of a mutual fund. That is, if the hedge fund is an investment company that has few investors that are directly involved with the actions of the investment company and its capitalization.

$6 billion a year is a large sum of money to spend on the maintenance of financial services regulation. The treasury department head Henry Paulson has his sights on the regulating the activities of private funds held in hedge funds that often are held offshore and onshore around the world. Henry Paulson says “Since so many pension funds like cal per’s invest money into investments like hedge and mutual funds the managers of pension funds have the responsibility to protect the asset of Americans on the verge of retirement. If you leave these funds unregulated you will put the old and elderly in jeopardy. This policy of unregulated pension fund investment funds could lead to catastrophes similar to the likes of Enron. “ [13]

But don’t you think that managers of pension funds have the responsibility to their stake holders to make wise and informed investments that have little risk of loss. They also have the generating a return on investment with the savings. They have the responsibility to invest into safe securities and avoid ones that are too that are too risky for the returns they want to realize.

Conclusion:

The past shows that the federal and local government has been tightening down over time. This can be seen as long ago as the 1930’s. Some authors say that regulators develop plans for tighter rules and pull them together when crisis strikes. By looking at the current arguments for regulation we can see that managers, government officials and other market participants make persuasive claims that the financial markets must be scrutinized for the good of society. We defined the Hedge Fund and the Mutual fund as two distinct examples of investment vehicles that require different regulatory treatment. The dialogue between hedge funds investors and public mutual fund companies followed. It is very important that truth is separated from the fog of financial crisis. It’s important that federal regulatory committees focus on the right market participants. Hedge fund managers don’t have a fiduciary responsibility to thousands of shareholders but rather a small group of wealthy investors. Publicly trade mutual fund companies have a fiduciary responsibility to manage thousands of passive investors. The public companies should maintain transparency of finance info but regulators should be careful not to invade private investor’s information. On one hand the history of financial regulation is used as evidence of a stable 20 years under the green span watch but economic principles show us that incentives matter. If the cost of investing money in financial markets black markets can arise, or people just exit the market in search for more profitable activities. If a healthy financial system is the goal then an overburdened tax and regulatory system will push investors out of the market. This would lead to the supply of loan able funds and investable funds severely lacking. Financial Intermediation and good investment vehicles are goals of investment companies.

[1] Hedge Funds- Myths and Limits

[2] Sergey Francois -Hedge Funds

[3] "Schroders CIO says hedge funds need more regulation"

[4] Kim Landers ABC News

[5] Hedge Funds need more oversight

[6] The financial structure is badly outdated.

[7] %27 growth in hedge funds WSJ

[8] Intensity of financial regulation

[9] Howell Jackson- intensity of financial regulation

[10] Howell Jackson- intensity of financial regulation

[11] Howell Jackson- intensity of financial regulation

[12] Howell Jackson- intensity of financial regulation

[13] Howell Jackson- intensity of financial regulation

[14] Paul M. Healey "the fall of Enron"

Works Cited

Regulation? Plus ca change for investment banks

TONY JACKSON. Financial Times. London (UK): Apr 7, 2008. pg. 20

Hedge Funds Need More Oversight, Transparency, Treasury Panels Say

By David Cho Two committees appointed by the Treasury Department called yesterday for greater accountability within the secretive world of hedge funds and ... Washington Post, United States - Apr 15, 2008 http://www.washingtonpost.com/wp-dyn/content/article/2008/04/15/AR2008041502807.html

KATHY SHWIFF Hedge Fund Assets Grew 27%Hedge funds world-wide had $2.65 trillion in assets under management at the beginning of 2008, up 27% from a year earlier, according to new Wall Street Journal. http://online.wsj.com/article/SB120835749453919575.html?mod=googlenews_wsj

Francois-Serge Lhabitant, Hedge funds Myths and Limits John Wiley & Sons .Baffins Lane, Chinchester, West Sussex PO 19 1UD England

United States Taxation and Regulation of Offshore Mutual Funds. Harvard Law Review, Vol. 83, No. 2 (Dec., 1969), pp. 404-452 Publisher: The Harvard Law Review AssociationStable URL: http://www.jstor.org.libaccess.sjlibrary.org/stable/1339676

Paul M. Healy and Krishna G. Palepu The Fall of Enron .The Journal of Economic Perspectives, Vol. 17, No. 2 (Spring, 2003), pp. 3-26Publisher: American Economic AssociationStable URL: http://www.jstor.org.libaccess.sjlibrary.org/stable/3216854

PAULINE SKYPALA Schroders CIO says hedge funds need more regulation. Financial Times. London (UK): Apr 14, 2008.

Howell E Jackson Variation in the Intensity of Financial Regulation: Preliminary Evidence and Potential Implications. Yale Journal on Regulation. New Haven: Summer 2007. Vol. 24, Iss. 2; pg. 253, 39 pgs

[1] Hedge Funds- Myths and Limits

[2] Sergey Francois –Hedge Funds

[3] Schroders CIO says hedge funds need more regulation

[4] Hedge Funds need more oversight

[5] The financial structure is badly outdated.

[6] %27 growth in hedge funds WSJ

[7] Intensity of financial regulation

[8] Howell Jackson- intensity of financial regulation

[9] Howell Jackson- intensity of financial regulation

[10] Howell Jackson- intensity of financial regulation

[11] Howell Jackson- intensity of financial regulation

[12] Howell Jackson- intensity of financial regulation

[13] Paul M. Healey “the fall of Enron”

A new financial era begins

2008-12-17T11:08:00.000-08:00

A new financial era begins According to Mark Giff

The crisis is still far from over, and just when we think we understand it, another surprise pops up. Nevertheless, there is broad agreement on at least some of the causes, and the responses to these will help define the future shape of the financial world. ING chief economist Mark Cliffe gives his view on how the new financial landscape might look.

Here are twelve themes that may drive the process:

1. Tomorrow’s rules won’t be the same as today’s
2. The law of unintended consequences
3. Back to basics
4. The market isn’t always right
5. The age of frugality
6. Trust will need to be rebuilt
7. Keep it simple
8. Government will have a bigger say
9. Central banks will pay more attention to asset prices
10. From globalisation to localisation
11. A more competitive financial eco-system
12. The cycle still exists… there will be an upswing

1. Tomorrow’s rules won’t be the same as today’s

The crisis has wrong-footed observers repeatedly. This should make us wary of firm predictions of the new financial world. This sense of humility is reinforced by the realisation that the full extent of the damage caused by the crisis has not yet been realised. Thus the current tally of losses incurred by banks worldwide is around US 700bn, but the final bill could be a mutiple. As a result, the rules of the game may change several times before the picture becomes clear.
2. The law of unintended consequences

The law of unintended consequences has been at work in spectacular fashion in this crisis. Just one example should suffice: the previous celebration of the efficiency gains from the risk-spreading arising from the global distribution of structured credit instruments has given way to an awful realisation that the risks were concealed, and through the application of leverage, effectively multiplied in the process. Sadly, the law of unintended consequences will continue to apply. The severity of the economic downturn sparked by the turmoil will make everyone determined to avoid a repeat. The hope is that the prospect of a more conservative and robust financial system will revive confidence. But the danger is that same prospect will make lenders and borrowers even more cautious in the short term, complicating efforts to revive the global economy. Thus banks, under pressure to raise their capital adequacy ratios to more ‘prudent’ levels in the face of a recession, will find it harder to step up their lending.
3. Back to basics

Some of tomorrow’s rules may look rather like yesterday’s. Now that the credit boom has turned to bust, the financial sector is reverting to more traditional conservative practices. High returns from investment banks and hedge funds turn out to have been based on high levels of borrowing; they have been brought down to earth, in some cases with a crash. Suddenly, conservatively run banks with diversified sources of funding and large pools of retail savings are looking smart. The outsourcing of risk evaluation to the now embattled credit ratings agencies has given way to the idea that in-house credit skills are to be prized. Lending multiples have been reduced, and the cost of loans has risen to better reflect their risks. Even if these trends start to reverse in the next economic upswing, the reversal will be more cautious than it was in the past. If the price of this is a slower recovery, it is widely seen as a price worth paying for more stable and sustainable growth.
4. The market isn’t always right

The credit boom was based on the belief that risks could be sliced, diced and priced efficiently by the financial markets. Fair value accounting was founded on the notion that market prices are the best measure of ‘value’. Banks started to rely on the wholesale money markets, believing that they would always be a liquid source of funds. These beliefs have been shaken by the crisis, which revealed that the financial markets fell well short of the perfection of the economics textbooks. When it came to the crunch, they lacked the large numbers of fully informed buyers and sellers required to produce viable prices and continuous trading. Some financial markets, old as well as new, simply shut down as a cloud of uncertainty over the scale and location of losses descended on the financial sector. Crucially, this led to a collapse in lending between, and to, banks. This massive market failure will have to be addressed in the new financial world. Transparent securities on open exchanges will be essential to the creation of liquid markets.
5. The age of frugality

Those who borrowed excessively are going through a painful learning experience. Some have been bankrupted as falling asset prices have combined with rising borrowing costs. Even those who escaped this fate will heed the lesson. In countries like the US and the UK, where consumers borrowed heavily to fuel their spending, thrift will become fashionable. More expensive credit and the wealth losses that consumers have suffered will stimulate a rebuilding of savings. For their part, the banks, having discovered that the money markets can be a fickle source of funds, will be keen to cultivate retail savers by offering attractive interest rates and services.
6. Trust will need to be rebuilt

A collapse in trust in – and between – financial institutions has been both a cause and a consequence of the crisis. Confidence in the industry will need to be rebuilt, especially in markets where banks have failed. Financial institutions will have to show that they are worthy of consumers’ trust and respect. Clarity about their financial strength, business models and products will be essential. Consumers, having had their fingers burnt with unexpectedly risky products or excessive leverage, will want to avoid a repeat. Transparency will also be required for a revival in trust, and trading, between financial institutions.
7. Keep it simple

Complexity has been another casualty of the crisis. Many investors, both individual and institutional, clearly did not understand the risks that the new financial markets were exposing them to. Indeed, even the banks and the issuers of many derivative based securities failed to understand the complexity of the risks that they were running. So aside from transparency, simplicity will be appealing. This will lead to efforts to standardise products, which will have the incidental advantage of making them easier to trade. Consumers will demand easily understandable information about what they are buying. It will be all the more important for financial institutions to think from the customer’s point of view.
8. Government will have a bigger say

The financial crisis is forcing governments to step in. With private savers looking to rebuild their battered savings, governments are trying to support economic activity through tax cuts or extra public spending. So public borrowing is replacing private borrowing, and government will play a bigger role in the economy. The crisis has also obliged governments to support the financial sector itself. Capital injections and even outright nationalisation of financial institutions means that taxpayers’ money is now on the line. Despite popular anger, most governments claim that they do not wish to interfere in commercial decisions and that their intervention will be temporary. However, the depth of the crisis is such that this involvement could last several years. Meanwhile, there will be lasting changes to regulation. The systemic nature of the crisis has revealed glaring gaps in international and domestic regulation. Tougher rules on capital adequacy and liquidity ratios are inevitable. There will also be determined efforts to improve market functioning through improved disclosure and transparency. Consumers can also expect greater protection, beginning with the US mortgage market, where the crisis began.
9. Central banks will pay more attention to asset prices

Critics have accused the central banks, notably the US Federal Reserve, of adopting an asymmetric approach: tolerating booming asset prices and then easing monetary policy aggressively when they subsequently plunge. They argue that this contributed to recent bubbles by encouraging excessive risk-taking. It seems likely that central banks will be more inclined to clamp down on strongly-rising asset prices in the future. This means that interest rates may be raised at an earlier stage in the next cycle, which may dampen down the economic upswing.
10. From globalisation to localisation

It is said that ‘economics is global and politics is local’. The politicisation of the crisis has raised real questions about the sustainability of globalisation. Why should taxpayers bail out foreigners? This question has complicated efforts to resolve the crisis. The rebuilding of trust and regulation, along with government intervention, will inevitably start at the national rather than the global level. Global financial institutions may be forced to embrace ‘multi-local’ business models to thrive in this new world.

The shift towards self-reliance may prompt a global rebalancing of saving and investment flows. Government policy will look to reduce dependence on foreign capital. Debtor nations, led by the US, are likely to increase their domestic savings. The flipside of this is that creditor nations, led by China, will find it tougher to pursue export-led growth and will therefore have to boost domestic spending. Now that ‘cash is king’ and creditors royalty, this will accelerate the rebalancing of economic and financial power towards the East.
11. A more competitive financial eco-system

The crisis is transforming the financial services industry. Collapsing asset prices and savage deleveraging has put paid to the heavily-leveraged business models of the US investment banks and many players in the so-called ‘shadow banking system’. Smaller and more conservative financial institutions that avoided the toxic complexities exposed by the crisis will probably continue to thrive, but bigger institutions may face more aggressive restructuring. Marriages forced by the crisis may lead to some complex divorces once regulators refocus on competition concerns. Global financial institutions will certainly face intense scrutiny, requiring clarity in their business models to justify their existence to regulators, investors and customers. There will be no quick return to the long boom in financial sector profitability that has been running for the last 30 years. Even once the current recession has ended, structural changes will weigh on the industry’s profitability. These include lower leverage, tougher regulations and possible extended state involvement, as well as margin pressures from product standardisation.
12. The cycle still exists… there will be an upswing

Not so long ago there was still talk of a ‘super-cycle’, despite the evident distress in the developed world. Subsequent events have shown that even super-cycles are prone to busts. Nevertheless, aggressive policy responses should reassure us that another Great Depression is not in the offing and that a recovery will ultimately emerge. Indeed, the crisis presents some tremendous opportunities as asset prices are driven down to below depression levels. Moreover, while the financial sector faces strong headwinds, there will be positive countervailing forces. Thus, the industry will benefit from savers’ efforts to rebuild their wealth, while in the emerging markets there is still scope for structural expansion of financial services. Strongly-branded survivors will benefit from higher margins as competitors disappear from the scene, and public sector led investment initiatives, such as on infrastructure and energy, will present attractive long term opportunities. The new financial world, while chastened and more conservative, will eventually shake off the current gloom.

VC Funding 3rd q 2008

2008-12-02T00:03:00.000-08:00

Venture Capital Funding 3rd q 2008

Steve Forbes On Credit Markets

2008-12-01T15:29:00.000-08:00

Tracking the Economy 2008

2008-04-22T15:47:00.001-07:00

Primaries

2008-01-07T14:15:00.000-08:00

Robert Longley presents the following information about presidential Caucuses

How our presidential candidates are chosen

In the summer of every presidential election year, political parties in the United States typically conduct national conventions to choose their presidential candidates. At the conventions, the presidential candidates are selected by groups of delegates from each state. After a series of speeches and demonstrations in support of each candidate, the delegates begin to vote, state-by-state, for the candidate of their choice. The first candidate to receive a preset majority number of delegate votes becomes the party's presidential candidate. The candidate selected to run for president then selects a vice presidential candidate.

Delegates to the national conventions are selected at the state level, according to rules and formulas determined by each political party's state committee. While these rules and formulas can change from state-to-state and from year-to-year, there remain two methods by which the states choose their delegates to the national conventions: the caucus and the primary.

The Primary
In states holding them, presidential primary elections are open to all registered voters. Just like in general elections, voting is done through a secret ballot. Voters may choose from among all registered candidates and write ins are counted. There are two types of primaries, closed and open. In a closed primary, voters may vote only in the primary of the political party in which they registered. For example, a voter who registered as a Republican can only vote in the Republican primary. In an open primary, registered voters can vote in the primary of either party, but are allowed to vote in only one primary. Most states hold closed primaries.

Primary elections also vary in what names appear on their ballots. Most states hold presidential preference primaries, in which the actual presidential candidates' names appear on the ballot. In other states, only the names of convention delegates appear on the ballot. Delegates may state their support for a candidate or declare themselves to be uncommitted.

In some states, delegates are bound, or "pledged" to vote for the primary winner in voting at the national convention. In other states some or all delegates are "unpledged," and free to vote for any candidate they wish at the convention.

The Caucus
Caucuses are simply meetings, open to all registered voters of the party, at which delegates to the party's national convention are selected. When the caucus begins, the voters in attendance divide themselves into groups according to the candidate they support. The undecided voters congregate into their own group and prepare to be "courted" by supporters of other candidates.

Voters in each group are then invited to give speeches supporting their candidate and trying to persuade others to join their group. At the end of the caucus, party organizers count the voters in each candidate's group and calculate how many delegates to the county convention each candidate has won.

As in the primaries, the caucus process can produce both pledged and unpledged convention delegates, depending on the party rules of the various states.

How Delegates are Awarded
The Democratic and Republican parties use different methods for determining how many delegates are awarded to, or "pledged" to vote for the various candidates at their national conventions.

Democrats use a proportional method. Each candidate is awarded a number of delegates in proportion to their support in the state caucuses or the number of primary votes they won.

For example, consider a state with 20 delegates at a democratic convention with three candidates. If candidate "A" received 70% of all caucus and primary votes, candidate "B" 20% and candidate "C" 10%, candidate "A" would get 14 delegates, candidate "B" would get 4 delegates and candidate "C" would get 2 delegates.

In the Republican Party, each state chooses either the proportional method or a "winner-take-all" method of awarding delegates. Under the winner-take-all method, the candidate getting the most votes from a state's caucus or primary, gets all of that state's delegates at the national convention.

For a detailed, and much more technical explanation of the primary-caucus-convention system, see:

Primary/Caucus/Convention Glossary (from Greenpapers.com)

Key Point: The above are general rules. Primary and caucus rules and methods of convention delegate allocation differ from state-to-state and can be changed by party leadership. To find out the latest information, contact your state's Board of Elections.

Human Capital Ecuador

2007-12-15T20:45:00.000-08:00

Growth in education depends on whether or not the individuals have an inventive to invest in the future. The correct incentives are needed in order to accomplish growth in developing countries. The correct amount of government and technology must be available. Equador is currently moving toward political stability. In the health report that the World Health Organization published this year, it is stated that between 2001 and 2005 there were nine different health ministers. Social stability is a huge factor leading to health and educational gains.

William Easterly discusses Gregory Mankiw’s analysis on investment in education in order to achieve economic development. Gregory Mankiw found a 78% connection between education and income difference among nations. Mankiw explains that investment in education and human capital must be hand and hand in order to accomplish growth. In regards to education, Easterly says that Mankiw’s connection between investment in education and gdp growth is not strong since the evidence leads to another conclusion. You would think that if the supply of unskilled to skilled decreased than wages to skilled labor would increase. If skilled wages increase, drawing skilled labor from abroad, his conclusion would be correct. But since current evidence shows that skilled labor consistently flows from low supplied areas to developed saturated areas (known as brain drain). Easterly’s statement that incentives alter people’s decisions is stronger and not Mankiw’s sweeping conclusion that there is a strong positive relationship between education and income growth. So, Easterly says there exists an optimal level of education, societal incentives, physical capital which creates an environment for economic growth. [1]

Burns and Charlip explain that essential infrastructure such as efficient transportation are necessary in order to accomplish a health economy. So if transportation is not in place then education and health care are infrastructures that are not as developed as they should be. [2] In 2001 dentists and physicians tended to be concentrated in urban areas, while nurses and obstetricians lived were in the rural areas. In 2003 there were 15.6 physicians for every 10,000 people 5.3, nurses, 1.7 dentists, 1.8 obstetricians, and 9.8 nurses assistants per 10,000 person. When Dartmouth research is compared to the UN human resources section of the health report we see that Equador’s and us physician to population ratio is very similar, even though the U.S. is slightly higher. The us rate is .0016[3] and Equador’s is .00156[4]

The UN report on health says that investment in research and development in 2003 was.07% of the GDP. It appropriated 8 million USD in 2005 and 26million in 2007. This report discusses Political stability, and water sanitation in relation to Health care in Equador. (Health in the Americas,2007)[5]

Political Instability-

“Political instability from 2001 -2005 caused problems in governance and social violence and increased corruption, administrative instability and lack of continuity in public management. This situation affected the dynamics of the health sector and its potential reform. The repeated replacement of authorities”(nine ministers of health between 2001-2005) (Health in the Americas 2007)

Water and sanitation investment-

“In its 2003 national water and sanitation policy, the government identified the need for an investment of approximately $150million per year to eliminate the existing deficit in water and sanitation services for 2001-20010. It is estimated that 42$ million are required for this same period for the final disposal of solid wastes in 180 municipalities in the country”

Works Cited

Burns, Bradford; Charlip, Julie Latin America: A Concise Interpretive History.

Prentice Hall, Upper Saddle River, New Jersey 07458

Charles L. Taylor and David A. Jodice, World Handbook of Political and Social Indicators,Third Edition,

Yale University Press, New Haven and London, 1983

Easterly, William The elusive Quest for Growth

MIT Press, Cambridge, Massachusetts 02142. 2001.

World Health Organization, HEALTH IN THE AMERICAS, 2007.VOLUME II–COUNTRIES

Department of Chronic Diseases and Health Promotion
Avenue Appia 20 , 1211 Geneva 27 , Switzerland

Population Reference Bureau , Education for all Global Monitoring Report.
1875 Connecticut Avenue, NW , Suite 520 Washington, DC 20009-5728 USA
E-mail: popref@prb.org

[1] Easterly; Elusive Quest for Growth.

[2] Burns; Charlip. Latin America.

[3] Charles L. Taylor and David A. Jodice

[4] Charles L. Taylor and David A. Jodice

[5] World Health Organization(Health in the Americas 2007)

Foreign Aid Ecuador

2007-12-15T20:44:00.000-08:00

Ecuador- Foreign Aid.

Ecuador is a country divided over the Andean mountains. Its mountainous environment creates high transportation costs which hinder trade. Ecuador has required aid since, among many factors, it is a region that experiences frequent natural disasters that destroy crops and drive the cost of living up. According to balance of payment reports Ecuador has received loans from other countries such as, Venezuela, U. S. and neighboring countries. Foreign aid in Ecuador has been given in many ways including foreign direct investment.

Foreign aid is best, when it is a combination of foreign direct investment and domestic development. Prospects of The nationalized oil company and foreign oil companies have created an expansion of trade possibilities. In The U.S Department of Commerce report on Foreign Economic trends and their implications for the U.S. it states that the state of the petroleum company CEPE is expanding its productive capacity, and 12 foreign consortia are carrying out exploration activities. Investment by these foreign firms may exceed $200 million during 1989. This was a huge addition to the exporting capability of Ecuador then and since then, there has been much development.

Development in LDC’s depends on connecting research with implementation, Democratization, proliferation of markets, civil institutions according to Julious Court.[1]Aid and development have been volatile in the Ecuador region. Records on Ecuador seem to suggest that it is a rich with natural resources, capable people, but that its environment along the Andean mountains offers inhabitants a fair share of obstacles to growth and sustainability. Jeffery sachs offers insight into the problems that Ecuador has faced when he says:

This area has experienced economic decline because 1. Geographical difficulties, such as, impassable mountains, etc, have stood in the way. 2. This regions society suffers from sharp social divisions among ethnic groups. The European descended population tends to be much richer than the indigenous and Mestizo populations. 3. This region is vulnerable to extreme external shocks, both natural (, earthquakes, floods, droughts) and economic. [2]

According to the U.S. State Department in an October 2007 Report:

The U.S. and Ecuador have maintained common goals of fostering democratic institutions, combating narcotrafficking, building trade, and investment. The United States assisted Ecuador’s economic development directly through the agency for international development (USAID) and through multilateral organizations such as inter American development bank and the world bank. The U.S. is Ecuador’s principal trading partner. In 2006 Ecuador exported about 6.7 billion in products to the U.S. for over ten years Ecuador has benefited from duty free entry for certain of its exports under the Andean trade preferences act and received additional trade benefits under the Andean Trade Promotion and Drug Eradication Act (ATPDEA) in 2002.[3]

Foreign aid is needed in a country when production within that country is below the level that it need to remain sustainable. Some trade and sharing of technology are beneficial in order for the Ecuadorian quality of life to rise. This is a principal that is gained from Adam Smith’s writings about the wealth of nations. Each country will benefit from trading with others. Less Developed countries will especially gain from trade if it engages in trade with a technologically advanced one. It learns techniques and practices that were developed over long periods of time. So, foreign trade takes place in many ways. Weather a neighboring country’s business invest in Ecuador or of they loan useful equipment to them there is benefit. When Ecuador’s neighbors assist in helping to find sustainable ways to meet production demands, that is best. It appears that Ecuador is now a major exporter of banana and other agricultural crops. The European Union, and North Atlantic Trade Agreement are to major forces that have been organizing trade with Ecuador.

Works Cited

Court, Julius. Hovland, Ingle, Young John. Bridging Research and policy in development: Evidence and the Change Process. Oversees Development Institute. Bourton on Dunsmore, Rugby, Warwickshire, CV23 9QZ , UK

John S. Odell, Negotiating Trade Developing Countries in the WTO and NAFTA

Cambridge University Press, The Edinburg Building, Cambridge, UK 2006

Lancaster, Carol.; Van Dusen, Ann. Organizing U.S. Foreign Aid : Confronting the Challenges of the Twenty-first Century Washington, D.C Brookings Institution Press, 2005.

Sachs, Jeffery. The End of Poverty; Economic Possibilities for Our Time. Pengui Books Ltd, 80 Strand , London WC2R ORL, England 2006.

U.S. Department of Commerce. Foreign Economic Trends and Their Implications for the United States. U.S. Department of Commerce 1401 Constitution Ave., NW Washington, DC 20230 1989

U.S. State department. Background Note: The Republic of Ecuador U.S. Department of State
2201 C Street NW, Washington, DC 20520

[1] (Bridging Research and Policy)

[2] Sachs “End of Poverty”(p. 71)

[3] (U.S. State Department)

Ecuador

2007-12-15T20:42:00.000-08:00

Ecuadorian Government has been a country that has struggled to control drug trafficking, facilitate trade, and maintain a stable government and economy. Ecuador is located between Colombia and Peru. Its Capital city is Quito with a population of 1.6 million people. Guayaquil (2.4 million) is another major city.
According to the U.S. State Department, The Ecuador government is a republic that declared independence from Spain in 1822. It is formed with an executive branch, congress, and provincial courts. There are over a dozen political parties. Voting is obligatory for citizens 18-65 years of age. [1]

The 1998 constitution provides for 4-year terms of office for the president, vice president, and members of Congress, although none of the last three democratically-elected presidents finished their terms. Presidents may be re-elected after an intervening term; legislators may be re-elected immediately. The executive branch currently includes 24 ministries (including coordinating ministries with inter-governmental responsibility). Provincial leaders (called prefects) and councilors, like mayors, city councilors, and rural parish boards, are directly elected. Congress meets throughout the year except for recesses in July and December. Congress is divided into 20 seven-member subject committees. Justices of the Supreme Court are appointed by the Congress for life; members of the Constitutional Court serve four years. Ecuador Maintains an embassy in the United States with consulates dispersed throughout the U.S. Ecuador has experienced Economic growth at 1.5% per year[2]

There are many political parties in Ecuador.Ecuador’s political parties have historically been small, loose organizations that depend more on populist, often charismatic leaders to retain support than on programs or ideology. Frequent internal splits have produced great factionalism. No party has won the presidency more than once through elections since the return to civilian government in 1979. [3]

Ecuador has experienced political instability. From 1997-2006 the Ecuadorian Roldosista Party(PRE), won the Presidency on a platform that promised populist economic and social policies. It challenged what Buckram termed as the power of the nation’s oligarchy. During Buckrams administration there was heavy suspicion of corruption. Buckram was deposed by the congress in February 1997 on grounds of alleged mental incompetence. In his place, congress named Fabian Alarcon interim president. Ecudors fragmented multi party system has cause unrest and contributed to the political instability that it experiences. [4] (Social Christian Party, or PSC), Partido Roldosista Ecuatoriano (Ecuadorian Roldosist Party, or PRE), Izquierda Democrática (Democratic Left,or ID), and Democracia Popular (Popular Democracy, or DP)? have consolidated and together have won about three-fourths of the vote. This has occurred

within the framework of a highly fragmented and atomized system. Just as important,

however, is the increasing share of the vote that these parties have managed

to accumulate over time. One of the prominent characteristics of the

Ecuadorian party system is this apparently contradictory combination of fragmentation

and concentration. The large number of parties that win seats in

Congress and gain access to representational positions in provincial and local assemblies

is offset by the predominance of a relatively small number of parties.

Generally speaking, the parties have demonstrated a greater ability than independents

to secure voters support. William Easterly noted, in Creative destruction, in the 19^th, and 20^th century, Ecuador, Costa Rica, Peru, and Syria all had unpredictable government policies that tended to discourage investment in the future through innovation. [5] Ecuador shares U.S. concerns over narcotics trafficking and international terrorism, and has energetically condemned terrorist actions. The government has maintained Ecuador virtually free of coca production since the mid-1980s, and is working to combat money laundering and the transshipment of drugs and chemicals essential to the processing of cocaine (with U.S. support). It has recently given greater priority to combating child labor and trafficking in persons.[6]

Ecuador has experienced large amounts of growth over time but has also experienced setbacks in relations with its major trading partner (United States). It is structured as a multi party democracy which does not have a majority party. This has proven to discourage investment. Instable government policies and lack of overall government investment in infrastructure has hindered trade. United States was one of Ecuador’s major trading partners and aid givers. Until the Ecuadorian government non compliance with hydro carbon treaty. The Ecuadorian government also showed resistance in anti drug trafficking security that the U.S. implemented, causing stunted relations with the U.S.

Works Cited

Central Intelligence Agency World Fact Book

Office of Public Affairs Washington, D.C. 20505

Easterly, William The elusive Quest for Growth

MIT Press, Cambridge, Massachusetts 02142. 2001.

U.S. State department Note: The Republic of Ecuador U.S. Department of State
2201 C Street NW, Washington, DC 20520

Mainwaring, Scott(editor). Crisis of Democratic Representation in the Andes.

Palo Alto, CA, USA: Stanford University Press, 2006. p 10-127.

http://site.ebrary.com/lib/sjsu/Doc?id=10156554&ppg=119

[1] (U.S. State Department)

[2] (World Fact Book)

[3] (U.S. State Department)

[4] (mainwaring pg.101)

[5] (Easterly Ch.9”Creative Destruction)

[6] (World Fact Book-country note)

U.S weak dollar

2007-12-15T20:19:00.000-08:00

Tourists aren't only taking advantage of favorable exchange rates, they're also unwittingly helping the US through what might otherwise be an economic disaster.

With the dollar near its lowest rate against the pound in 26 years, and its lowest rate against the euro ever, many Europeans are looking at the US the way some Americans have long viewed Latin America and the Caribbean and, once upon a time, Europe -- a cheap place to flex their strong currency.

The situation is more than just a potential blow to Americans' self-image, it could be a blow to the world economy as some central bankers worry about "currency tension," and many countries move trillions of dollars out of their foreign reserves and buy euros instead.

The dollar's fall has been so drastic, it has seeped into the popular consciousness. In his last video, rapper Jay-Z cruised the streets of New York flashing not a stack of Benjamins, but a fistful of euros.

The dollar had been at relatively low levels against the pound and euro for most of this year, but in April it broke the US$2 to &POND;1 barrier and the exchange rate started to make headlines in Britain.

Environmental data

2007-12-14T11:51:00.001-08:00

THE 10 WARMEST YEARS

1998: 0.52C (above the 1961-1990 average)

2005: 0.48C

2003: 0.46C

2002: 0.46C

2004: 0.43C

2006: 0.42C

2007 (provisional): 0.41C

2001: 0.40C

1997: 0.36C

1995: 0.28C

Ecuador

2007-12-13T13:03:00.001-08:00

Ecuador throws down oil gauntlet

By Jane Monahan
Washington

When Ecuador's left-wing President Rafael Correa drastically increased the state's share of oil revenues in October, and oil minister Galo Chiriboga also announced that contracts with foreign oil companies had to change, industry analysts said the country had gone too far.

Correa's recent electoral win has strengthened his hand

After all, foreign firms currently account for about half of Ecuador's total crude production of more than 500,000 barrels a day (bpd).

And while Petroecuador, the state oil corporation, accounts for the rest, it continues to be plagued by mismanagement and debt, analysts say.

The proposed increase in the government's share of windfall oil profits - those obtained whenever world oil prices exceed those established in existing contracts - was also huge.

The tax went up from 50% of windfall oil profits to 99%.

That would net the government $830m a year more in revenues, assuming world oil prices stay at current levels.

The principal oil companies affected - Spain's Repsol, China's Andes Petroleum, Brazil's state company Petrobras, French-owned Perenco and US-owned City Oriente - were already unhappy.

There will be much less incentive for the companies to increase exploratory work and production

Simon Pachano, university professor, Quito

They objected strongly when the state's share of windfall oil profits was increased for the first time, to 50%, in a law passed in 2006.

But President Correa, who has been in office since January, is coming from a position of strength.

He decreed the oil tax hike within hours of winning a landslide victory in a vote and more than 60% of the seats in a new national assembly, which has started rewriting the country's constitution and forging ahead with his radical agenda.

Poverty reduction

Mr Correa, a former finance minister who has a PhD in economics, also explained the move in his decree.

He said the government would spend the extra oil money on services, roads and electricity for the poor, which was wildly popular.

Ecuador is Latin America's fifth-biggest oil producer. But World Bank estimates show that some 56% of the country's 13.4 million people live in poverty.

That figure rises to more than 80% for indigenous Ecuadoreans, who are mainly small farmers in mountainous highlands.

Mr Chiriboga and Mr Correa believe justice is on their side

But confronting the foreign oil companies is risky. Take the controversy over changing the oil contracts.

In announcing the change at a recent press conference, Mr Chiriboga said the companies could comply by reducing their levels of participation in existing production-sharing contracts with Petroecuador.

Otherwise, they could switch to new service contracts, where they earn a fixed fee for specific services such as prospecting and production, but the state owns all the oil once it is extracted from the ground.

Mr Chiriboga, whose ministry is now in talks with the oil companies over the latest oil tax increase and the new contracts, said his objective was to find a solution that offered both sides "a reasonable profit".

But Simon Pachano, a professor at the Latin American University of Social Sciences in Quito, Ecuador's capital, says that in either case, "there will be much less incentive for the companies to increase exploratory work and production, or to invest in machinery."

As a result, because Ecuador's oil industry accounts for 40% of the country's exports and more than a third of government revenues, there is a risk that the nation's economy may suffer, if investment and production in the oil sector declines.

Legal wrangles

There is also a risk of litigation, as shown by the US's City Oriente, the smallest of the principal oil firms in Ecuador with only a 3,000 bpd output.

It won a favourable ruling in November from the World Bank's International Centre for the Settlement of Investment Disputes over the first oil tax increase approved last year.

Ecuador's Constitutional Assembly has already begun its work

And Antonio Brufau, chief executive of Repsol, the biggest oil multinational now in Ecuador, with a 65,000 bpd output, referred to Mr Correa's new oil tax hike at a meeting in Chile in November, saying: "This [measure] to us is one that does not allow us to operate within a reasonable corporate environment."

Complicating matters further, Mr Correa's repudiation of the current oil contracts is not just about foreign oil companies, but also the previous Ecuadorean governments, run by conservative political elites, that agreed to them.

"The contracts have not benefited Ecuador. The problem is also the previous governments. This is widely recognised, " Mr Pachano says.

Mr Correa is an ally of Venezuela's President Hugo Chavez - and, like him, is not shy about using colourful rhetoric on occasions.

He maintains justice is on his side. Most of the existing oil contracts were agreed when international oil prices averaged $24 a barrel, before they started rising in 2003.

But, said Mr Correa at a press conference during a state visit to China in November, Ecuador was still receiving just $3 to $4 in taxes from oil sales, even though the price of crude has risen to about $90 a barrel.

"These are the extraordinary benefits that the investors haven't done anything specific to receive. The benefits should go to the owner of the resources," Mr Correa declared - in other words, the citizens of Ecuador.

Banking Problems

2007-12-12T15:16:00.000-08:00

Is the credit crunch finally over?

It has been a dramatic week on the financial markets, with the US central bank cutting interest rates and the UK government coming to the rescue of savers at the Northern Rock.

So is the crisis over, or are there still some big problems remaining?

WHERE'S THE BAD DEBT?

The crisis began when US mortgage companies made hundreds of billions of dollars of inappropriate loans to individuals with poor credit histories.

These debts were then packaged up and sold to financial institutions around the world, who then sold it on to pension funds and hedge funds.

We still don't know where these bad debts are concealed in the financial system.

And until we do, banks will still be reluctant to lend to each other, and investors will be suspicious of the health of the financial sector.

UNFREEZING THE CREDIT CRUNCH

The reluctance by banks and other financial institutions to lend money, because they are not sure how risky it might be, is gumming up the financial system.

Despite the injection of hundreds of billions of dollars and euros, interest rates on inter-bank lending are still unusually high. And banks are tightening up on their lending to individuals and companies, restricting the amount of lending as well as making loans more expensive.

There are also hundreds of billions of dollars worth of short-term debt obligations that will fall due in the next six months, which could further depress the market if no buyers can be found for them.

WILL THE HOUSING MARKET CRASH?

The overhang of bad mortgages is depressing the US housing market. Thousands of people are having their homes repossessed, and with a glut of homes on the market prices are dropping.

Mortgage companies are finding it difficult to raise money even to lend to sound borrowers. So despite a pledge by the US government to help, house building is at a record low.

Although there are far fewer sub-prime mortgages in the UK, mortgage lenders like Northern Rock are also finding it difficult to raise the cash to pay for additional mortgage lending. So it could become harder to get a mortgage, and it could cost more - and both these expectations are lowering house price inflation.

WILL THERE BE A WORLD RECESSION?

A big slowdown in the housing market could have serious economic consequences.

Construction is a big part of the economy, and people who move house are also more likely to buy consumer goods like washing machines. The tightening up of credit and worries about mortgage repayments may make everyone more nervous about borrowing money to buy big-ticket items like cars.

There are already signs of an economic slowdown in the US, the world's biggest economy. And if it deepens, it could dampen down the economic recovery underway in Europe and Japan. The UK, as a major exporting nation, would also be affected.

WILL THE DOLLAR PLUMMET?

The effect on the rest of the world economy could be worse if the US dollar begins to fall in value.

The dollar is already weak because of the huge trade deficit the US runs with the rest of the world - nearly $1 trillion - which has been a big boost to the world economy. But if the US economy slows, and interest rates are cut sharply, the dollar will become a less attractive currency and could fall further.

This in turn would make imports into the US more expensive, and make it harder for exporters like Britain to win orders. A big decline could also force countries like China, which hold $1.3 trillion in currency reserves, mainly in dollars, to diversify their holdings, further depressing the greenback.

WHO'S TO BLAME?

Politicians and financial institutions are trading accusations about who is to blame for the crisis.

In the UK, the governor of the Bank of England is under fire for not intervening earlier to prevent the Northern Rock crisis from getting out of hand.

In the US, the central bank, the Federal Reserve, is under fire in Congress for not regulating sub-prime mortgage lending properly.

And both bankers and politicians have blamed the credit rating agencies for certifying as safe many of the bad debts which had been bundled up and sold. There is a growing move to tighten up international regulation of the financial sector - but worries about whether this can be done without inhibiting financial innovation.

IS THERE A SILVER LINING?

Many economists believe that the crisis is also an opportunity for rebalancing the economy, which has become overly dependent on consumer spending financed by cheap credit and government borrowing.

An increase in household savings, encouraged by higher interest rates for savers, could lead to more long-term investment.

And a mild economic slowdown in the US, coupled with a gradual reduction in the value of the dollar, could help rebalance the world economy, which has become overly dependent on the US as the engine of world economic growth.

12/11/2007

2007-12-11T17:35:00.000-08:00

Monetary Theory, Economic History of the United States , Development Economics, and Securities Investments are the Highlight of my week as I head into finals this weekend!

Monetary Theory has been a wild ride. I have been surveying thought on money supply over the last 70 years. John Keynes, Walras, Milton Freedman, Alan Greenspan and David Ricarian theories are who im reading about. I must say that this has been an interested and sometimes confusing area of study.

The main school of thought today centered around the causes of Agregate demand. a major contributer to the incongruencies of thought in the past was the lack of clear data that represents key truths about economic measurements.

Economic Development in South America has been an interesting study .I recently finished writing a paper on Healthcare, Government, and Foreign aid in Ecuador. The Evolution of the World bank, IMF, and other international institutions. The World Banks was created after World War Two to serve as part of the Marshall plan in foreign aid to defeated or undeveloped parts of the world. since then it has gone from a war reparation agency to a economic development agency that lends to countries. these loans are part of large public infrastucture projects such as Roads, bridges, hospitals, etc.

Today ALgerian UN building was bombed by an organization call Al Queda. Thats Crazy!

What do extremest have against a United Nations organization?