Critique: does an improving stock market mean an improving economy?

In Jessica M.’s blog does an improving stock market mean an improving economy, she argues that a variety of factors contributed to the current state of the economy. Some of which were AIG, Ben Bernanke, and rising unemployment. I agree with her, with the following paragraphs.
Reuters states that there are some encouraging signs in the credit markets, and that U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll. Also, 130 million Americans will receive tax rebates, which will be more money that the government doesn’t receive, and could further increase the national debt and inflation. Furthermore, why are we so anxious to lend money back out when job market is unstable, and it could create the same problem we are currently in. Why do we want to put money back in the hands that couldn’t pay their past debt. Some of the home buyers are those that lost their home because they couldn’t afford the mortgage. We can now say that we live in a country where debt is encouraged, and when worst comes to worst you just write it off. We give money back to people who can’t manage it in the first place, and they take on so much debt that it eventually consumes them.

Also, the Chicago Fed president expects the economy to recover in the second half of this year. This may sound good, but nothing is set in stone. After all, who would have predicted that the economy would just plummet like it has, when it just seemed to keep increasing in value.

Some things take time to fix, and the stock market didn’t get the way it is overnight. Some of the top economic and financial people are trying to work on how to fix this problem, and are still baffled on what to do. Ben Bernanke isn’t the only one where it got the economy to where it is, and where is Allan Greenspan when you need him. Some of Greenspan’s policies could have contributed this turmoil.

In an age of get rich quick schemes, scams, and identity theft it is fair to say that greed is what motivates these criminals, and greed is what ultimately caused the huge collapse in the stock market. Greed is what have caused investors to lose it all, and what has motivated the desire for instantaneous returns in a short period of time. Just look at Bernie Madoff, how he took money from new investors/clients and paid returns to previous clients with their money.

Ethical business management states that greed has harmed the economy, and it started a long time ago. It began in the nineties with a stock market scheme to make money called “day trading.” Thousands speculated to gamble for quick one day profits. Thousands lost everything. Some also took on too much risk, fueled by greed, and made make or break trades.


Links:
http://www.reuters.com/article/ousiv/idUSBOM20597220080424

http://www.forbes.com/feeds/afx/2008/05/12/afx4996768.html

http://ethical-business-management.suite101.com/article.cfm/an_economic_crisis_bank_failures

Should GA 400 continue to have tolls?

Recently there has been question on whether the tolls on GA 400 should be lifted due to excess reserves held by the state. CBS news has continued to cover this story, and is asking why are we still paying these tolls considering the bad economy. If you lift the toll 400 will become more congested, and the state or the GOT will lose a source of income. This extra money that it is collecting now could be put forth to expand roads where needed, instead of only paying for GA 400. As a result the state could reduce its future risk of having to raise funds for road work, as well as not increase traffic on an already busy road.

Even though I don’t use the road I believe that drivers should continue to pay the tolls. Once you remove the tolls then there will be increased traffic due to the people that avoid 400. In due time there will need to be construction to expand the road, and the future toll money would fund this expansion and plan for the future. After all, Georgia’s roads aren’t the greatest, and we all know when 5 o’clock comes around its impossible to go anywhere.

Links: CBS news

Critique: Increasing Importance of the Weather Man

After reading Jessica L’s post on weather derivatives I had some mixed feelings on the whole concept. I agree with her that there is still some uncertainty with pricing this type of financial tool. With very uncertain climate conditions it is a good idea to hedge by using this financial tool. Using this derivative will insure a farmer’s profitability and reduce risk associated with adverse or unexpected weather conditions according to wikipedia. However, the buyer of the derivative could not be fully protected since the contract is triggered on a regional basis rather than on an individual basis.

Also there are many other companies that can use weather derivatives to protect seasonal profits. These companies may be theme parks, sports teams, or power companies that depend on the weather to remain profitable. Jessica states that “98-99% of derivatives traded are based on temperature.” Since temperature is related to precipitation the derivative is triggered by one of the two. So pricing this model would be easy using stochastic processes, where probabilities are determined by which state you are in. So the insurer should study the probability for consecutive rainy and rain free days. Based on this the model to price this type of derivative should be very complex, since you have to consider each day until maturity.

The insurer should also account for the land, the crop being grown, and the location. If either one of these is unsuitable for favorable crop growth then the price of the derivative should be higher than some one buying a derivative in a more favorable climate for a crop. For example a weather derivative for an orange grove in Florida will be cheaper than for an orange grove in New York due to more favorable conditions.

The Chicago Mercantile Exchange currently trades weather derivative contracts for 18 cities in the United States, nine in Europe, six in Canada and two in Japan. According to investopedia, weather risk is also unique in that it is highly localized, it cannot be controlled and despite great advances in meteorological science, still cannot be predicted precisely and consistently. If you buy a weather derivative in a city that is somewhat close to your farm, you may have different weather conditions even though you are so close. As we stated in class one person may gain or lose depending on what happens in the region around the city you are hedged against. So these contracts are not fully customized to every local farmer’s needs, they are only protected when the city that is insured has bad weather conditions.

Links:
http://jlewis45rmiblog.blogspot.com/

http://en.wikipedia.org/wiki/Weather_derivatives

http://www.investopedia.com/articles/optioninvestor/05/052505.asp

http://www.usatoday.com/weather/forecast/2008-06-09-weather-derivative_N.htm

AIG and spending

The American government should take full responsibility for this economic downturn. They should have better regulated the financial sector, so that if one company failed the whole financial system failed. The government has placed too many eggs in one basket, and in return is paying the price for it. The stock market is plummeting almost everyday, due to a lack of investor confidence.

When you invest $170 billion as a federal bailout into one company you are very committed to that investment. It seems like the government just handed over the money to AIG without any regulations on how it should be used. Why is this if they continue to do what got them in financial distress in the first place.

The $165 million in paid bonuses was part of a larger total payout valued at $450 million. Although AIG reportedly lost $61.7 billion for the fourth quarter of last year (the largest corporate loss in history), the financial products division felt this bonus was needed as compensation for their good work. Most of AIG’s losses came from the financial products division, which sold risky credit default swaps. If AIG was contractually obligated to pay these bonuses, future bonuses should directly account for the performance of the company. By giving these bonuses it has hurt the public’s image of the company, and because of this customers will shy away from doing business with AIG in the future.

So why should taxpayers pay to bailout a company that is so focused on greed, that it lacks the sense for what it right or wrong. Why would you even accept a bonus, when you know that your company isn’t doing well and that it received money from the government in order to survive.

With this said taxpayers should have a say in where bailout money should go, instead of the government investing in companies that could eventually fail (AIG and GM). In order to survive both companies need to restructure and have more regulations. With these two companies being in the news so often, we are depending on them to get us out of this economic crisis. However, I feel that the public’s perception of these companies hasn’t changed and AIG and GM will have trouble recovering.


Links:http://www.foxnews.com/politics/2009/03/16/lawmakers-target-aig-executive-bonuses/

Critique: what caused this crisis

I agree with Anna in her blog “what caused this crisis.” She says that “we have discussed in class that risk management is key to maximizing profits when done correctly.” The news seems to focus on the negative effects of the recession, and what caused them.
With the current economic situation there are numerous companies in the spot light that have practiced bad risk management. However, there are those that have used good risk management receiving no national attention.

Wikipedia defines risk management as assessing, mitigating, and monitoring risks.
Obviously financial companies that have gone bankrupt failed to follow some, if not all, of these steps. In terms of options and derivatives, companies should not rely on making greater bets on riskier bets to make up for their losses. This defeats the purpose of risk management, since you are disregarding the risk associated to try to make up for your losses. Instead, companies should try to make up their losses gradually over time. Doing so, companies will profitable over time and have financial stability.

Anna also states that “risk management is not the problem, it is people and companies that think they can do without risk management or do so much management that they have negative profits.” The point here is, what is the optimal amount of risk management to use. Dong Hyun Ahn from the University of North Carolina states that the optimal amount of risk management you should forego is the amount that minimizes a firm’s value at risk.

We discussed in class that it is too costly to completely hedge your risks, and buying insurance is the most common solution for people and companies to do so. For smaller companies and lower income families insurance may be unaffordable. However, if more people had insurance, the insurance companies could slightly lower premiums by pooling more risk. Thus, the insurance companies would be collecting more money, as well as reducing their risk of incurring large losses.


Links:

http://act-alr.blogspot.com/

http://en.wikipedia.org/wiki/Risk_management

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=225921

AIG bonuses

Just when you thing AIG’s situation couldn’t get any worse, it does. With today’s discovery that AIG gave $165 million in bonus money to executives, which was funded by bailout money, have caused massive uproars from the president, Ben Bernanke, and taxpayers. After the government injected billions of dollars into AIG, AIG feels that some of the executives that got them into their situation deserve and need bonus compensation. It makes you wish that all jobs were like this, where you get compensated for negative results.

Resulting from this greed will put AIG into a worse position than it already is. The public that is disgusted by AIG’s actions may not want to do business with the company in the future. This decision ultimately has affected AIG’s image and will have a negative impact on future cash flows. This could further prolong the financial instability, since the government bailed out AIG to save the financial institution.

Links:
http://www.foxnews.com/politics/2009/03/16/lawmakers-target-aig-executive-bonuses/

http://online.wsj.com/article/SB122156561931242905.html

Public education system

The public education system has long been deteriorating, and the government continues to do very little to fix this problem. At times the government wastes time and money on bad projects, and the money could be invested into the public education system. What got us into this economic crisis was the demand for instantaneous positive short-term returns.
When I was in high school it seemed like teachers would just pass students in order to get them through the system, without learning anything. When I sat in on some technical classes, it seemed like there was no teaching going on and the teachers were just there to baby-sit. The people in these technical classes account for the majority of the graduating class, and now we just let them into the real world with no financial knowledge. They will need housing, and thus they entered into bad loans. Thus, causing the housing market to suffer.
To fix the economy we need more than just money. The government needs to focus on public school systems in order to create better industries and jobs. If we lack the education for better jobs, companies will forego the US and look somewhere else to invest their capital. Although investing in education will not see immediate short-term results, but the US needs it to be successful in the future.


Links:
http://www.foxnews.com/politics/first100days/2009/02/24/raw-data-excerpts-obamas-prepared-remarks-congress/100days/
http://www.foxnews.com/politics/first100days/2009/03/09/economic-crisis-obamas/

GA tax revenues down

According to reports on the news last night, GA’s tax revenues were down by about 30% (not sure). This should be no surprise, considering the current state of the economy. Of course people are spending less, due to unemployment and insecurity, so the tax revenue stream is uncertain. So right now we have politicians making budgets with money they don’t have. This emphasizes the point that there is something wrong with our government system. Politicians are constantly spending money they don’t have. As a state government there is no sense of responsibility for their actions, because they believe that the federal government will help them out when they need help. But if all 50 states rely on this ideology then the losses will start adding up quickly.

As a nation we should not leave the responsibility of the economy in the hands of the government. Most of the politicians running for office are unqualified for the position in the first place. Then when they are elected they have cabinet positions to give them advise for things they have no expertise in. The government at all levels should reduce the number of cabinet positions in order to reduce their costs, but citizens need to elect politicians that are most qualified for the job.

There are also slow seen effects from government actions. So instead of a bailout, we should let the free market economy fix its own problems. Just look at General Motors, the federal government gave them billions of dollars as a bailout, and they are still asking for money. Then it turns out that GM might have to file for bankruptcy anyway. Taxpayers will have to pay for the government’s actions for giving GM billions of dollars, which will not help GM.


Links: http://www.legis.state.ga.us/legis/2009_10/house/budget/reports/AFY_2009_Bill_House_Version.pdf

Hyundai assurance

Hyundai’s Assurance Plan could get the automaker through these tough economic times. The plan states that if you buy a new vehicle from them, and you lose your income, Hyundai will let you return the car. This plan will let you walk away from the loan without having to worry about negative equity. The plan will cover up to $7,500 in negative equity. Under this plan you are covered in case of involuntary unemployment, physical disability, loss of driver’s license due to medical reasons, international employment transfer, self-employed personal bankruptcy, and accidental death.
This could benefit the company by generating cash flows they wouldn’t have received if they were to let the cars sit on their lot. Hyundai is increasing their cash flows by getting more than they would if they weren’t selling the cars. It seems like Hyundai is taking all the risk out of having the car buyer pay future payments. If you were to default on your loan Hyundai would credit up to $7,500 for the remaining balance of the loan, and I guess you would be responsible for the difference.
If this were the case when you buy a $20,500 vehicle, and you were to default on the loan you would still be responsible for $13,000-payments of the remaining balance. I may have this wrong, but if this were the case then it seems like this plan is more beneficial to Hyundai than consumers. Hyundai would be making: (market value of the car-$7,500). Then they could resell the car you returned to them, and still make profits from that.
After looking at this plan, there is almost no benefit to the consumer, because they would be losing more than they are gaining from the Assurance Plan. For the above example of $20,500 the consumer would be paying $13,000 no matter what happened. So they would be paying for more than half of the car. It doesn’t make any sense to just return the car and lose the $13,000 along with the car. They might as well just pay the remaining $7,500 since they are obligated to pay $13,000.


Links:
http://www.hyundaiusa.com/financing/HyundaiAssurance/HyundaiAssurance.aspx

http://hyundaiassurance.walkawayusa.com/pdfs/HyundaiAssuranceLeaflet.pdf
http://archives.chicagotribune.com/2009/jan/07/business/chi-talk-carjan07