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.

Crackdown on independent candidates in China

There has been a recent string of crackdowns on independent party candidates participating in neighbourhood People’s Congresses in China. Although largely powerless, the increase in interest in these congresses and the alarm shown by the Chinese government may indicate a greater desire for democratic participation. With the increase in access to higher education has come a desire for greater political participation. Previously in the Americas, areas with more income equality allowed for greater access to education and more general suffrage rights. In China, it seems that education may be leading to growing interest in the political process and democratization in general, suggesting that any field equalizer, such as income equality or access to education, will lead to the desire for mass participation in government. However, these congresses have little power, and interest in them may not lead to anything more significant. In the event that they do though, they are worth watching.

Graduation Rates Declined

In Los Angeles, drop out rates for high school were 1 in 3 students in 2008. For California overall, the number was 1 in 4. These numbers are very sobering as they represent such a huge loss in potential. Such a huge increase in dropouts have been attributed to an increase in Latino immigrants who are the most likely dropouts, raising of educational standards, and a decrease of funding to public education. Such a crisis needs immediate attention as education leads to so many benefits to society.

http://articles.latimes.com/2008/jul/17/local/me-dropout17

Can You Put a Number on Education?

The relationship between earnings and education has been the focus of much debate in labor economics. Trillions of dollars and a huge chunk of the overall economy is spent on education. How can we quantify the benefits of this education we spend so much on? Most of the benefits we seek from education are economic in nature as more schooling signals a certain level of training and ability. Higher education means higher income and higher productivity. However, there is surprisingly little conviction about how much education contributes to the nation's overall wealth. Economists have tried and come up with some illuminating numbers. Alan B. Krueger, an economics professor at Princeton, says the evidence indicates that, up to a point, one more year of schooling is likely to increase an individual's income about 10 percent. Of course, it is not true for all people and it varies by individual.Two Harvard economists, Lawrence F. Katz and Claudia Goldin, studied the effect of increases in educational accomplishment in the United States labor force from 1915 to 1999. They approximated that those increases directly resulted in at least 23 percent of the overall growth in productivity, or around 10 percent of growth in gross domestic product. If economists are right, education is not just part of the cost of continuing a functioning democracy, but an avenue of wealth creation for everyone. That means that investing in the education of every American is in everyone's self-interest.

http://www.nytimes.com/2005/12/11/business/yourmoney/11view.html

Gender Gap: Men Still Outearn Women

In 2008, women still earned only 77 cents on the male dollar according to the latest census statistics. For African American women and Latinas, that number drops to 68% and 58%. There are signs of some progress. President Obama's first bill as president was targeted towards the wage gap. However, it has been nearly half a century since paying a a person based on his or her sex was outlawed so why is there still a discrepancy between men and women? The answer to this varies depending on who is asked. One reason suggested is that women tend to cluster in lower-paying fields. The most-educated group of women, for example, gravitate toward the teaching and nursing fields. Men with similar schooling become business executives, scientists, doctors and lawyers. No matter how it is explained, there are just some factors that can not be rationalized. These are most likely the results of discrimination whether conscious or not. Women's wages have gone up by only half a penny on the dollar for the last 40 years. How long will it take to reach true equality?

Kuznet’s Second Stage?

As we learned in class, the Kuznets curve is the graphical depiction of Simon Kuznets' hypothesis that economic inequality increases over time while a country is developing, and then after a certain average income is attained, inequality begins to decrease. In class we saw that the Kuznets curve suggested that income inequality rose from the founding of the country up until the last 19^th century, when inequality began to decline sharply until 1940. Kuzent argued that this decline was caused by government intervention in the form of income redistribution and the provision of education. From 1970 till present day however, the United States and other developed countries have experienced huge increases in inequalities levels. Many people believe that we are currently in a “second stage” of the Kuznet cycle and that inequality will begin to decrease once governments decide to do more to redistribute wealth. Even so, the recent financial crises may have limited the government’s ability to respond. A new report by the OECD demonstrates that the gap between rich and poor has grown ever wider in wealthy countries over the past three decades. The question therefore is not whether or not we are in a period of rising inequality, but rather how long and severe it will be.

Ricardo Johnson

http://www.economist.com/blogs/dailychart/2011/12/incomes

Is Education the Next Bubble?

As the world economy continues to recover (slowly) from the subprime financial crisis and the housing market crash that hit in 2007/2008, many academics and economists have begun to predict what the next major bubble will be. Interestingly enough, some have come to believe that higher education has become an unsustainable bubble that is bound to burst any second. Their main argument is that that the price of attending college has risen dramatically in recent years while the returns to education has fallen drastically (the reason for this may be an increase in skilled workers or a decrease in demand for them). Nevertheless, people continue to pay these high prices because they have unfounded and unrealistic expectations that they will get the job of their dreams after college. Rather than basing their decisions on economic realities, it appears as though individuals choose go to college simply because they think that is what they are supposed to do: “People are not getting their money’s worth, objectively, when you do the math. And at the same time it is something that is incredibly intensively believed; there’s this sort of psycho-social component to people taking on these enormous debts when they go to college simply because that’s what everybody’s doing.” On the other hand, the author presents evidence that suggests attending college is still beneficial, partly because it is one of the few routes to higher salaries. While there may be a case of education inflation, college degrees are still correlated with higher income and employment opportunities. Even though current evidence suggests that there are still high returns to education, it may be possible that those returns may soon begin to decrease. Furthermore, higher college tuitions in the near future may mean that investment in education will be too costly for the average American. This in turn may increase income inequality.

Ricardo Johnson

http://www.economist.com/blogs/lexington/2011/04/higher_education