After reading Jessica M’s post on dividends I disagree with how beneficial they are, and with the current economic crisis companies should shy away toward declaring dividends. Wikipedia criticizes that money that goes toward dividends should be reinvested into the company instead. Also, the company will have more capital on hand when they need it to fund future projects, if needed.
Also dividend income could be subject to double taxation, where you could be possibly be taxed for more than what was declared in the dividend. So the investor could possibly see no gains from dividend income, due to taxes. Sometimes dividends are so small that, that it costs more for the company to send the check, than what the dividend was worth. The larger the dividend the bigger the cost for the company.
Callwriter argues that dividends in a bear market are good because stock prices won’t reach ridiculous values. I disagree with this because the company may not be able to afford to pay every time it thinks the price of its stock is too high. A company shouldn’t focus so much on its stock price. Instead is should it should focus on R&D and future investment opportunities.
Since paying dividends decreases a stocks value, a company loses value through the payment of dividends.
Callwriter states, not paying a reasonable dividend can actually result in harm to shareholders. Hoarding cash can lead to excessive executive compensation, poor management, and employing assets in unproductive ways. One study found that the more cash a company keeps, the more likely it will overpay for acquisitions. Dividend-paying companies tend to be more efficient in their use of capital than similar companies that do not pay dividends and are less likely to engage in funny accounting.
Links:
http://rmi4350jmorse.blogspot.com/
http://en.wikipedia.org/wiki/Dividend
http://www.callwriter.com/newsletter/dividend-basics.htm
Monday, April 20, 2009
Is the smallest choice the smartest choice?
With astronomical fuel prices, auto manufactures are complying with consumer demands by introducing more fuel-efficient cars. The car looks like it has nothing bare essentials, with no trunk or front engine space. Although the car may have passed crash tests at low speeds, crashes at highway speeds could be more deadly than in a mid size automobile.
Crash videos online show the smart car going up against a mid size vehicle. After seeing the results of the crash I would not even want to step foot in a Smartcar. The car was tossed off the hood of the on coming vehicle. It looked like the Smartcar had shattered, while the other car had insignificant damage to the engine only. Since the Smartcar has no hood, there is little protection in a head on crash, or any crash what so ever.
In order to avoid substantial future losses due to lawsuits and loss of income, the smart car needs to have above average safety features. These features need to protect passengers where most cars would not. Thus, consumers would feel the value of driving a smaller car and not have to worry about their safety. If Diemler Benz were to not meet these standards, then consumers would shy away from buying the Smartcar.
Smart cars are popular in Europe, where there are many narrow streets. In contrast this is not the case in American suburban/rural cities, since the roadways are completely different. More traveling is done on highways, and if you are trusting the safety of a small compact car to protect you in a crash thing again. There comes a fine line between getting better fuel economy and passenger safety, and the Smartcar in my opinion is well below this line. Until further improvements in technology (hybrids/electric), that we can have better fuel economy and still maintain the same level, if not better, of safety.
Links:
http://auto.howstuffworks.com/smart-car.htm
http://www.spike.com/video/crash-test-shows/3151924
Crash videos online show the smart car going up against a mid size vehicle. After seeing the results of the crash I would not even want to step foot in a Smartcar. The car was tossed off the hood of the on coming vehicle. It looked like the Smartcar had shattered, while the other car had insignificant damage to the engine only. Since the Smartcar has no hood, there is little protection in a head on crash, or any crash what so ever.
In order to avoid substantial future losses due to lawsuits and loss of income, the smart car needs to have above average safety features. These features need to protect passengers where most cars would not. Thus, consumers would feel the value of driving a smaller car and not have to worry about their safety. If Diemler Benz were to not meet these standards, then consumers would shy away from buying the Smartcar.
Smart cars are popular in Europe, where there are many narrow streets. In contrast this is not the case in American suburban/rural cities, since the roadways are completely different. More traveling is done on highways, and if you are trusting the safety of a small compact car to protect you in a crash thing again. There comes a fine line between getting better fuel economy and passenger safety, and the Smartcar in my opinion is well below this line. Until further improvements in technology (hybrids/electric), that we can have better fuel economy and still maintain the same level, if not better, of safety.
Links:
http://auto.howstuffworks.com/smart-car.htm
http://www.spike.com/video/crash-test-shows/3151924
Monday, April 13, 2009
Critique: Universal Currency
In Unique’s blog about universal currency she states many reasons why there should not be one. I agree with her position, because part of a countries identity is its currency. This is how countries gain reputation among others, by having a strong currency. Also, having different currencies promotes nationalism. For years the US dollar has been a reliable currency, and is commonly used in international markets due to confidence of the government’s ability to back up the USD.
That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.
Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).
Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.
Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.
According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.
Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.
Links:
http://uniquebl0gs.blogspot.com/
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358
http://en.wikipedia.org/wiki/Forex
That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.
Since the USD has been a staple in the currency market, there has not been a direct alternative to it that has the reach and circulation. Many people have invested in US bonds, so when the USD decreases in value so does the value of their investment. The domestic currency gets stronger while the foreign currency gets stronger(in terms of US).
Globalization has established trade levels that have never been recorded, but is occurring in the absence of broadly based universal currency standards. The largest trading partner of the US, China, use to hold 90% of their reserves in USD, and are now reducing this figure due to the weakening dollar.
Unique also states that with a universal currency there will need to have universal banks and interest rates. If this were to occur, it would be easier to assess risks on loans, because of the same standard set across the board. Creating a universal currency would create more stability, but would make a part of the financial sector become obsolete. With one currency there would no longer be a need for an international currency exchange (FOREX). By using a universal currency there is no further use for financial tools such as foreign FRA’s and swaps, since there will only be one currency. So, as a trader you would no longer be able to speculate on foreign currency markets, where speculating is the main reason why people trade on FOREX. Traders have no intention in taking the currency in which they are speculating in.
According to wikipedia the purpose of FOREX is to facilitate trade and investment. This market is one of the largest and most liquid financial markets in the world, and involves large banks, governments, and currency speculators. Major currencies are traded on the FOREX, as well as lesser familiar currencies. Thus, this market makes it easier for countries to change the currency they are holding. For example, if you are holding yen, you can easily exchange this for USD or British pound sterling. Etc.
Troubled countries that face high inflation rates, and political instability would benefit both economically and financially from a universal currency.
Links:
http://uniquebl0gs.blogspot.com/
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000563358
http://en.wikipedia.org/wiki/Forex
GM recalling 1.5 million cars over fire fears
Just when you thought it couldn’t get worse for GM, it continues. While browsing through cnn.com I came across this article stating that GM is recalling 1.5 million cars due to the possibility of engine fires. They may be doing this to avoid future lawsuits, but this could impact GM’s future image, sales, and profitability. However, they are doing the right thing by telling and warning the public of the possibility of engine fires, to avoid the backlash of more serious negative effects.
The recall covers certain mid and full size sedans under GM’s Chevy, Buick, Oldsmobile, and Pontiac brands. This recall shouldn’t affect most consumers, since they have converted to driving gas guzzling SUV’s. One of the engine parts was leaking oil, and was dripping on to another part, which gets very hot and spark a potential fire.
The vehicles involved are:• 1997-2003 Buick Regals.• 1998-2003 Chevrolet Luminas, Monte Carlos and Impalas.• 1998-1999 Oldsmobile Intrigues.• 1997-2003 Pontiac Grand Prix.
Although this is a minor defect in the performance of their engines, GM is taking the initiative by fixing this problem as it has arisen. Hopefully the public will see this action as GM taking corporate responsibility for their actions, and in return buy GM cars. Consumers may feel that if GM finds a problem with their product line, they will do everything to correct the problem.
Links:http://www.cnn.com/2009/US/04/13/gm.recall/index.html
The recall covers certain mid and full size sedans under GM’s Chevy, Buick, Oldsmobile, and Pontiac brands. This recall shouldn’t affect most consumers, since they have converted to driving gas guzzling SUV’s. One of the engine parts was leaking oil, and was dripping on to another part, which gets very hot and spark a potential fire.
The vehicles involved are:• 1997-2003 Buick Regals.• 1998-2003 Chevrolet Luminas, Monte Carlos and Impalas.• 1998-1999 Oldsmobile Intrigues.• 1997-2003 Pontiac Grand Prix.
Although this is a minor defect in the performance of their engines, GM is taking the initiative by fixing this problem as it has arisen. Hopefully the public will see this action as GM taking corporate responsibility for their actions, and in return buy GM cars. Consumers may feel that if GM finds a problem with their product line, they will do everything to correct the problem.
Links:http://www.cnn.com/2009/US/04/13/gm.recall/index.html
Sunday, April 5, 2009
Critique: Reserves what, how, why?
In Jessica M’s blog about reserves she assesses the importance it is to firms to keep them. Some companies may hold reserves for an individual policy, but in most cases they hold reserves for the group they have pooled. Section 1303 of NY’s Insurance Law requires that insurers maintain reserves for the payment of losses or claims and expenses, incurred on or prior to the statement date, whether reported or unreported. The concept of reserves is basically putting the money you need in a bank account, to fund future expected claims or losses. Insurers generally have to estimate how much they need to hold in reserves, and over time the reserve becomes large enough to fund a policyholder’s loss when incurred.
Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t
tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid
I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.
This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.
Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm
personal experience
http://en.wikipedia.org/wiki/Actuarial_reserves
Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t
tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid
I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.
This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.
Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm
personal experience
http://en.wikipedia.org/wiki/Actuarial_reserves
CEO’s compensation
Perhaps one contributing factor to the dismal economy is the decisions that top CEO’s make, and the compensation they receive. CNN states, “as the economy melted down, so did CEO compensation.” The average compensation for 200 chief executives at America’s largest public companies fell 5.1% to $10.8 million. This was the first time in five years that CEO compensation shrank.
So why don’t risk managers (shareholders) say that enough is enough, and limit the compensation given to CEO’s. By having so much money tied up into one person, it limits the flexibility of a firm. If you have invested so much money into one person, you expect above average returns from that investment. I feel that companies have continually overvalued CEO’s and are now paying the price for it. Just look at where AIG and all of these investment banks stand now.
If shareholders decided to compensate CEO’s significantly less, it could use this money to compensate lower level workers. This could increase worker productivity, and create more value to the firm than just one person. Thus, workers feel more tied to the firm and create a slower turnover in employees. Is there justification to complain in a pay cut when you are making millions of dollars. One extreme example would be the CEO of McDonalds making $13.4 million in 2006, while you have thousands of people working at minimum wage.
Links:
http://money.cnn.com/2009/04/05/news/top_ceo_pay/index.htm?postversion=2009040514
http://www.networkworld.com/news/2009/033009-sprint-ceo-pay.html
http://www.usatoday.com/money/economy/2007-04-10-3656879995_x.htm
So why don’t risk managers (shareholders) say that enough is enough, and limit the compensation given to CEO’s. By having so much money tied up into one person, it limits the flexibility of a firm. If you have invested so much money into one person, you expect above average returns from that investment. I feel that companies have continually overvalued CEO’s and are now paying the price for it. Just look at where AIG and all of these investment banks stand now.
If shareholders decided to compensate CEO’s significantly less, it could use this money to compensate lower level workers. This could increase worker productivity, and create more value to the firm than just one person. Thus, workers feel more tied to the firm and create a slower turnover in employees. Is there justification to complain in a pay cut when you are making millions of dollars. One extreme example would be the CEO of McDonalds making $13.4 million in 2006, while you have thousands of people working at minimum wage.
Links:
http://money.cnn.com/2009/04/05/news/top_ceo_pay/index.htm?postversion=2009040514
http://www.networkworld.com/news/2009/033009-sprint-ceo-pay.html
http://www.usatoday.com/money/economy/2007-04-10-3656879995_x.htm
Monday, March 30, 2009
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
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
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
Monday, March 23, 2009
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
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/
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/
Monday, March 16, 2009
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
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
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
Tuesday, March 10, 2009
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/
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
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
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
Sunday, February 22, 2009
Stimulus Plan
Although everything sounds good with the current stimulus plan, just how long will the long-term effects catch back up to us. This plan could be prolonging the future economic pain.
According to the Washington Post, the Obama administration is seeking ways to reduce the number of foreclosures and spur demand as the housing recession enters its fourth year. Part of the plan calls for the federal government to match reductions that lenders would make in interest rates aimed at lowering borrowers' payments to 31 percent of their monthly income.
Last week, Obama also signed a stimulus package including an $8,000 tax-credit for first-time homebuyers. If this plan is aimed at primarily at graduating college students, then it might not be as effective due to the current job market. People might also see this tax credit as a way to get a bigger house than they had originally planned. Then if they cannot afford the payment then the whole housing crisis will start all over again.
Also since there is so much uncertainty in the job market people are shying away from buying houses and cars. Without job security they may not be able to make future payments.
We are relying too heavily on the government to get us out of this financial crisis. By trying to stimulate the economy, they could incur greater costs than they had expected. They could also hurt unintended markets and cause serious long-term damage. The government is absorbing too much cost, and won’t have an immediate way to finance them. The costs outweigh the benefits, and will cause the US to slip as being a major world power. Just how can we survive, when the government cannot operate without incurring a loss.
As of Feb. 22, 2009 the current outstanding public debt is $10.8 trillion. The estimated population is 305.7 million, which gives each citizen $35,370.19 in national debt that they haven’t directly caused. Since September 28, 2007 the national debt has increased an average of $3.52 billion per day. So you could say that the stimulus is just pennies compared to our current national debt.
Links:
http://www.washingtonpost.com/wp-dyn/content/story/2009/02/20/ST2009022002635.html
http://www.brillig.com/debt_clock/
According to the Washington Post, the Obama administration is seeking ways to reduce the number of foreclosures and spur demand as the housing recession enters its fourth year. Part of the plan calls for the federal government to match reductions that lenders would make in interest rates aimed at lowering borrowers' payments to 31 percent of their monthly income.
Last week, Obama also signed a stimulus package including an $8,000 tax-credit for first-time homebuyers. If this plan is aimed at primarily at graduating college students, then it might not be as effective due to the current job market. People might also see this tax credit as a way to get a bigger house than they had originally planned. Then if they cannot afford the payment then the whole housing crisis will start all over again.
Also since there is so much uncertainty in the job market people are shying away from buying houses and cars. Without job security they may not be able to make future payments.
We are relying too heavily on the government to get us out of this financial crisis. By trying to stimulate the economy, they could incur greater costs than they had expected. They could also hurt unintended markets and cause serious long-term damage. The government is absorbing too much cost, and won’t have an immediate way to finance them. The costs outweigh the benefits, and will cause the US to slip as being a major world power. Just how can we survive, when the government cannot operate without incurring a loss.
As of Feb. 22, 2009 the current outstanding public debt is $10.8 trillion. The estimated population is 305.7 million, which gives each citizen $35,370.19 in national debt that they haven’t directly caused. Since September 28, 2007 the national debt has increased an average of $3.52 billion per day. So you could say that the stimulus is just pennies compared to our current national debt.
Links:
http://www.washingtonpost.com/wp-dyn/content/story/2009/02/20/ST2009022002635.html
http://www.brillig.com/debt_clock/
GM success: Chevy Volt
GM’s future success primarily depends on the success of the Chevy Volt and the Camero.
The Volt is said to go on the market in late 2010, as a 2011 model year. Since conception GM has been working hard to develop a battery to power the car. Since this will be such a revolutionary car GM plans to sell the Volt at $30,000, but first versions might be $40,000. The battery will last the first 40 miles and then a gas generator will kick in, that can be driven 400 miles on a full tank of gas. This type of technology will save consumers money on gas in the long run. Thus, once more electric powered cars are on the road, the cost of gasoline will decline and lessen our dependence on foreign oil.
Since the Volt will be the first full electric car, it will boost GM’s image and customer appeal. Customers today want “green” products that will reduce pollution, and this car will affect driver’s daily impact. Having an electric engine, the car will not produce harmful fumes that escape into the atmosphere.
I haven’t heard of any other GM competitors trying to develop a concept like this. So in order for GM to emerge from bankruptcy it might be strategic for them to release the car for a few years, and then sell their design to its competitors. They should make a contract, so they will a get a percentage of the sales of the cars. Thus they will be profiting from their own sales and also making a small profit from its competitors. This portion of GM’s small profit could be put forth towards research and development for future models and consumer surveys, to develop the quality of their cars.
Links:
http://gm-volt.com/chevy-volt-faqs/
The Volt is said to go on the market in late 2010, as a 2011 model year. Since conception GM has been working hard to develop a battery to power the car. Since this will be such a revolutionary car GM plans to sell the Volt at $30,000, but first versions might be $40,000. The battery will last the first 40 miles and then a gas generator will kick in, that can be driven 400 miles on a full tank of gas. This type of technology will save consumers money on gas in the long run. Thus, once more electric powered cars are on the road, the cost of gasoline will decline and lessen our dependence on foreign oil.
Since the Volt will be the first full electric car, it will boost GM’s image and customer appeal. Customers today want “green” products that will reduce pollution, and this car will affect driver’s daily impact. Having an electric engine, the car will not produce harmful fumes that escape into the atmosphere.
I haven’t heard of any other GM competitors trying to develop a concept like this. So in order for GM to emerge from bankruptcy it might be strategic for them to release the car for a few years, and then sell their design to its competitors. They should make a contract, so they will a get a percentage of the sales of the cars. Thus they will be profiting from their own sales and also making a small profit from its competitors. This portion of GM’s small profit could be put forth towards research and development for future models and consumer surveys, to develop the quality of their cars.
Links:
http://gm-volt.com/chevy-volt-faqs/
Risk modeling
Perhaps one contributing factor to the current economic crisis is that the models used by risk managers and employees did not model the correct risk. With so many methods to model one thing, you could possibly get two different outcomes by using different models. Considering a continuous number of methods and probability distributions, there is a good chance that the model you are implementing does not match the distribution. Even though the choice of method depends significantly on the amount and type of historical data available, each method has its advantages and disadvantages. Each method also requires varying analytical skill and experience.
There are 3 broad categories of modeling methods presented by the CAS:
Methods based primarily on the analysis of historical data
Methods based on a combination of historical data and expert input
Methods based primarily on expert input
I believe that models that represent both historical data and expert input should be more accurate. You don’t always want to base assumptions on models, since they don’t always represent real life situations, and if they did we wouldn’t be in an economic crisis.
One process that falls into this category is stochastic processes. This process expresses the difference in the value of a variable at time t and the value one time period later (t+1). This process is probably one of the more accurate processes since its probabilities consider the past, but future probabilities depend on the present state. Thus, stochastic processes predict random change looking into the future. However, there could be thousands of possible outcomes, which may get complicated to decipher.
Links:
http://www.ucop.edu/riskmgt/erm/documents/overview.pdf
There are 3 broad categories of modeling methods presented by the CAS:
Methods based primarily on the analysis of historical data
Methods based on a combination of historical data and expert input
Methods based primarily on expert input
I believe that models that represent both historical data and expert input should be more accurate. You don’t always want to base assumptions on models, since they don’t always represent real life situations, and if they did we wouldn’t be in an economic crisis.
One process that falls into this category is stochastic processes. This process expresses the difference in the value of a variable at time t and the value one time period later (t+1). This process is probably one of the more accurate processes since its probabilities consider the past, but future probabilities depend on the present state. Thus, stochastic processes predict random change looking into the future. However, there could be thousands of possible outcomes, which may get complicated to decipher.
Links:
http://www.ucop.edu/riskmgt/erm/documents/overview.pdf
Sunday, February 15, 2009
Stimulus package
Before President Bush left office he had implemented a stimulus package that was supposed to soften the blow on the economy. He also gave stimulus checks to people in order to jump-start the economy.
Since then there has been little to no effect, as we can see from the current economy. Now President Obama wants to spend $787 billion to help soften the blow again. He also says “that things are going to get worse before they get better.” However this stimulus package could make things a lot worse. We could be spending millions of dollars that will never affect the economy. I believe that he should wait until everything settles down, before he implements such a large stimulus plan. Then he could accurately pinpoint what is wrong with the economy and how to fix it effectively. Rather than just prolong the situation and continue the same bad habits that got us into this mess, we should not rely on the government to solve this problem. After all when government gets involved in things they screw things up. Considering our growing national debt, just how much is too much, and when will the spending stop. It has been justified that since we stimulate other economies that being in debt constantly is ok. However, this debt has finally caught up with us. The government has crippled the nation, since we constantly borrow on credit from other nations.
Links:
http://www.nytimes.com/2009/02/16/us/politics/16talkshows.html?_r=1&hp
Since then there has been little to no effect, as we can see from the current economy. Now President Obama wants to spend $787 billion to help soften the blow again. He also says “that things are going to get worse before they get better.” However this stimulus package could make things a lot worse. We could be spending millions of dollars that will never affect the economy. I believe that he should wait until everything settles down, before he implements such a large stimulus plan. Then he could accurately pinpoint what is wrong with the economy and how to fix it effectively. Rather than just prolong the situation and continue the same bad habits that got us into this mess, we should not rely on the government to solve this problem. After all when government gets involved in things they screw things up. Considering our growing national debt, just how much is too much, and when will the spending stop. It has been justified that since we stimulate other economies that being in debt constantly is ok. However, this debt has finally caught up with us. The government has crippled the nation, since we constantly borrow on credit from other nations.
Links:
http://www.nytimes.com/2009/02/16/us/politics/16talkshows.html?_r=1&hp
Steroids in Baseball
Lately baseball has been to focused on records being broken, that it has failed to look back on those individuals achieved those records. Although you may attribute the increase in muscle mass to better technology and harder work ethics, there seems to be a fine line of natural and enhanced muscle development. There raises suspicion when a player gains 15-20 pounds in muscle in the off-season, roughly a 5-month period.
Back in the 1900’s when the game first began there were no performance enhancing drugs, and players didn’t play just for the money. To them it was a summer job, and they made nothing compared to today’s players. Now it seems like everyone is in it for the money, and not for the passion of the game.
In order to standout among the hundreds of players in the league, you need to put up above average numbers. This has produced so much pressure from players that they are willing to do anything to get a big contract, even if it means putting their own health at risk. In the era of Hank Aaron, there were probably very few players that had 40-50 homerun seasons. While today you cannot have a good year unless you have at least 30 homeruns.
With the recent investigation many of the star players in the 1990’s have been found to use performance-enhancing drugs in their career. With names like Arod, Clemens, Bonds, Tejada, Mcgwire, and Sosa it is hard to say that they would have accomplished what they did without enhancing drugs. This has tainted baseball’s image and will hurt future player’s reputations. Whenever someone breaks another record, they will have to answer the questions of whether it was legitimate or not. Ultimately the steroid era has produced illegitimate players, and has hurt baseballs reputation. There will be harsh long term effects, because people don’t want to pay money for cheaters to play the game. To correct this problem by engaging in risk management baseball needs to implement a harsher drug penalty, and test players on a regular basis. They also need to stay ahead of the latest new drugs that become available on the market.
Links:
ESPN
Back in the 1900’s when the game first began there were no performance enhancing drugs, and players didn’t play just for the money. To them it was a summer job, and they made nothing compared to today’s players. Now it seems like everyone is in it for the money, and not for the passion of the game.
In order to standout among the hundreds of players in the league, you need to put up above average numbers. This has produced so much pressure from players that they are willing to do anything to get a big contract, even if it means putting their own health at risk. In the era of Hank Aaron, there were probably very few players that had 40-50 homerun seasons. While today you cannot have a good year unless you have at least 30 homeruns.
With the recent investigation many of the star players in the 1990’s have been found to use performance-enhancing drugs in their career. With names like Arod, Clemens, Bonds, Tejada, Mcgwire, and Sosa it is hard to say that they would have accomplished what they did without enhancing drugs. This has tainted baseball’s image and will hurt future player’s reputations. Whenever someone breaks another record, they will have to answer the questions of whether it was legitimate or not. Ultimately the steroid era has produced illegitimate players, and has hurt baseballs reputation. There will be harsh long term effects, because people don’t want to pay money for cheaters to play the game. To correct this problem by engaging in risk management baseball needs to implement a harsher drug penalty, and test players on a regular basis. They also need to stay ahead of the latest new drugs that become available on the market.
Links:
ESPN
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