Tag Archives: economics

Tango Down

You can’t deny that things are just not working out for Argentina these days. First, they had their hopes and dreams crushed earlier this summer after they lost against Germany in the World Cup. Obviously, soccer is just a sport. However, its also a way of life in most South American countries. So you can imagine how heartbreaking it must have been for the Argentinians.

To add insult to injury, recently, Argentina also defaulted on part of its sovereign debt. This means that it failed to meet its payment obligation to some of its creditors. Before we continue let me clear up two common misconceptions about sovereign defaults. The first one, is that it occurs when a country goes bankrupt. This is false. Default just refers to not being capable of paying or refusing to pay debt. The fact that Argentina defaulted on its debt was entirely its own decision as I will explain soon. Argentina still had money in its treasury to pay its debt off. Or it could have printed some money to do so; but it refused. The second misconception is that sovereign defaults are very rare occasions that only occur once in a million years when the economy or financial sector of a country is in shambles. This is partly true. Yes, financially troubled countries are more likely to default, but even developed countries can default too. The United States came close to defaulting in 2011 when Congress nearly refused to raise the country’s debt ceiling. The following list of sovereign defaults since 1961 shows that it can happen pretty often.

SIGSovereignDefaults2003

So why did Argentina default? You might have noticed from the table above that Argentina defaulted not too long ago in 2001. The story of Argentina’s most recent default can be actually be traced to its previous one. So lets go back to 1998 to get a better understanding of where we are today.

In order to control the hyperinflation caused by an economic crisis in the late 1980s, Argentina decided to peg its currency, the austral, against the US dollar in 1991. This lowered inflation and caused Argentina’s GDP to grow by nearly 50% between 1990 and 1998. Living standards rose and Argentina was labeled as one of the new emerging economies. However, not everything was as it seemed. Deep down within Argentina’s economy, a crisis was brewing. Argentina was spending a lot more than the revenue it was generating. Thus, the nation’s external debt kept on piling up. A financial crisis that occurred in 1997 in Asia slowed the Argentinian economy and reduced investor confidence in emerging markets such as Argentina. The final piece of the puzzle came when in 1999, Brazil devalued its own currency, causing the Argentinian austral to be less competitive against the currency of its neighbor.

After having enjoyed a honeymoon period during the early 90s, Argentina’s GDP declined by 3% in 1999 and the country entered a three-year long recession. Despite consecutive tax hikes and spending cuts by the Argentinian government, unemployment kept rising, the economy kept on shrinking and borrowing costs rose, making it harder for the the nation to finance its debt. The situation failed to improve as the people took the streets to protest and the IMF refused to keep lending to Argentina. By November of 2001, investors rushed to sell their australs, causing a run on Argentinian banks. Shortly thereafter, Argentina was forced to abandon the currency peg. Finally, on the last week of 2001, the Argentinian government defaulted on $132 billion of public debt. Here are a couple graphs that display how everything went insane in Argentina around 2000.

argentina-gdp-growth

Historical Data Chart

This is where our story truly begins. Until that date, Argentina’s $132 default was the largest in history. Despite cutting off the country from international capital markets, it stopped the Argentinian currency from entering hyperinflation and as the graph depicting Argentina’s GDP growth rate proves, it helped the country to enter a period of growth.  Argentinians are known for their kindness. That’s one of the reasons why their flag has a smiling sun on it. So, in 2005 and 2010, the Argentinian government offered new discount bonds to the holders of its defaulted debt. These bonds pad about 35 cents on the dollar of the original bonds. It was an offer that these investors could not refuse. If they did refuse, they got nothing. They had worthless bonds in their hands. If they said yes, they at least had something. Thus, 93 percent of bondholders agreed to the deal.

Who were the the remaining 7 percent, and what where they thinking? Well, they’re a group of hedge funds including Elliott Management and Aurelius Capital and they decided to take off their investor hats and become lawyers by going on a crusade to get the exact amount of money that they were originally owed. In other words, this was their reaction to Argentina’s proposal.

You see, the original bonds had a clause called parri passu, which means ‘equal treatment’ across all bonds. The holdout investors claimed that this meant that Argentina can’t pay back some bond holders and not the rest. Its a clever argument really. And its also risky. These investors could have taken the easy way out and received the discount bonds. But for years they’ve been going after Argentina to get their money back in its entirety. Its something that only a very determined and diabolical person would do. Paul Singer, the CEO of Elliott Management, the most aggressive hedge fund, fits that persona both characteristically and physically. I mean just look at him. He is a prime candidate to be the next Bond villain.

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“James Bond. Allow me to introduce myself. My name is Ernst Stavro Blofeld. They told me you were assassinated in Hong Kong”

So how have these hedge funds fared over the past decade? Not so successful actually. They attempted to sue Argentina in the past and failed. When it seemed that suing wasn’t working, they turned to seizing Argentinian assets. Not financial assets though, they targeted physical assets. In 2012, Elliott Management seized a frigate belonging to the Argentinian navy off the coast of Ghana as partial payment for the money that it was owed. But this tactic failed as well when Elliott Management were forced to hand the frigate back. I don’t know what is funnier, imagining hedge fund pirates taking over a ship in Armani suits, or that the fact that this ship is still used as a frigate in the Argentinian navy when it clearly belongs in a museum.

The holdouts made their breakthrough in 2012 when a lone judge in New York named Thomas Griesa ruled that the holdouts were correct about the parri passu clause, and that Argentina couldn’t pay the exchanged bonds without paying the holdouts too. To put the pressure even more on Argentina, Judge Griesa ruled that if Argentina refused to pay the holdouts, it would prevent any financial institution from facilitating the payments Argentina maid to the exchanged bondholders. This decision put Argentina in a tough situation because if it didn’t pay the holdout bonds, it would default on all the exchanged bonds, even thought it was willing and able to make the payments. I’m sure this was Paul Singer’s reaction after Judge Griesa’s decision.

Time went by, insults were thrown and meetings were held, but both sides could not come to an agreement by July 30, which was the deadline that Judge Griesa had placed on Argentina. Hence, Argentina defaulted. Besides stubbornness, there were several other reasons for why Argentina refused to pay. Firstly, their foreign currency reserves were running low. At the time of the default, Argentina only had $29 billion in foreign currency reserves. If they paid the holdout investors, then their reserves would reach critically low levels and would greatly effect their monetary policy in the future. The second reason is that Argentina had another clause in their exchange bonds called RUFO ( Rights Upon Future Offers). This clause forbid Argentina from offering any new future bondholders a better deal, without also extending the same deal to exchanged bondholders. In other words, they would have to pay the exchange bondholders the same full amount on each bond just as they would pay to the holdouts. If Argentina broke this clause, they would have been liable to pay the exchanged bondholders approximately $120 billion.

Although the holdouts failed to get what they wanted, they are still searching for ways to shake some cash out of Argentina. On August 11th, a federal court in Las Vegas gave NML Capital, one of the holdout creditors, the right to investigate the US-based companies of an Argentinian businessman named Lazarao Baez.  Mr. Baez is under investigation in Argentina for allegedly embezzling $65m from government contracts. By looking into Baez’s activities, NML hopes to perhaps recover some funds through a court order and to humiliate Argentina for not paying its debts. I think that after defaulting 8 times in its 200 year history, Argentina is impervious to financial humiliation.

So what happens now? Will Argentina’s economy crash again like last time? Not really. This default occurred for obscure legal reasons as opposed to financial reasons. Of course it will continue to cut off Argentina from international capital markets, making it harder for Argentina to borrow, but they were still in that situation anyway. Argentina’s economy will continue to be in stagflation, with negative growth and high inflation. I think they’re used to it by now. Finally, because Argentina’s external debt and GDP is so low compared to the global economy, this default will not have a large effect on global markets.

Historical Data Chart

Nevertheless, I feel bad for the people of Argentina. They’re forced to suffer due to the mismanagement of an incompetent government and the greed of a group of rich hedge fund managers. I think there’s only one man who can solve this problem. The one man that all Argentinians turn to when they are desperate for something miraculous to save them at the last minute…Lionel Messi.

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BONUS: If you follow this blog regularly, you would know by now that I like to simplify complicated concepts by using humor and various real life examples. I think it gives a chance for people who are not familiar and not interested in these topics to understand and enjoy reading about these issues. Lets be honest, sovereign debt defaults, hedge funds and RUFO clauses are not the most interesting subjects in the world. As a bonus, I’ve added a video of Felix Salmon, a Reuters reporter, who tries to explain the story of Argentina’s default in even simpler ways than me …by using Legos and action figures. Enjoy.

“This situation thrust upon the Argentine people is also a form of violence. It is a financial missile, which also costs lives”
– Cristina Fernandez de Kirchner, President of Argentina

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Europhoria No More

In 2011 and 2012, the Eurozone was on the brink of destruction. Investors were preparing for a Greek exit from the Eurozone and some experts were even questioning the very existence of the European Union. However, in two years, much has changed. Today, the possibility of Greece leaving the Eurozone or of Cyprus becoming insolvent seems like a distant memory and after two years of being in recession, the Euro area has finally generated positive growth. The growth is slow, but is nevertheless positive.

How did the Eurozone manage this turnaround? Well, we can all thank the European Central Bank (ECB) for this. In July of 2012, ECB President Mario Draghi announced that the, “ECB would do whatever it takes to preserve the Euro.” In addition with this speech, the ECB extended the maturities on the loans it gave to European banks (called Long Term Refinancing Operations) and announced a new program (called Outright Monetary Transactions) where for the first time, it promised to purchase the sovereign bonds of financially troubled nations, given that they agree to implement certain fiscal reforms (tax hikes, spending cuts, etc.).

The ECB used a tricky monetary maneuver called sterilization to make sure that LTRO didn’t increase the European money supply the way FED’s QE did and until today, no country in the Eurozone has actually applied for a bailout through Outright Monetary Transactions. However, the mere existence of these programs created a sense of security in the Eurozone and they helped reduce the sovereign bond yields of Eurozone nations that had been inflicted by the crisis. For you bond newbies, the lower the interest rate on a bond, the less riskier it is deemed by the market. The graph below does a good job in visualizing Spanish and Italian bond yields in relation with ECB actions.

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In fact, one could argue that the sovereign bond yields of periphery Eurozone countries have dropped too low. For example, on the day that I have written this post, 10-year Spanish government bonds are yielding 2.68% whereas 10-year German bonds are yielding 1.27% . That means that the spread between the country with the highest unemployment rate in the developed world and the safest economy in the Eurozone is less than 2%. Back in August of 2012, that spread was about 6%. Even when Apple issued 10 year bonds in April of this year, their bonds yielded 3.45%. I think its safe to say that the markets have treated periphery Eurozone nations rather kindly.

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Despite the irregularities in the bond markets, its hard to deny that the Eurozone has been in a honeymoon period for the last two years. However I realized that something is rotten in the state of Denmark, France, Italy, Spain, and all the other Eurozone countries (that was a Shakespeare joke. Read a book people). when a couple of months ago, I got a phone call from my good friend Mario Draghi.

Mario Draghi
“Buddy, I need your help with something. Come on over quick. Party at Merkel’s place afterwards.”

Even though I had a very busy schedule, I couldn’t say no to one of my oldest friends. So I decided to take the trip down to Frankfurt. Here I am outside the ECB.

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I’ve lost count of how many times I’ve been there but I still have to go through security. Its so annoying. Anyway; when I walked into his office, Draghi seemed worried. He told me that the Eurozone is on the brink of negative inflation, otherwise know as deflation. The ECB’s target inflation rate has been 2% for the past several years. However, as the graph below shows, Euro area inflation has been below 1% since November of last year. In fact, just last month, several European countries including Greece, Cyprus and Hungary observed negative rates of inflation.

euro-area-inflation-cpi (2)Even those of us who haven’t received an education in economics have been told to fear inflation. However, deflation can be just as bad, if not worse. I’m pretty sure I explained this in a previous post but deflation has two main negative impacts. First of all, deflation discourages spending. Why should a sensible person purchase something today if he knows that it will be cheaper and more affordable tomorrow. This situation might seem profitable for an individual, but if everyone acts this way, then spending will decrease and the economy will come to a halt. Secondly, inflation has the ability to ease the cost of borrowing. Imagine that I take on a loan. Because of inflation, the amount of money I borrowed becomes less valuable. However, the amount that I borrowed stays the same. Thus, it becomes easier for me to pay back my loan. In cases of deflation when a currency gains in value, the exact opposite happens and debt becomes harder to pay off.

Due to the austerity measures installed in many Eurozone countries following the debt crisis, the Eurozone economy is barely expanding. Draghi fears that deflation could push the Eurozone economy back into recession. One of the reasons that Draghi had his hands tied was because he had already lowered interest rates to nearly 0%. Yet, he was failing in spurring inflation. That was where I stepped in to give Draghi some advice. On June 5th, Draghi listened to everything I had to say and held a press conference. The cameraman zoomed in on Draghi so I didn’t make the shot but I was sitting right next to Draghi during the press conference.

Firstly, I realized that European banks were parking their money at the ECB. Thus, I urged Draghi to set the ECB deposit rate to a negative figure. Negative deposit rates can encourage banks to take their money out of the ECB and perhaps lend it to consumers and companies because they would actually be losing money for depositing their cash at the ECB. This would spur growth and much needed inflation. Draghi followed my advice and lowered the deposit rate to -0.1%. He also lowered the headline inflation rate to 0.15% from 0.25%

Secondly, in the final hours of our meeting, we came with an idea to initiate a new financing program called Targeted Long Term Refinancing Operations (TLTRO)  where banks can borrow money from the ECB equivalent to as much as 7 percent of their outstanding loans to non-financial corporations and households. The loans will be given for 4 years. However, if these institutions don’t lend out the money they get from these loans, we will cut their maturities to two years.

Finally, I told Draghi to always have an ace of spades in his back pocket, in case the worst comes to worst. That ace of spades, would be outright bond purchases, just like Quantitative Easing in the US. We came to the conclusion that its better to wait and see how the Eurozone economy reacts to the policies we came up with that day, but letting the markets now that just like back in 2012, we would do whatever it takes to spur inflation in the Eurozone will help increase inflation expectations. Those are the unorthodox policies that Draghi touched on towards the end of his speech. Bond yields are already very low and QE in the United States has shown that bond purchases don’t necessarily spur inflation. However, the idea of bond purchases being a possibility will definitely play a role in protecting the Euro from appreciating.

After working for hours to come up with these policies, we finally called it a night and decided to go to Angela Merkel’s mansion in Berlin for a wild party. It was strictly BYOB. Apparently Merkel is tired of buying everyone drinks. All those bailouts in Southern Europe may be to blame. I can’t tell you what went down in that party. Lets just say that many world leaders wouldn’t want the pictures to leak to the press.

Popping champagne.
This is only the pregame.

Following Draghi’s press conference in June, Eurozone inflation remained stable at 0.5%. Draghi gave me a phone call last week and thanked me for his help. I told him that he owes me one and I gave him one final piece of advice.  I told him to publish the minutes from the ECB meetings, just like the way the FED does them. This would not only give the ECB some much needed transparency but would also increase the effect that his decisions have on market expectations.

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As you can see, my friend Draghi looks awfully cute when he is happy. I hope his happiness continues and that the Eurozone can get out of this deflationary trend soon. In the globalized world that we live in, our economies are extremely interconnected. Thus, the fate of one large economy can have an effect on all of our countries and all of our lives.

“If we do not resolve the euro crisis, we will all pay the price. And if we do resolve it, we will all benefit”
-Mario Draghi

 

 

 

Economy in Digits – 02/01/2014

In the past couple of weeks I didn’t see any significant economic indicators in the news. However, we got a lot of data over last week.

United States

Driven by the fastest consumer spending in the last three years and a rise in exports, US GDP increased by 3.2% year-over-year in the 4th quarter.The calculations also showed a 1.9% increase in GDP across all of 2013, compared to 2.8% the previous year. The 2013 figures showed that a significant decrease in government spending due to the shutdown in October had dragged GDP figures down when compared to last year. That was of course accompanied by the extreme cold temperatures in the winter which also hampered the economy. However, the numbers are still positive and despite the continuation of tapering by the FED, the US still remains the safest economic harbor right now. As we’ll discuss soon, Emerging Markets are not doing too well right now.

united-states-gdp-growthTurkey and India

Both the Turkish Central Bank and the Indian Central Bank resorted to drastic interest rate hikes. In Turkey, a corruption probe against government officials had led to the resignation of various cabinet ministers. The following levels saw the Turkish Lira lose significant value and brought the Turkish Lira/US Dollar spot rate to unprecedented levels. To stop the devaluation, the Turkish Central Bank sold parts of its foreign reserves but it was to no avail. Finally, the Central Bank had enough and they raised interest rates sharply. The benchmark interest rate was raised from 4.5% to 10% and the over night lending rate was hiked from 7.5% to 12%. Following the rate hike, the Turkish Lira gained 4% against the US dollar. However, the crisis is yet to be averted. Even though the Lira gained in value after the Central Bank’s decision, the sell off creeped in again. This decision is surely to slow Turkish economic growth and that could prove crucial to determining the outcome of the upcoming local elections in March.

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On to India, another country that required a rate hike this past week. As I stated in an earlier post, India is struggling with high inflation and lackluster growth and just like Turkey, they will be having elections this year. However, the Indian Central Bank let everyone know that they are serious about battling inflation when they increased the repo rate by a quarter point to 8% and announced that they plan to reduce the inflation rate to 6% by 2016. As you can see from the graph below, the latest inflation figure in India is over 11%.

indiainflationGreat Britain

Another GDP figure came from Great Britain as GDP growth was announced to be 0.7% in the 4th quarter of 2013 and by 1.9% in 2013 overall.That figure might seem as slow as Shaq running down a basketball court however that is the fastest growing quarter that Great Britain has had since the 2008 economic crisis. The main force behind the growth was the services and the manufacturing sectors and evidences that slowly, eventually and oh so gradually, the British economy is picking itself up.

Historical Data Chart

EU

The Eurozone had been battling a rather unfamiliar problem, deflation, which is the opposite of inflation. To battle the deflation, the European Central Bank had decided to lower interest rates last month. However, we got new inflation figures from the Eurozone which don’t look so bright. Consumer price inflation across the Eurozone fell from 0.8% in December to 0.7% in January.. Even though the worst of the European debt crisis is behind us, deflation means that firms and individuals are more likely to hold off on spending money until the future, which could take a toll on growth. Even though I see it to be unlikely, European Central Bank officials stated that if matters get worse, they could resort to negative deposit rates for banks’ deposits at the European Central Bank.

Historical Data Chart

That was what made economic headlines this week. Stay tuned for more economic news in Economy in Digits in the following weeks.

“Economics is extremely useful as a form of employment for economists.”
-John Kenneth Galbraith

Upcoming Emerging Market Elections

The geopolitical stage is typically divided into two camps: the Developed Markets (such as USA, the EU, Japan, England) and the Emerging Markets (such as China, Russia, Brazil, India, Turkey). Developed Markets are countries that have stable financial markets and political systems. Their economies are powerful but have developed to the point where they can now only grow at a slow and steady pace. On the other hand, Emerging Markets are the new players on the global stage. Their economies have grown rapidly over the past several years and they appear to have promising futures. However, their financial systems still need improvement and their political systems are still unstable. If the two groups could be visualized as Hollywood actors, the Developed Markets would be Liam Neeson.

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No matter what movie it is, you know for a fact that if Liam Neeson is in it, he is going to dominate that role and he is going to be a total badass as he trains Batman, saves his daughter, releases the Kraken, etc. Much like Liam Neeson, Developed Markets shape the context of the globe and have established themselves as the leaders of the world. On the other hand, Emerging Markets are James Franco.

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You can tell James has a lot of potential. He’s had some great movies such as 127 Hours, the Spiderman series and Pineapple Express. But let’s be honest, he’s been in some lousy movies too. Have you seen Your Highness? No you haven’t; and neither has anyone else. So you know Franco is a great actor but you can’t tell if his next movie is going to break box office records or totally fall flat and bomb. Similar to Franco, Emerging Markets have potential and may even become one of the world’s leading nations in the future. However, they are unstable and have their internal problems, much like Franco’s problem to keep his eyes fully open.

After the financial crisis of 2008, Developed Markets suffered greatly. Their economies were in shambles. These nations responded by lowering interest rates to stimulate demand. Thus, investors moved their money to Emerging Markets to seek higher returns on higher interest rates. After 2009, Emerging Market economies skyrocketed. From 2010 to the end of 2011, most Emerging Market economies grew somewhere between 6-11%. For example, in 2011, the Chinese economy grew by 9.2% and the Turkish economy grew by 8.5%. Following these developments, everyone believed that the time of Emerging Markets had come and that they would lead the world out from pits of the financial crisis.

However, in 2013, as central banks around the world such as the FED started talking of taking their foot of the pedal and slowing their support of their economies, interest rates rose in the developed world. 2013 was also the year when political upheaval broke out in certain Emerging Market countries, the US economy continued to recover at a steady pace and the EU saw the worst of its crisis pass. All of these factors caused investors to put their money back into the Developed Markets. As the cheap money was pulled away from Emerging Markets, their economies slowed down and their currencies lost value against Developed Market currencies.

In case you don’t believe me, here is a finance professor from George Washington University discussing how Emerging Markets fared in 2013.

Now in 2014, many Emerging Markets will go to the polls and determine their leaders in elections. These elections will shape the political sphere in those nations for the next several years and will definitely effect not only their national economies but ultimately the global economy. So, along with a graphic from the Wall Street Journal, here is a breakdown of upcoming Emerging Market elections in 2014.

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Brazil

Brazil’s economy is highly dependent on commodity exports. Thus, a fall in commodity prices, excessive government spending and a social upheaval against the government in the summer all proved troublesome for the Brazilian economy. The general election in October will decide if President Dilma retains her position or replaced by the opposition.

South Africa

In South Africa, the African National Congress party has won every election after the apartheid era. But they are now being challenged by the Democratic Alliance which won 16% of the votes in the 2009 elections and has grown in popularity ever since. Come election time in April, the ANC’s hegemony over South African politics may come to an end.

Turkey

Recep Tayyip Erdogan and his AK Party have dominated every local and national election since they first came to office in 2002. During their term in power, they have further liberalized and grown the Turkish economy and have also increased Turkey’s influence on the global stage. However, resentment against Erdogan’s authoritarian tendencies and his party’s encroachment on personal freedoms exploded this year during the nationwide Gezi Park protests. Furthermore, a recent corruption scandal charged against several AK ministers have led to their resignation and has made the AK Party lose even more of its influence. The AK Party is still highly popular throughout Turkey, but it will be interesting to see the effect of recent events on the local elections in March.

India

The Indian economy currently faces stagflation as it is stuck in a state of high inflation and below average growth. Incumbent president Manmohan Singh has stated that even if his United Progressive Alliance party wins, he will not be president for a third term. Investors are hoping for a victory by pro-reformist Bharatiya Janata Party. Only time will tell the outcome of the general elections in May.

Indonesia

In July, whoever wins the Indonesian general election to replace outgoing two-term president Susilo Bambang Yudhoyono will have a full plate. Growth has slowed, politically popular fuel subsidies are draining the treasury and corruption remains rife.

All of these countries require the implementation of unpopular but important reforms to aid their economies and remedy social issues. However, because of upcoming elections, ruling parties are unfortunately likely to delay these reforms till after the elections are over.

“Emerging markets are hugely important.”
-James Dyson

Larry Summers Throws in the Towel

Down goes Summers! Down goes Summers!

Several days ago, I had written a post about the candidates that were in consideration to become the new FED chairman after Ben Bernanke. The two leading candidates were Federal Reserve Vice Chairwoman Janet Yelen and renowned economist Larry Summers. But on Sunday, Larry Summers stated to President Obama that he would be dropping out of the race.

"I was too sleepy to be FED Chairman anyway"
“I was too sleepy to be FED Chairman anyway”

 “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery,” stated Larry Summers in his letter to President Obama

That sounds so noble but let me translate that for all of you.

“There is no chance of me becoming the next FED chairman so I’m throwing in the towel” is what Larry Summers really meant to say. If you think I’m being too cruel, allow me to explain.

The process for electing the chairman of the Federal Reserve is as follows: the President elects a nominee which is then voted on by the Senate Banking Committee. On Friday, senator Jon Tester of Montana became the fourth Democratic senator on the Senate Banking Committee that stated that they would not support Larry Summers. The other three dissenting Democratic senators are Elizabeth Warren from Massachusetts, Sherrod Brown from Ohio, and Jeff Merkley from Oregon. The reason why so many liberal Democratic senators dislike Larry Summers is because they believe that his policies of deregulating the financial markets in the 1990s (as President Clinton’s Treasury Secretary) caused the economic crisis of 2008. In order for the Senate Banking Committee to vote in favor of Summers, Obama would have to lobby votes from Republican senators and that is something he doesn’t have the time or leverage to do right now.

Thus, with Summers out of the picture, Janet Yelen appears to become an even greater favorite to become the next and first FED chairwoman. Her resume checks many boxes. She has experience with working in the FED, she would be the first woman FED chairman, and her support of quantitative easing is supported by Wall Street investors. Now recall that quantitative easing is the FED policy of pumping money into financial markets. Summers had at times spoken against this policy. Therefore it wasn’t a big surprise that the stock market increased following the news that Summers had dropped out of the race. It must be a horrible day for any person if you decided to give up on your dream and the financial markets rejoice.

A final candidate for the job is Fed Vice Chair Donald Kohn. Additionally, Timothy Geithner, the former Treasury Secretary under Obama’s first term, was also listed as a possible candidate. However, Geithner had turned the job down. Thus, Janet Yelen appears to likely be the next FED chairman.

 In honor of Larry Summers, we remember him one last time by taking a look at his most memorable moments courtesy of Bloomberg.

“There are children who are working in textile businesses in Asia who would be prostitutes on the streets if they did not have those jobs.”
-Larry Summers

New FED Chairman

The Federal Reserve (FED) is the bank of all banks within the United States. It serves as the lender of last resort to banks within the nation, influences interest rates, controls the supply of money in the economy, and much more. The decisions the FED makes, let alone the topics they discuss in their meetings, have a huge impact on not just the American economy, but the entire global economic system.

Since 2006, the FED chairman has been this guy. Ben Bernanke. Or as I like to think of him; Captain Picard with a badass beard.

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“Quantitative Easing? Make it so.”


At the end of this year, Bernanke’s final term as FED Chairman will end and it will be up to President Obama to select his successor.

Why does this all matter? The reason why who becomes the next FED chairman is so crucial is because of the policies they will choose to enact. In response to the financial crisis of 2008, Bernanke decided to employ an operation called Quantitative Easing (QE), where the FED pumped money into the economy by continuously buying bonds. However, since the economy has steadily improved over the past several months, Bernanke is looking to draw down QE.

Enter the potential candidates. The first contender is Janet Yelen.

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Janet Yellen is currently the vice chairwoman at the FED. So she’s Bernanke’s right hand woman. Because of her experience in central banking and her familiarity with the rest of members of the FED, she is seen as the front-runner for the position. Many believe that she will represent a continuation of Bernanke’s ideas and policies and thus think that Yellen is a safe bet candidate. Of course she would make everyone feel safe. I mean look at her. If I ever ran into this woman, I can be positive that she would bake me cookies with milk and then tuck me into bed.

On the other hand is Larry Summers.

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Larry Summers is a widely acclaimed economist. His past positions include serving as Secretary of Treasury under Bill Clinton, the National Economic Council under Barack Obama in 2009, and as chief economist at the World Bank; not to mention President of Harvard. The most important factor, however, is that President Obama adores him. When several media outlets discussed how Summers is impulsive, has trouble working with others, and has a history of being misogynistic with female coworkers (smooth), President Obama made a statement in his defense. Summers is also seen as a person who tends to think outside the box and is experienced when it comes to dealing with crises. He not only served in the National Economic Council in 2009 after the economy tanked in 2008, but he was also the Treasury Secretary during the late 90s when Asia was in the midst of a financial crisis and Russia and Mexico had a currency crisis. These experiences would serve crucial at a time when the US economy is susceptible to the threat of a deepening crisis in Europe and to economic uncertainties across the world. Many believe that based on Summers’ track record, it might be possible for Summers to scrap or reform Bernanke’s current policies and come up with new FED actions.

In my opinion, Janet Yellen seems to be the more logical choice. She has an ample amount of experience working in the FED and has most likely earned the respect of other FED members. Though I don’t doubt Summers’ intellectual capabilities, it is important to point out that Summers’ actions as Treasury Secretary under President Clinton paved the path for financial deregulation which many state is the reason the 2008 crash occurred. So far, President Obama has said that he still has not made up his mind about the decision. Only time will tell and if you’ve been following the news lately, you will know that Obama has a lot on his plate right now.

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“In fact, the world needs more nerds.”
-Ben Bernanke

Journey to Symmetry

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Asymmetric Information is the economic theory (developed by George Akerlof, Michael Spence, and Joseph Stiglitz) which states that in transactions, when one party has superior information than the other, an imbalance of power is created, which can eventually lead to market failures.

This condition is apparent in many instances throughout society. It occurs when you’re unsure about the quality of a used item on Craigslist or when an insurance company decides to insure an individual but is unable to determine what medical conditions he/she really has.

However, I think the most important instance of asymmetric information is the way our world runs. Everyday, crucial economic, financial, and political decisions are made all around the world and because of how integrated our world has become in this age of rapid globalization, all of those decisions end up affecting our lives in many ways. The interest rates on our college loans, the price we pay to fill up our car with gas, and the amount of money taken away from our paycheck for taxes are just a few examples of things that are decided by a few people in different corners of the globe but that have an impact on our everyday lives. These decision makers have an immense amount of knowledge on these issues while many of us idly accept the fact that we will never understand them, thus leading to asymmetric information. This is one of the reasons why most of the world’s wealth is owned by 1% of the world’s population. If more of us were more educated and informed regarding these issues, not only would we learn more about the world around us, but we would also make better decisions in our lives.

The main two reasons why the average person doesn’t take it upon himself to engage himself in this material is that he/she is either uninterested or unable to learn. This is where I come in. I’m just a 23 year old college graduate and thus I don’t claim to be a guru in all political and financial issues. However, I have studied them extensively for the last 5 years and I regularly follow these events on a daily basis. I decided to start this blog so as to help others become more educated and well-versed regarding political, financial, and technological subjects and events. After explaining the content I discuss in my writings, I will end my articles with my own opinion regarding the issues. That way, I will attempt to separate the facts from my own opinions. If you have any comments or questions, feel free to contribute. But please keep it clean. If you would like to contribute an article, please email me your writing at yegenugur@gmail.com. I’m always glad to have contributors join me on this blog. With easy to understand explanations, links to educational sites, visual aids, and with a sensible dose of humor and wit, I believe I can do my small part in attempting to overturn the status-quo, and end information asymmetry.

“We make the rules pal. The news, war, peace, famine and upheaval, the price of a paper clip. We pick that rabbit out of a hat and everyone else sits out there wondering how the hell we did it.”

-Gordon Gekko