A new financial era begins

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

Venture Capital Funding 3rd q 2008

Steve Forbes On Credit Markets

Tracking the Economy 2008

Primaries

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

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

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[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

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

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[1] (Bridging Research and Policy)

[2] Sachs “End of Poverty”(p. 71)

[3] (U.S. State Department)

Ecuador

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

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[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

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

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

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

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

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?