Europe goes back to the drawing board

The uncertainty that the European debt crisis has created can be controlled. Most EU countries want the German government to bail Greece and Italy out by either loaning them the money needed or collateralize the Greek and Italian bonds with German credit rating.
Chancellor Angela Merkel does not want to put its country's credit worthiness on the line without securing the risk. Germans want to be able to influence the fiscal policies of other E.U. countries. If that happens EU will change into a fiscal as well as a monetary union. that  way Germany would be able to control the government spending of Greeks and Italians.
The Greeks have to accept deep spending cuts to their public benefits and austerity, otherwise these crisis will continue to get worse.  European leaders will meet again this week to discuss the possibilities; however, Last Friday, Merkel again ruled out the creation of eurobonds, which could drive up borrowing costs for creditworthy nations such as Germany. The European Commission has proposed issuing so-called stability bonds as part of a plan to pool government debt across Europe.
 
http://money.cnn.com/2011/12/04/news/international/european_crisis_summit/index.htm?iid=SF_BN_River

Debt crisis in Europe and its effect on America

The american banks have not directly made loans to these members of E.U., however, the worry is that if Greece goes bankrupt the Europeans will come to us for a loan. Also, in the globalized market of today, if the sales drop in Europe, the profits will drop here consequently.
In addition, there are some worries that the American institutions have made under the table bets through their derivatives about the future of E.U; same problem that caused the 2008 debt crisis.
Evaluating these derivatives are nearly impossible and that's why they are not represented on the balance sheet of these american financial institutions.
Therefore if they win their bets nothing will have happen, but if these american banks loose, the taxpayers have to pick up the tab after they go under. The high volatility of banks during the past 3 months signals that investors are worried about the effect of European debt crisis on our banks.

Two UCLA professors, pointed out this concern through an article in the WSJ last week.

http://online.wsj.com/article/SB10001424052970204531404577052493270860130.html

http://video.cnbc.com/gallery/?video=3000059493

The dow makes a comeback

We learned in two lectures in class the importance of interest rates and their effect on stimulating our economy. In recent news, The Fed and several other various banks are planning to lower interest rates on dollar liquidity swaps. Essentially, this makes it cheaper for banks around the world to trade in U.S. dollars. Ultimately, this is being done to help alleviate the issues on supply of credit to households and businesses in order to encourage and foster economic activity.

http://money.cnn.com/2011/11/30/markets/markets_newyork/index.htm

More jobs in the Midwest

People in the Midwest can thank the auto industry for creating potential new jobs for them. This is especially exciting, as employement in these states have fallen by over half, causing 270,000 individuals to lose their job since 2001. The good news is that around 200,000 new jobs will be filled by 2015 (150,000 net due to replacement of retired workers). This doesn't exactly make up for all the jobs lost, but it does show much progress on behalf of the auto industry.


http://money.cnn.com/2011/12/06/news/economy/auto_jobs_midwest/index.htm

Stock Market Crash

We spoke about the stock market crash extensively in class, which was one of the causes for the great depression, effecting about 16% of households who invested in the market. In recent times, many feel as though we are going through another crash, or will soon. Jeremy Grantham, a main investor at GMO, believes that we will be suffering even more through the rest of our decade. He notices that equity markets have been absolutely bombarded by bad news recently, and feels that stock prices will come down with them around 2012, causing another large crash.

http://finance.fortune.cnn.com/2011/12/06/jeremy-grantham-crash/?iid=HP_LN

Value of the euro

In order to keep the value of the Euro intact—as many are predicting its collapse—German Chancellor Merkel and French President Sarkozy met on Monday in Paris to discuss a joint proposal for the upcoming summit meeting on Thursday, seen as the last chance this year to stabilize the euro zone. This is somewhat reminiscent of the erosion of faith in the gold standard in the 30’s which led to market speculation in various countries, such as the UK, where gold reserves were depleted despite attempts to defend its currency. Market speculation currently threatens the struggling economies of Italy and Spain. The gold standard worked very effectively before WWI because the UK was the global financial leader, and there was absolute faith in the gold standard. After the war, faith in the gold standard eroded, and the US was not able to effectively lead the global financial market. Will Chancellor Merkel and President Sarkozy be able to provide the leadership necessary to restore faith in the value of the Euro?

Are Republican candidates pretending to be clueless

Paul Krugman argues in Send in the Clueless that in order for a Republican to win the nomination, one must either be cynical and fake cluelessness, or actually be clueless. This is in part due to the fact that they must denounce current government policies even though many of those policies have their roots in former Republican policies. He gives as example President Obama’s national healthcare reform which is identical in many respects to Massachusetts’ healthcare reform that Mitt Romney had introduced. They must also attack big government while defending big government practices such as Medicare and Social Security, as older voters were key to Republican success last year. This calls to mind the belief that many Americans hold: there is great social mobility in the US. However, although this may have held true, today the data suggests mobility in the US is actually lower in comparison to Europe. There may be a growing gap between what we hold to be true and what we actually support and what is actually true. In order to affect change, we may have to begin reassessing our current opinions and values so that they align better with reality.