Words from the SoapBox » Finances

Did The Bank Bailout Work?

admin — Sun, 21 Mar 2010 01:47:21 +0000

by Marquis Codjia

A few months ago, the crumbling global economy was atop the agenda of many G20 leaders. Social unrest, banking sector meltdown, global growth conundrum, and stock market yo-yos were the main discussion topics among the planetary leadership.

Governments the world over addressed the most imperative issue, the banking pandemonium, with massive cash inflows into a sector that hitherto epitomized capitalism at its best (and worst), with a modus operandi more akin to central intervention in communist economies.

The global tab ranges from 4 to 5 trillion US dollars according to the most optimistic estimates, but the overall costs may run higher in the future.

The financial rescue of the ailing banking sector, in principle, was the right course of action and various experts across the political spectrum saw eye to eye on its criticality, including the staunchest free-market theorizers who routinely treat as leftist energumens out of the antediluvian era those who dare buck conventional wisdom regarding the role of government in social economics.

It was flummoxing, however, to observe how lenient authorities were vis-à-vis banks throughout the bailout process on top of the very favorable terms under which funds were disbursed. Hence, financial institutions that benefited from state largesse were able to quickly use monies received to regain profitability and reimburse their respective governments.

Other parts of the economy didn’t experience so swift a recovery. Unemployment is still high; the mortgage sector is still in a shambles. Banks have been reluctant to lend, creating an underperforming productive sector and a lethargic private consumption. The stock market may be up but, debatably, the “real economy” is still down.

Banks played a crucial role in the current economic malaise but anti-bailout commentators were wrong to vilify them and to affirm that such guilt should have precluded public rescue. Financial intermediaries are an epochal pillar of our post-modern economies and it would have been socio-economically ruinous and politically unpalatable to let them sink.

Admittedly, a majority of banks are today more cash awash and profitable than a year ago albeit some pockets of the industry are still comatose owing to the liquidity hemorrhage that has devastated them since the recession erupted.

Regrettably, nothing has changed. These institutions are resorting again to the erstwhile practices that wrought havoc to the economy in the first place, under the aegis of a regulatory body eerily blind, deaf and tongue-tied.

Banks, evidently, should be encouraged to pursue and make profits as any private concern. But when such a financial quest comes at the expense of an entire system or poses a systemic threat to the productive sector of the economy, the argument in favor of tougher regulation becomes of preeminent import.
Companies need to utilize hedging for exposure control; yet, speculators lately seem to use derivatives to bet against their very benefactors. Although outrageous to vast swaths of the populace, such practices are explicable if one considers that the speculating camp only furthers private interests of elites (their investors) who seldom factor morality into the profitability equation.

Case in point: Greece. The Hellenic government bailed out its banking sector with billions of dollars only to see their country downgraded a few months later because of an perceived default risk.

At this moment, elected officials and central bankers should ponder the following question: did the bailout work? Or, stated differently, did the mammoth cash infusion into banks and the associated supplemental initiatives reach the initial goals?

Seasoned economists and social scientists will grapple amply with issues regarding program effectiveness and efficiency in the future, but prominent experts currently believe the answers to such interrogations are negative. George Mason University economist Peter Boettke posited that bank bailouts have created a “cycle of debt, deficits and government expansion” that in the end “will be economically crippling” to major economies, whereas Barry Ritholtz, famed author of Bailout Nation and CEO of research firm FusionIQ, thinks the rescue programs could have been conducted better.

It can be argued that the initial rescue phase of the bailouts program was effectual in that it helped avert a domestic and global banking hubbub. But, contrary to popular credence, that was the easiest part. The courageous headship of political leaders and regulators cannot be underrated in the process, but it is indisputably far facile for a powerful central bank, like the US Federal Reserve, to make journal entries to the credit of targeted institutions and replenish their corporate coffers via the much celebrated “quantitative easing”.

The Fed, just like other G8 central banks, is in an enviable position because it can create money ‘out of nothing’ by increasing the credit in its own bank account.

Regulation is where actual political bravery need be shown from authorities, and so far the lack of sweeping reforms in the financial sector may obliterate the latter’s plodding recovery.

At present, there are five distinct reasons explicating the mediocre results obtained so far from the bailout scheme.

First, the much needed financial overhaul is taking longer to move up the legislative ladder and reach US President Barack Obama’s desk because not only financial lobbies – such as the über-powerful American Bankers Association – are exerting strong pressure, but the political agenda is also crowded with the healthcare reform and the geostrategic concerns linked to the conflicts in Afghanistan and Iraq.

The fact that Senate Banking chief Chris Dodd, D-Conn., wants to introduce reform in the sector will probably change little in the short-term.

Second, President Obama’s own senior level financial staff is composed of former Wall Street alumni and lobbyists, and many skeptics are incredulous that a clique so tied to financial interests can spearhead true reforms in an industry that was previously munificent to them.

The next two factors are endogenous to the banking industry. One is the past experience of regulation and deregulation cycles that usually make laws dissipate over time, and the other stems from the idiosyncratic ability of financial engineers and investment bankers to design new products and techniques to counter existing laws.

Finally, the regulatory endeavor should be global in scope, and the present lack of geographic cooperation and the practical difficulty to track systemic risk within the industry are currently handicapping further advances.

(Article initially published at http://wp.me/pMqmW-8y)

About the Author:

I’m a finance professional with a solid, varied risk management experience in the financial services arena. I have been involved in capital markets for a few years now, in the course of my work but also as a trader.
I’m an MBA graduate from Rutgers University Graduate School of Business at New Brunswick, New Jersey, and a CPA (Certified Public Accountant).
Read expanded bio at http://marquisc.wordpress.com/about/

Some Other Ideas

If I Were a Rich Man… by Carl Hampton

admin — Sat, 16 Jan 2010 03:55:46 +0000

If I Were a Rich Man… by Carl Hampton

Many Americans living in the lower, middle, and even upper middle classes now more than ever before believe that they are striving for wealth that is unreachable. They believe that they will never be truly wealthy, only perhaps maybe with a little more luck they just may be a little better off than they once were, or better yet, better off than the people next door or that guy down the block.

Do the celebrity images put forward by the media exemplify true wealth? If that is the case then maybe most of us will never be truly wealthy.

This struggle with what real wealth should, especially during this recession, bring to light many questions, what is wealth? Is it the size of the house we live in? Is it flashy cars and jewelry? Is it were we take our vacations? Realistically the most important question should be how is wealth defined for the average man-that lower, middle, and upper middle class family that makes up the bulk of the American people?

Many Americans define wealth by the size of the income they earn. How much income per year defines wealthy? Depending on where you are starting form your opinion may change. Is it a “triple digit” income? Perhaps $75,000 means wealthy in your book?

Well, according to Kiplinger Washington Editors if you made at least $35,000 in 2008 you are more prosperous than over half of all of taxpaying Americans. According to the Department of Agriculture, in 2008 nearly 50 million Americans struggled to put food on the table. With these figures along with figures from the US Census, that is roughly one sixth of the entire population of the United States. One sixth of the United States had a hard time feeding themselves and their families.

I find that statistic staggering. Never the less, that puts that $35,000 into some kind of perspective– that is a lot of money. In fact, if you were to be able to make a little less than twice that, $66,000, you would be in the top twenty five percent of all wage earners in the US. That means realistically that you would be more affluent than 75% of the American population.

So, what’s my point? Well, if you are fortunate enough to fall into these categories, why do you not consider yourself of considerable wealth? Why do you not see yourself as having the opportunity to be even more prosperous? Should so many of us define wealth by outward appearance, showy cars, perhaps a boat or private schooling for the kids?

Why not define wealth, in these times of recession, as the ability to be without debt, have food on the table, and perhaps being able to invest some money into a future for your family, whether it be college funds for the kids or a strong stable plan for retirement?

Wealth can also be measured by what you do with your money and how you make it work for you, after all it is easier to save money than it is to make more so why not make it work harder for you?

About the Author

“Your Money Matters” By Carl Hampton Author of “From Credit Despair To Credit Millionaire” http://CarlHampton.com

The Ins And Outs Of Trying Out A For-ex Demo Account

Tue, 15 Sep 2009 17:13:53 +0000

Trying your hand at For ex in way of a demo account is used by thousands of traders and investors trying to determine if For ex is for them. Demo accounts are available widely on line, where an interested person can see how the whole thing works. Playing with a demo is along the same lines as the Pentagon generals playing war games. You basically have an account, with no real money in it, to buy, sell and trade the same way you would in reality. This allows you to see what is involved without risking any real money. The software for the demo accounts is deeply rooted in reality and you are able to see, at the end of the day, if you have made wise choices or need to keep practicing.

The idea behind the program is quite simple. The investor would have a pretend margin account with $10,000 in it. After studying the data from markets, they think the US dollars will have increased value when compared with the Japanese yen. The program allows purchases on margin, so one hundred thousand US dollars are purchased while selling one hundred thousand dollars worth of Yen. The difference, or spread, is what the pretend profits are.

So why spend your time with pretend accounts? Why not just jump right into it?
Well, it is much safer to learn how to do this complex trading when no real money is risked. While you may not have thought about it, a lot of people will spend hours on top of hours getting their feet wet as it were, before going swimming. A pilot, for example, will spend several hours in a flight simulator before actually taking off in a real plain. A person just learning to drive will practice before going out and driving on the highway.
Practicing with the demo software is the same principal. You have to know what you are doing before taking risks. Spending time on the For ex simulator allows you to gain knowledge, skills and instincts that will be needed when you go out there and risk ten thousand dollars for real.

You can find these demo accounts through most brokerage companies that trade in For ex. The demo may be free or there may be a small fee associated with it. If there is a fee, don’t just assume it is not worth your money. Even if a fee is assessed, it is most likely worth your money to practice. You have to have an idea what you are doing before you just jump right in. Spend all the time you can practicing with the demo account. If you deal directly with a broker, an account can be set up quickly. You can go on line to find a wide array of companies ready to set up an account for you to help fine tune your skills. It cannot be stressed enough that time must be spent in the demo account.

Besides making yourself feel at ease, it may help your spouse as well. Mike Marley opened a demo account after months of study. Convinced he could make a healthy profit as a day trader in For ex, he spoke to his wife. She was not convinced it was a good idea. After all, with the kids’ after school activities and retirement to think about, not to mention the mortgage and other monthly bills, there wasn’t a lot of extra money to play with. But after Mike found a brokerage company he felt he could trust, he set up a demo account and handled it just like a live account. After practice, and several days, Mike was able to make a nice pretend profit. He took that information to Mrs. Marley. After she looked it over and understood more about what was happening, she agreed to let Mike give it a whirl. Today, Mike has become quite successful in trading For ex and the two believe this will continue to happen. Oh, sure, there were a few times that Mike made the wrong call and they lost a little, but overall, they are on the plus side. By using a demo account before using real money, Mike was able to overcome his wife’s objections and is an active trader today.

Nick Makaryk is an Internet Publisher, Copywriter, and Founder of Best Credit Cards . A Free consumer credit card comparison site helps consumers find the Best Credit Card while avoiding high interest rates, charges, and fees.

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What Drives Traders To Forex Markets

Tue, 15 Sep 2009 17:13:52 +0000

Millions of people are attracted to the Forex because it is the biggest financial market in the world. Currency trading is the hottest, fastest growing type of investing today. While the Forex is called a 'market' it is not what you would traditionally think of.
Millions of people are attracted to the Forex because it is the biggest financial market in the world. Currency trading is the hottest, fastest growing type of investing today. While the Forex is called a 'market' it is not what you would traditionally think of. The trading is done via telephone or on line with computers. Formed in 1971, when the floating exchange rates came round, there is no one central location for trading in any given country in the world. It is an inter-bank or inter-dealer system. With over 3.5 trillion levels being exchanged each and every day, it is clearly growing in worldwide popularity.

Availability
One of the most attractive features of the Forex to investors is the fact that it never closes. It is open all day, every day of the year. People all over the world are just waiting to trade. If you find that you cannot sleep, you can trade. You don't need to wait until the next day. And you wouldn't be alone. It doesn't matter what time it is, trading will be occurring full steam ahead. This availabity is very appealing to a lot of people because you can do it in your spare time or when you get home from work. The reason the market says open twenty-four hours is because it essentially has to be. With time differences and such, there is really no other way. The Forex allows traders to capitalize on the large trading time and it is appreciated. Also, because the market is open all the time, you are never 'stuck' over night with the decisions you made right before closing time. There is no worrying that you won't be able to get out of your investment if something big happens at night or, gasp, on the weekend!

Excitement
The excitement of twenty-four hour trading is another very attractive aspect of the Forex to many traders. If you are willing to stay up all night long, the Forex will accommodate you. The market is so large it offers almost full liquidly, in fact, any were between $1.5 and $3.5 trillions dollars are available every day. It can be an Adeline ride for traders who are used to only trading nine to five, Monday thru Friday except for major holidays. There are no anxieties that come with the closing of the stock market. You can buy, sell and trade as needed without added stress. If something happens in the world, you can take care of business now and you won't have to wait until the markets open.

It's For Everyone
In times gone by, the stock markets were only for the rich and not perceived rich. Typically, a cash deposit of at least one million dollars would have to be given to the bank to even open an account to trade with. As you can see, this made it very difficult for the 'working man' to play the market. However, today, we have the Forex, which is opened to smaller investors as well. Most of the people who invest in Forex are doing so from home. One of the elements that make it attractive are the lower margins. The lower margins allow the smaller investor to trade right along with the big dogs on a more equal footing. Also, information and trading in Forex is readily available on line. This has also happened just recently. Now, home-based traders are doing very well for themselves because they have access to the same real time information as the larger traders.

Because the Forex offers excitement, availability and opportunity, it truly is for everyone. It may be something that, once given a try, you may not want to give up. Forex is such a popular topic in business schools today because of the seemingly endless opportunities. Check with your local community education center if you are interested in learning more about the Forex market. Once you are aware of the rules and regulations, you can open an account on line and start trading right away.

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