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Posts Tagged ‘Economics

Macro Level Resolution Strategies per the Ongoing Financial Systems Crisis of 2008

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Just a few thoughts and possible resolution strategies (in outline format) to consider per the current financial system crisis from a concerned long-term investor, citizen, and voter.  And from an Independent’s perspective, the political players from both parties don’t seem to be focusing on real solutions, just the problems and the resulting finger-pointing (or “blame game”) that occurs.  Note: In terms of presenting a macro causal analysis for this financial crises, private sector lenders issued risky home loans to buyers who could not afford them, which they then sold to Wall Street financial institutions as bundled, mortgage-backed securities that eventually became worthless with the downturn in the housing market. As a result, the heavily leveraged financial institutions became overly susceptible to the collapsing asset class, leading to a liquidity crisis, a disturbance of bank lending, and an overall global contagion.

I. Short-Term Macro Level Strategies to Mitigate Current Crisis (note that some of these strategies are now being implemented in some fashion) –

1). Continued Implementation of timely “lender-of-last-resort” measures by central banks are needed in order to mitigate the current credit crisis before it spirals completely out of control.      

1a). Immediate, large-scale damage-control measures are needed in order to restore the public’s confidence in financial markets and institutions.            

1b). Organized bailout programs by central banks across the globe are needed in order to reduce the overall amount of help and costs involved (i.e., the quicker the better in terms of lowering costs).

2). Aggressive actions required on the part of central banks and governmental agencies in order to mitigate the seizing global credit crisis include the following:

2a). Continued cutting of short-term interest rates and increasing the amounts of loans made available to banks via auctions in order to maintain fluid liquidity levels.            

2b). Force remaining lenders to extend low “teaser” rates on ARM based loans that have been given to sub-prime borrowers.           

2c). Force remaining lenders to restore partial homeowner equity to sub-prime mortgage holders having negative equity in order to forestall the foreclosure rates.           

2d). Continued swapping of Fed funds (e.g., Treasure bills, etc.) for “Level 3” securities from struggling financial institutions in order to provide them with necessary liquidity.            

2e). Permanent providing of emergency loans to the remaining investment banks, with the resulting increase in regulation that should go with it (i.e., like that required for commercial banks).           

2f). The establishment (ASAP) of an organization similar to the former Resolution Trust Corporation of the S&L days to use taxpayer funds to buy out the worst sub-prime loans.  Note: When the current credit crisis finally does ease up, central banks will then need to expedite reverse monetary actions designed to prevent the reintroduction of market speculation using “cheap” money.  

II. Long-Term Macro Level Strategies & Proactive Regulatory Measures –

1). Implementation of  stricter governmental regulations for securitized mortgage loans.            

1a). SEC directed revamping of underwriting standards to reduce the chances that credit risks will be underestimated, which in turn will reduce the overvaluing of securitized sub-prime loans.            

1b). SEC led mitigation of regulatory capital arbitrage attempts in the securitization process by enforcing the maintenance of minimum capital requirements by financial entities.            

1c). SEC led mitigation of “safety net” and risk transfer abuses in the securitization process.

2). Require that mortgage loan originators hold bigger equity positions in the securitized packages and that banks issue “covered” bonds backed by securitized mortgage loans in order to keep the risks on  their balance sheets.

2a). Increase involvement of criminal investigation agencies in the securities arena to mitigate the misrepresentation of the quality of mortgage loans in securities filings by financial entities. 

2b). Implementation of more stringent licensing requirements for mortgage brokers and tougher mortgage lending standards, including enhanced risk management practices by lenders.

2c). Implementation of more stringent disclosure and write-down requirements for financial institutions, as well as an increase in the monitoring of their “capital adequacy”.

2d). Consolidation of the different governmental finance agencies into a financial oversight “super” agency designed to rate sub-prime mortgages and financial securities per their safety levels.

2e). Establishment of well defined roles for the International Monetary Fund (IMF) in terms of its serving as a bailout agent for emerging market countries experiencing financial difficulties.            

2f). Need to mitigate any moral hazard issues that could arise due to IMF intervention (e.g., an increase in risk-taking activities by the governments of the countries being assisted, etc).            

2g). Complete banning of Alternative-A type mortgage loans, which require little or no documentation on a borrower’s wealth or income, resulting in abuses on the part of mortgage brokers.

3). Establishment of new generally accepted auditing standards (new FAS rulings) designed to force financial entities to start valuating their investment instruments (e.g., CDOs) using market based measures rather than their own pricing models, along with the reform of the credit rating agencies.

3a). Mortgage based securities should be strictly booked as “marked to market” from an accounting standpoint instead of “book” value in order to help mitigate the blatant overvaluation of the underlying collateral assets.

3b). Mortgage securities packages should be categorized and split into different “tranches” based on their differing levels of certified risk for both investing and auditing purposes.

3c). Tighter regulation of credit rating agencies (e.g., Moody’s, S&P, et al.) by the SEC and Congress.

3d). Credit rating agency reform acts are needed to mitigate the overrating of tenuous capital structures being passed as investment grade securities &d to enhance agency quality control measures.

3e). Recourse measures should include the suspending of credit rating agencies that continuously propagate inaccurate (“pumped up”) ratings due to the conflicts of interest involved with the issuers.

3f). The compensation method for credit rating agencies needs to be changed from that of being paid by the issuers of structured debt products to that of being paid by investors to eliminate conflicts of interest.

3g). Credit rating agencies should be required to decline credit rating services for exotic types of securities that have no performance records to track.

3h). Credit rating agencies should also be precluded from having exclusive access to non-public investment information.

Agency Note:  SEC chief Mary Schapiro has now called for sweeping industry changes at a roundtable meeting as credit ratings agencies have been thoroughly blasted for not warning about the risks of subprime mortgage securities. Moody’s, Standard & Poor’s, and Fitch dominate the industry: one proposal calls for a governmental ratings agency that would compete with these three firms.

3i). Central banks should have quickly executable, pre-approved contingency plans “in place” for when unexpectedly large write-downs by financial institutions occur in the future.  The immediate availability of liquidity measures and the continued identification of potential merger partners for failing financial institutions is key here.

3j). Tighter regulation of the corporate auditing function by the SEC & Congress.  If necessary, the corporate auditing function may even need to be “nationalized” to become entirely a governmental function in order to eradicate the inherent conflicts of interest that currently exist between corporations & the private auditing/consulting firms that they employ on a high-fee basis (i.e., need to reduce the risk of over-inflated equity valuations based on creative accounting measures, etc).

Note: These macro strategies were initially conceived of as part of my section of responsibility for a group project/presentation in a graduate level finance course at the University of Houston (i.e., FINA 7340 – Financial Markets & Institutions).

Click on URL to link to a recently published NYU Stern working group paper that provides excellent insights on viable, real-time solutions for financial reform:  http://govtpolicyrecs.stern.nyu.edu/docs/whitepapers_ebook_full.pdf

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Written by Larry Fry, CCP, MBA

August 10, 2015 at 12:47 pm

Administration Vows to Get Tough with China?

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Due to the large amount of U.S. government debt currently being held by China, we are pretty much at its mercy and remain beholden to it as one of our largest (i.e., most manipulative) debt holders.  This is not a good position to be in!  We can make demands and issue hollow threats all we want, but when we need to borrow more money or refinance the huge debt of ours that the Chinese currently holds, then we end up having to acquiesce to doing things their way again (i.e., the same old broken record).  Insisting  that China should implement the same types of labor laws, products pricing mechanisms, and currency regulations that put us in an uncompetitive position in the global economy is laughable when they are the major holder (i.e., manipulator) of the U.S. government’s debt.  The U.S. dollar itself is also a potential hostage here as China’s large $2.45 trillion collection of foreign exchange reserves consists of a tranche of U.S. dollars that makesup approximately 67  percent of the entire collection, giving China some absolute leverage over the USD’s value should it decide to make significant “policy” changes.

So, per the old saying “Those who pay ($) have the say”, China is definitely in the driver’s seat in terms of driving the global economy; they are definitely beating us at our own game.  I assume that Richard Nixon and Henry Kissinger never foresaw this in their wildest dreams when they implored Maoist China to open up to the West in the early 1970’s.  The recent paradigm shift over there has been amazing; I just keep waiting for their oversized (and state induced)  bubble to pop.  If and when it does, then watch out rest of world as the resulting collateral economic damage will be widespread!

Written by Larry Fry, CCP, MBA

September 16, 2010 at 1:24 pm

Cuba Updating the State’s Role in the Economy?

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If the Cuban government (i.e., Castro) is really serious about taking a stab at state capitalism, then let’s offer to close out the Guantanamo Bay Naval Base and convert it into a mega-resort and cruise ship terminal complex for Caribbean destined tourists.  The idle Cuban work force could be employed as laborers for the project and then trained as hospitality workers to be employed at the complex once it has been completed.  Cuba has a lot of potential as a Caribbean tourist destination and the Cuban government needs to recognize this fact and start trying to “capitalize” on it in order to pull the nation out of its current state of economic malaise.  The conversion of the Guantanamo Bay Naval Base (which is no longer needed these days) into a pristine resort complex by a top-flight entrepreneurial group would be a “win-win” proposition for all parties involved. And communist countries such as China (and now Viet Nam) are proving that state capitalism is far better than no capitalism at all, so the Cuban government needs to take heed and take action before it is too late.

Written by Larry Fry, CCP, MBA

August 2, 2010 at 10:52 am

The Great Sirius XM (SIRI) Stock Debate!

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More and more, Sirius XM stock (ticker symbol ‘SIRI’) appears to represent a good, low cost bet on making some attractive  gains in the not too distant future. Nothing is ever guaranteed in life (other than the two main stays), but now seems to be very opportune time to get on the train at the beginning of what could be a very profitable ride based on the increasingly cost-effective commercial uses of satellite-based technologies (led by SIRI, for one). In a nutshell, the currently low price of SIRI stock coupled with its promising future based on the vertical integration of its product lines makes it a very inviting bet in my book.  And the announcement today of the availability of Sirius XM’s new app for Android-powered smartphones (coupled with existing apps for BlackBerry and iPhone) is just the latest in a ever expanding portfolio of value adding products being offered.  Finally, SIRI is starting to  remind me of Apple’s stock in the late 1990′s, when it was priced around $2.00 per share and the introduction of Apple’s industry changing iPod products was just around the corner.  Stay tuned!

Click on URL for the latest on SIRI stock:  http://www.thestreet.com/quote/SIRI.html

Written by Larry Fry, CCP, MBA

May 28, 2010 at 2:05 pm

Wall Street Bankers’ Bonus Abuse Issue!

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The notion that Wall Street keeps its gravy train rolling by lining the pockets of our top-tier politicians with money and other influence-peddling gifts in order to condone the financiers’ actions is quite disturbing. In fact, the financiers’ claims per the paramount importance of their work as an excuse to enable them to get away with whatever they deem appropriate for themselves (e.g., awarding of excessive tax-payer financed bonuses, etc.) is very disturbing as it smacks of greed and self-centered conceit.  But the biggest rub is that these absurd bonuses were largely financed via the billions of dollars in taxpayer-financed funds from the Troubled Asset Relief Program (TARP) and trillions in loans from both the Federal Reserve and the FDIC.  These sources of aid money were designed to help the Wall Street financial institutions deemed too big to fail to survive their own terrible misdeeds, not to excessively reward their executives for jobs NOT well-done.  This has got to be perhaps the biggest misappropriation of our hard-earned tax money that has ever transpired in the history of this country. 

Finally, as long as big money talks and remains the primary influence driver in the current socio-political (or cultural) climates across the globe, then people in power will apparently continue to walk in the direction deemed appropriate  by the big money purveyors (e.g., Goldman Sachs, George Soros, et al.).  The condoning by governments of  their large scale market manulation shenanigans for their personal gain at the expense of the taxpayers of the world speaks for itself.  And their latest ploy of shorting the Euro while playing credit default swaps (CDOs) shows that there’s no shame on their part.  Finally, even President Obama is softening up his tone towards the big banking entities and their actions. And speaking of being “too big to fail’, perhaps the US socio-economic system and federal government is falling under this same exact definition.  This splitting up (i.e., per the splitting up of  giant oil corporation Standard Oil over 100 years ago) is becoming a more realistic option over time in terms of gaining more value and growth opportunities from the resulting smaller entities that would result.

Written by Larry Fry, CCP, MBA

March 2, 2010 at 11:55 pm

Massive Government Control of Free Markets Debate!

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Quote of the Day  –
“The case for free markets never was that markets are perfect … [but] that government control of markets, especially asset markets, has always been much worse.”

University of Chicago professor John Cochrane, per criticism from Paul Krugman, New York Times columnist and proponent of massive government intervention policies (click on URL below for his full rebuttal).

http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm

Written by Larry Fry, CCP, MBA

January 31, 2010 at 2:50 pm

Ten Most Disruptive Technologies of 20th and 21st Centuries!

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My choices for the ten most disruptive technologies of the 20th and 21st centuries per the related Discussion issue in LinkedIn professional group “Disruptive Technologies” are as follows:

20th Century –

01).  Advent of nuclear technology, which drastically changed the balance of power in the world via its weapons applications, and it is still a burgeoning factor as the technology spreads.

02).  Advent of the automobile and airplane, which revolutionized the transportation industry and made traversing the world alot more feasible in terms of time, distance covered, and costs.

03).  Advent of Wernher von Braun’s rocket technology, which revolutionized the communications industry (via satellites), made space travel possible, and drastically changed military strategies and power structures.

04).  Advent of digital data processing at the large mainframe level (starting with Rand’s Eniac).

05).  Advent of the transistor, which replaced vacuum tube technology and allowed for start of integrated circuit technology.

06).  Advent of the integrated circuit technology from transistors, which enabled the commoditization of computer technology via the resulting dissemination of higher speed, lower cost computers (and more portable computers due to the resulting miniaturization).

07).  Advent of the personal computer, which replaced the mainframe as the primary means of computing and has greatly expanded access to computer technology to the masses.

08).  Advent of the world wide web (Internet), and the resulting information and communications revolution that it has invoked.

21st Century (so far) –

09).  Advent (emerging) of nanotechnology and its potentially huge impact on medical technologies and society in the not-too-distant future (e.g., “Singularity” type issues, etc).

10).  Advent (emerging) of teleportation technology at the level of the atom, which is in the beginning stages of greatly increasing the speed and overall power of computer technology (i.e., quantum information processing); its crossover to other applications includes possible revolutionary changes in travel technology at the surreal level by the end of the century.

Addendum1:  Taking item 10’s discussion a step further within the context of disruptive microchip techology, I still like the idea of developing data teleportation technology at the level of the atom, which stands to greatly increase the speed and overall power of computer technology (i.e., quantum information processing). The possible crossovers to other product applications, including surreal, revolutionary changes in travel and shipping technology, is what has really piqued my interest. But in discussing this issue with an executive at one of the major chip firms over the holiday, it was conveyed to me that the atomic teleportation of data is still at least twenty years away in terms of becoming feasible enough to be a disruptive technology per the quantum information processing genre. I would think that the speeding up of the development process for this entity would have to represent a major competive advantage for a developer within the microchip (or academic) industry, especially considering the possibilities represented by revolutionary crossover product development (i.e., major disruptive technologies)!

Addendum2:  the fulfillment of emerging items 09 and 10 is hghly contingent on the continued mitigation of item 01.

Note: From an IT standpoint, I especially like the world-class Gartner Group’s clear, concise definition of what constitutes a disruptive technology from a business systems standpoint: “…[as] one that causes major change in ‘the accepted way of doing things’, including business models, processes, revenue streams, industry dynamics and consumer behaviour”: http://www.gartner.com/it/page.jsp?id=681107

Interested LinkedIn members are invited to join the ”Disruptive Technologies” professional group (URL below): http://www.linkedin.com/groups?about=&gid=1027037&trk=anet_ug_grppro