New Keynesian Economics

John Maynard Keynes is one of the most prominent economists of all time. His essential conclusion is that the economy may not be working at its full potential during economic downturns. This calls for an outside force, aka the government, to intervene until the economic downturn is over. Personally, I believe this is necessary and it is what the government is doing now. They helped the banking industry, the auto industry and the real estate industry with billions and billions of dollars. However, I believe over the next 20 years there will be a dividing line between economists and the extent of interventions.

This current crisis is changing the economy that we will have until the next major ripple(the great depression and our current crisis.) There has to be a line at which the government cannot be responsible for the private forces that are causing the economy to crumble. I say this because they cannot know what amount will be the right amount with each intervention; hence the AIG news that was released about how they were spending their bailout money. The government cannot be fully responsible for private sector actions. That is a pandora’s box waiting to explode.

As we have seen in the Bank of America scandal (if you are unfamiliar read posts below,) because small body with that much power is destined to fail. That is why capitalism thrives on the free hand. When the general population makes personal decisions to better themselves no one holds all of the power. When the government chooses which car company to save, they are affecting the consumer. As we saw they extorted Bank of America into preventing Merrill Lynch to fail and bringing further commotion to the market in the short term. In the long term they established themselves as players in the private sector, the big stick in the pond. They chose to bail out certain car companies that may not be conforming to the current eco friendly trends of the market. Essentially the intervention in the long term could cause even more detrimental effects to our economy as we know it.

There needs to be a dividing line in macroeconomic theory that further points out the extent of outside intervention in the economy, New Age Keynesian Economics.

Hope everyone is having a great summer,

Matthew James

Current Frustrations

Good evening,

I know it has been a while, I apologize for letting so much time pass between blogs. I promise, though, I have been keeping up with everything! The first thing that really frustrates me is the public outcry to curb foreclosures, secondly, I wanted to make a note about the auto contracts.

Starting with number one, I skimmed a cover story on the Wall St Journal earlier this week about a gentleman who had become one of public leaders calling to stop foreclosures and asking that banks lower some monthly payments. I feel like I shouldn't even have to dignify this with an argument. The man I am talking about organized protests to the extent that he littered furniture across bank CEO's property so that they would understand what an eviction felt like. I would like to point out that if there is anyone to blame, it is not the bank CEO. An arguement can be made for the politicians that enacted legislation that promoted banks giving loans. They passed bills that were supposed to allow more people to get loans because it would be better for the general economy. That is one arguement to use. Realistically, the sole blame lies on each individual that couldn't afford the house they wanted untill this legislation was passed. What happened was people got greedy, they took bought the biggest houses they could afford assuming they would continue making their current wages and neglecting any problems that might arise. The blame lies solely with these individuals. Stop trying to blame the banks for giving you the money you couldn't afford, with all the bad media about the banks, they seem to be a scapegoat between the people that promoted lending and the people that accepted the money.

Secondly, I have a problem with the up-playing of the union contracts in regards to the auto bailout. I will never deny that the contracts have been strapping the Big Three for rebounding from their current financial woes. This is a fact. However, people don't realize how smart the union officials were in negotiating these wages and pension plans. Bear in mind that unions were the first to fight for almost all of the things that we take for granted today: weekends, minimum wage, child labor laws, the 8 hour work day. All of these things are due to the power of the employed. While acknoledging these things, remember that, in general, production lines are the most mind numbing monotonous work known to man. Finally, thank the union officials for negotiating the contracts that are in place. When someone finally recognized the absurd amounts of money that were being paid out to the officers or managing core, they wanted a cut. The majority of the labor was being done by the people paid least, thus they got together and said, I'm done with this we would all rather be broke than be exploited. That is how we ended up with the contracts we have today.

I applaud everyone that was a part of that negotiation. These are the little skirmish wins that the American nation can stand strong on knowing that although very small, it was a battle won. However, these contracts were negotiated during the most profitable of times, so if big business is not making money, small America cannot be either. I think that many people are starting to understand this, but like the exploitation that happened in every industry (including professional sports), it takes time to recognize. I just hope that people don't hold a grudge on the organizations that brought us so much over the past years.

Peace,

Matthew James

Communism at work in America

I am troubled by the lack of discussion about economic tactics used by the government to control private companies. I hope everyone had a chance to look at the Wall St. Journal on Thursday and Friday. The cover story on Thursday was that of Ken Lewis’s testimony that the chairman of the FED and the Secretary of the Treasury effectively forced him to acquire a “sick” asset in Merrill Lynch. In order to discuss this we must first understand the background of this situation

In terms of economic power in the United States, Chairman of the FED, currently Ben Bernanke, as well as Secretary of the Treasury, Hank Paulson during the alleged intervention and currently Tim Geithner, hold the most power. It is also important to understand where these men came from before their current positions. Ben Bernanke and Geithner came as Presidents of regional banks for the FED and Paulson served as President of Goldman Sachs. This is extremely important because it may lead to the biases that these men have been criticized for; most notably Paulson. Paulson has been widely criticized for not responding harshly enough to the Wall St. firms. In my mind I can only justify this because he is currently making $196,200 as Secretary and I can guarantee you he took a more than significant pay cut to wield the power he currently has, so where do you think he is going now that his term is up in the White House? My guess is back to Wall St., the same Wall St. that he chose not to punish in the midst of all of the problems.

Understand the background is key to understanding the current situation, another one of these matters is the firing of Merrill Lynch CEO shortly after Bank of America took over Merrill Lynch. This is a huge deal because no one really knows what went wrong. In a story released today, former CEO John Thain says that the bonuses paid out were not his fault, but rather that of a collaboration with Bank of America CEO Ken Lewis and himself. No one really knows what happened, but the fact that all of the bonuses were paid out and the CEO was fired is fishy.

The communistic intervention that was the cover story last week was Ken Lewis’s testimony that Ben Bernanke and Hank Paulson forced him to buy Merrill Lynch after he discovered rising problems with the company. According to the Wall St. Journal, Bank of America discovered an additional 3 billion dollars in losses in a three day period before they acquired the company, this was the point at which they attempted to drop the acquisition. At this point, Bernanke and Paulson told Lewis that if he decided to not buy the company it would cause far too much trouble to the overall financial market. They knew this because the government let Lehman Brothers fail when they publicly acknowledged they shouldn’t have. Another firm falling would have been detrimental to the overall economy. Thus, they threatened to take over Bank of America and fire Lewis if he didn’t cooperate. This is a HUGE deal. This is illegal and personally, I believe everyone involved should be tried in court.

It makes sense that the government didn’t want anything more to happen to the market, but this is blowing up whatever boundaries there were with potential intervention in the private sector. The government has already fired a CEO in GM’s Rick Wagner, and apparently they were ready to do the same thing with Ken Lewis. Where is the line? This problem sets new definitions for the United States Economy. Are we no longer capitalistic? Are we no longer socialistic? We have been inching closer and closer to full blown socialism with each passing day of the current crisis and who knows where it is going to stop. I am upset to see it come to this, but it does make some sense of all of the things that have happened:

There will always be the question of how Paulson acts because of his ties with Goldman Sachs. If he forced Bank of America to assume 15 Billion of Merrill losses, how is Goldman going to fare? Further, does the bonuses paid out that were supposedly on the books at Merrill mean someone was trying to be paid off to keep quiet? This doesn’t seem like much of a stretch seeing the horrible financial state Merrill was in when they paid bonuses and the rising amount of losses. If the government can do something to this extent, the entire market should be worried. If this intervention of the government into the private sector is true, Bank of America shareholders should be able to sue the government, but this can only happen if they allow it which they almost certainly won’t. Further, the official statement that Lewis made with the Attorney General’s office of NY can be found here: http://www.oag.state.ny.us/media_center/2009/apr/apr23a_09.html

There are serious chunks of pages missing, what can we think about that?
19 pages missing between 13-339 pages missing between 42-5118 pages missing between 60-795 pages missing between 90-9651 pages missing between 99-151
The government only released half of the statements?

I don’t know what to think or where we are headed. Keep your eyes open.

Matthew James

Executive Power: Economic Intervention

DISCLAIMER: This is a 6 page paper I wrote for a comparative government class that argues the unrecognized economic power of the President of the United States as well as the President of Belarus. This post is significantly larger than most, feel free to argue as you like.

If you ask the average American what he believes the name for the United States Economy is, odds are you would say capitalistic economy; probably, based on factors such as: ease of starting a company, general belief that the market determines the price, and maybe some grounding in the idea of the invisible hand made famous by Adam Smith. Realistically, the United States has become more and socialistic since the days of the Great Depression. In doing so, control over the economy has gradually become one that falls on the shoulder of the president of the United States. For someone who has many other duties to the country, the President has a lot to worry about on top of staying up to date on economic theories. Further, nowhere in the three requirements to run for president[1] does it say that you need to be well versed in economic policy. Increasingly, executive power has meant more in the economy. One similar case can be seen from a young Eastern European country called Belarus. Although Belarus has only been recognized as an independent state for a short period of time, they have experienced much of the same economic indecisiveness. There was a short lived attempt to become a capitalist society followed by executive intervention that returned the country to a socialist base. Clearly these two polar opposite nations in terms of wealth, have utilized similar policies that may lead them to a similar fate.

In the United States of America, there are certain executive powers that people generally do not recognize as important powers. The main power that can be overlooked is that of appointment into office. This is a means by which the president intervenes in the economy. One of the most instrumental positions in policy making is that of Secretary of the Treasury. Under previous president George W. Bush, this role was extremely important in helping with the financial crisis that is still playing itself out. Under current President Barrack Obama, Tim Geithner assumes this role. This position is filled by appointment from the President. In most cases the President appoints someone who sees eye to eye ideologically so that there will not be any problem with passing his policies. Thus, the President of the United States picks who will have arguably the largest effect on economic policy over the next four years.

In terms of prior backgrounds before entering the seat of the Secretary of the Treasury, most of the appointed are people who have made their fortunes in the private sector and decide to take a short break to give something back to their country. Because the salary for this position is a measly $191,300[2], often millions of dollars less than they were previously making, this position is only accepted because of power. Tim Geithner served as President of the Federal Reserve Bank of New York prior to taking his seat in the cabinet. Hank Paulson, who served under the Bush administration previously worked as Chief Executive Officer at Goldman Sachs. As the current economic crisis exploded in late 2008, there were wide speculations about whether or not Paulson did not do justice to all of the firms that collapsed (or didn’t collapse because of government intervention) because of his ties to Wall St. To the general public, the faces and names of Wall St. don’t mean much, but to people who live and there, these are friends and families. People tend to be much more lax when they are dealing with a place they come from. In addition, Paulson cannot possibly keep an open mind in reforming the market, when he is planning on going back to work in the same place that he is placing government restrictions. The person in charge of handing over the reins to this powerful seat: President of the United States. Clearly, this is a huge power that is often overlooked when considering the powers of a President.

In addition to appointing the Treasury Secretary, the President also appoints the Chairman of the Federal Reserve Bank. In essence this bank controls the flow of money in the United States. The person at this seat can control interest rates and inflation as he sees fit to help the market. Essentially, the Chairman of the Fed controls the money in the market, and the Treasury Secretary controls the policies. As previously stated, both of these positions fall under the umbrella of presidential appointments.

These are only two powers that the President holds, but they play a necessary role in how the President personally jumps into the economy. First and foremost, one of the most interesting aspects of each election is the tax debate. Should they lower the tax rate and trust the public with the money they have earned at twenty percent, or should they raise it to thirty percent and use more tax dollars for public works projects and things that make it a better environment to live in? This often shapes the way that people vote. However, many of the non- decisive voting factors are policies that shape the economy in a much larger way.

Two of the most recent cases of these economy changing factors are that of the “bailout of the banks,” and the “bailout of the car industry.” The pressing question for the last quarter of 2008 was should the government bailout companies like AIG, Bank of America, and Citigroup when they are private companies that made their own mistakes? After Fed Chairman Ben Bernanke utilized all of his power to stimulate the economy by lowering interest rates to the lowest they have ever been, it was the President’s turn to give it a shot. Unlike other economic problems, this one happened to be setting in when a sitting president was leaving office, and another was coming in. This allowed for collaboration between both cabinets to solve a problem as well as the voting population to vote based on how their candidate would handle the problem. Part of the problem was resolved in the Emergency Economic Stimulation Act of 2008[3]. This was the “de facto” power of President Bush. The economy was falling and it was up to the president to save it. However, no where does it state that the President is Responsible to save the private sector as it is failing. The agencies that were recently bailed out of their problems were saved because the president thought it was a good idea for the economy, is it his position to make this assumption? This was clearly an executive intervention into the economy and it only started the ball rolling for President Obama.

The banking industry is the lifeblood of the economic cycle. This argument to bail out the banking industry makes it sound obvious, if the economy cannot survive without it, the government should help them out. However, once government intervention hit the car industry, the government was testing its powers. This assumption of power came at the hands of President Obama as he gave dwindling companies like General Motors, Chrysler, and Ford loans when they were going under. If the banking industry is the lifeblood of the economic cycle, what does that make cars? Is it necessary to bail out these companies that failed to recognize industry trends in their planning cycle simply because it would help the economy in the short term? President Obama went as far as firing a CEO in Mr. Wagner from General Motors if they wished to continue receiving government funds. [4] These are assumed powers that deal with the economy and they are setting president for potential government intervention and regulation of all industries.[5] The line that previously stood at the private sector has been crossed and may continue to extend until the current economic crisis is over.

The fact that the government now owns stock in many major banks can be quite scary. The idea for a central bank in the United States died a long time ago when President Andrew Jackson killed it because it was funding politically connected businesses.[6] The idea of corruption entering politics is scary, but the idea of corruption becoming a part of the economy could be detrimental to the current system. Multiple studies have been done that find a company becomes significantly less profitable when it is owned by the government.[7] President Bush assumed this power of intervention when he was in office and President Obama has taken it farther.

Because of these recent events that have clearly altered the de facto power of the president, combined with the powers of appointment that the position has always held, there can be no denying the claim that the country’s economy is moving farther and farther away from the capitalistic country we used to be and toward the socialist economy we now are, or are becoming. It is extremely interesting to compare this economic structure with that of Belarus; a transition country that has not been in existence for less than 25 years. Belarus has been in flux in terms of going back and forth between capitalistic and socialistic policies. What is extremely surprising is that the economy of the United States and that of Belarus is so similar despite having polar opposite economic power. Further, in both cases the executive branch has played a major role in shaping policy.

The country of Belarus initially started passing capitalistic laws and regulations during the early 1990’s, but in 1994 President Lukashenko changed the pace of capitalism. It was during this period that banks were renationalized since they were previously deemed private when the country received its independence. The current President has assumed government regulation and intervention in almost all sectors of the economy. About 80% of all industry lies in the states control.[8] This is astronomical, but it was the President that assumed the power to intervene in the economy; much like that of President Obama. There are striking and notable differences which are that President Lukashenko changed the constitution to allow him presidency for life, and that the most recent elections were not conducted fairly.[9] Obviously these are massive differences between the two states, but nationalization of banks and executive intervention are clearly not. With the United States government taking stake in the large banks and effectively regulating them, it is not a stretch to say they are in the process of nationalizing banks the same way that Belarus has done.

How has nationalization of banking done for them? As we stated before, lending is the lifeblood of a capitalist economy, and in terms of financial freedom, Belarus ranks low on the list. The banking lending system has scored a 10 on a scale of 100 (100 being free) because of the government guiding the system.[10] This is extremely low considering the world average is 49.1. Further, this is a huge impediment for economic growth in the country. In addition to this, government regulation has cause a brain drain in the investment sector because the country has made it so difficult to invest that anyone who knows how has moved to freer countries to do it in. The overall score of 45 for Belarus leaves them 167th on the list which is quite far away from the United States in the 6 spot with a score of 80.7. However, with rising socialistic intervention from the executive branch, the potential for the United States to fall significantly is rising.
Despite the socialist intervention in the past decade, the economy has been growing, constantly flirting with the 10% range for their Gross Domestic Production for the past 5 years.[11] This growth may lead people to believe that their executive assertion on the private sector has worked, but when you consider the hostile environment for business and investment, it is extremely hard to wage how fast the economy would be growing if it was freer. However, just as President Lukashenko assumed power in the 90’s he seems to have started returning to the ways of the economy before he took office. The way the economy was headed before he exerted his power was toward liberalization. The government has recently started privatizing joint stock corporations. They plan on privatizing more than 500 companies over the next two years.[12] This is important because it shows the cycle coming full circle: The government under the USSR was communist, but became a free market when it was liberated. In 1994 it left its capitalistic direction under Lukashenko and rapidly started moving toward socialism until now when they are realizing it is preventing growth.

This common thread that can be weaved throughout the United States economic movement and that of Belarus is that the executive branch leads the economy each time. As the United States moves toward a socialistic economy, it is Obama that assumes he has the right to do it. In Belarus it was President Lukashenko that led the country through its socialization and now capitalization. However, when presidential powers are brought up in either country, no where does it state that the president determines the classification of the economy. This entire concept brings up problems that can be widely debated: Should the Presidents wield so much economic power? Should there be certain aspects of the Economy that cannot be changed? Should there be elections of powerful economic advisers instead of appointments? The answers to these questions may never be definitely answered. It is important to recognize the de facto power over the economy that current executives have, and whether it is leading each respective country in the direction that it wants to be headed.


[1] The three requirements are: Natural born American citizen, at least 35 years of age, and have lived in the US for at least 14 years.
[2] "Secretary of the Treasury." US Department of Treasury. US Department of Treasury. 21 Apr. 2009 .

[3] H.R. 1424, 110 Cong., 1 (2009) (enacted).
[4] Forbes, Steve. "Sickening." Forbes 12 Jan. 2009: 16+. Academic Search Premier. EBSCO. Bentley, Waltham, MA. 15 Apr. 2009 .
[5] Meacham, Jon, and Evan Thomas.. "WE ARE ALL SOCIALISTS NOW. (Cover story)." Newsweek 153.7 (16 Feb. 2009): 22-24. Academic Search Premier. EBSCO. Bentley, Waltham, MA. 15 Apr. 2009 .
[6] THE WASHINGTON TIMES. "Uncle Sam's heavy hand." Washington Times, The (DC) (27 Mar. 2009): 16-16. Regional Business News. EBSCO. Bentley, Waltham, MA. 15 Apr. 2009 .
[7] THE WASHINGTON TIMES. "Uncle Sam's heavy hand." Washington Times, The (DC) (27 Mar. 2009): 16-16. Regional Business News. EBSCO. Bentley, Waltham, MA. 15 Apr. 2009 .
[8] THE ASSOCIATED PRESS. "Central Bank of Belarus Allows Currency To Fall 20%." New York Times (03 Jan. 2009): 2. Academic Search Premier. EBSCO. Bentley, Waltham, MA. 15 Apr. 2009 .
[9] "Belarus." 2009 Index of Economic Freedom. The Heritage Foundation. 21 Apr. 2009 .
[10] "Belarus." 2009 Index of Economic Freedom. The Heritage Foundation. 21 Apr. 2009 .
[11] Belarus. Belarus Foreign Ministry. Economic Development Review 2008. Economic Development Review 2008. Belarus Foreign Ministry. 21 Apr. 2009 .
[12] "Further Liberalisation Of The Economy Ahead." Emerging Europe Monitor: Russia & CIS 12.9 (Sep. 2008): 10-10. Business Source Premier. EBSCO. Bentley, Waltham, MA. 15 Apr. 2009 http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=33764043&site=ehost-live.







FURTHER READING: There was an article in the New York Times today arguing the opposing position about the United States becoming Socialistic that can be found here: http://www.nytimes.com/2009/04/19/weekinreview/19stevenson.html?_r=1&scp=3&sq=obamanomics&st=cse




Enjoy,

Matthew James

Ben Bernanke Stepping Out of the Lime Light

Today’s article about Ben Bernanke in the Wall St Journal touches upon some often under the radar aspects of American Society. I am describing the “iconization” of those who play central roles, especially in politics. Ben Bernanke has stole much of the limelight for the Federal Reserve Bank. As Chairman of the Fed, he holds a lot of power, but as the public start judging him on aspects they very seldom fully understand they bring a risk of “politicizing” much of the economy.

I would draw the comparison to the evolution of the presidency. Some of the greatest presidents in the history of this country would not have been in the position if we scrutinized them as we do today. For example: Abraham Lincoln was an awkward, tall, unattractive man. However, he was one of the greatest presidents in our history navigating the country through one of its most shameful times. FDR is another great example. Here is a cripple that helped propel the United States economy out of the Great Depression, but he was a cripple. Much of the country was unaware of this fact, and had he ran in a wheel chair today, I highly doubt that he would win.

Compare these examples to today’s presidents; Barrack Obama, George W. Bush, Bill Clinton. All of whom speak very well. I will always support the argument that Bush is an idiot, but the way that he speaks identifies with much of the United States population. Completely ignoring whether the presidents today are actually right for the job or not, do we want this to happen to arguably the most powerful man in the USA (Chairman of the FED.)

It would be irresponsible to let the media’s invasion of Ben Bernanke’s personal life affect whether he will be back as chairman of the FED. We can no longer let outside factors influence who we have doing the job, whether he is married, divorced, an alcoholic, or an avid reader, if Ben Bernanke is the best man for the job, then I want him controlling the flow of money. We need to take a page out of the European handbook on this one and not allow personal differences affect business.

I hope that Bernanke is successful in downplaying himself as a representation of the entire FED. Further, I hope the media doesn’t pin the entire financial recovery on the back of Bernanke and Obama; there are far more people responsible and it needs to be recognized.

Signing off,

Matthew James

Ford Embraces Reality

Of the car companies in Detroit, none seem to have embraced anything but trucks and SUV’s. This has changed for Ford. Ford may have been the best off in terms of money problems of the big 3, as far as money. They have a secured government loan that they can use if necessary, but haven’t taken advantage of yet because they haven’t had to. Otherwise, they have done a good job of pushing up dates for their smaller cars and are finally embracing the internet as a means of promoting change.

This idea of promoting change is one that is by no means new to the American nation this year as we have all (whether or not we voted for him) had to embrace political change in Barrack Obama. Obama was the first presidential candidate to utilize the growing internet community. Much of his campaign was discussed by his followers on Facebook and an avid fan created a YouTube video called Obama Girl which saw thousands of hits last year.

As evident by the man sitting behind the Resolute Desk, this outreach to Americans via means they use daily had an effect on the outcome of the election. Ford is now trying to use the same concept to advertise their smaller line of cars. The company has given 100 new Fiesta models out to citizens for 6 months under the circumstances they document what they like or dislike about the car on YouTube. The company has no control over what may be said about the car, but the 100 people that are a part of the experiment won their spot by having the ability to grab the viewer’s attention within the first 5-10 seconds. I believe this concept is going to work very well in the near future for Ford and I hope they look into advertising more and in innovative ways.

Congrats Ford,

Matthew James

Recession Similarities

First of all I would like to point out a disclaimer that I have not studied any of the American Recessions in general, but from my basic knowledge along with a great interactive piece provided by the New York Times I would like to discuss some similarities (How the Government Dealt with Past Recessions.)

One of the important parts to understanding government intervention is the idea of Keynesian Economics. This is a theory of a British Economist who believed that government intervention using fiscal and monetary policy is necessary from time to time to stimulate the economy; fiscal policy being tax cuts and government spending and monetary policy controlling interest rates and money supply.

Clearly, we are all aware that this has become a trend in modern economics as the government intervention has steadily increased over the years. Harvard Professor Jeff Frankel points out an interesting observation of the 1960 recession: essentially, JFK was the first to use fiscal policy and it seems that because of the democratic process, anything he could have done to stimulate the economy took too long to get through. I find this interesting because I believe that there can be a strikingly similar comparison to government intervention with the first stimulus package. When President Bush was in office he tried to get a tax refund to hit the American citizens. It went through but the effects were not felt. As the economy really started to tank, there was a much larger stimulus package enacted (something like 750 Billion). Critics at the time were saying that there was not enough known about the potential problems in the banking industry for a government intervention to help in any way. I do believe that this could be considered right.

As we now know billions of dollars were being shelled out to distressed companies like AIG and Bank of America, with limited restrictions. This lead to them using the government’s money to cover their own behind instead of using it to lend and write off assets like it was intended for. Today we have already lent more money to car companies and we are looking at another equally large stimulus package with more restrictions, when the economy is starting to show signs of turning.

Did we jump in too early when no one really knew how to fix the problem? Further, is the next stimulus package necessary or are we once again prolonging something that is not necessary?
Another interesting comparison is that of Columbia Professor R. Glenn Hubbard about the credit crisis that we faced in the recession of 1990. That was one crunch that we had not seen before. Federal Reserve Chairman Alan Greenspan used monetary policy by lowering the interest rates and that helped stimulate the economy.

This is quite intriguing when it is compared to our recession because we have already lowered the interest rates to the lowest they have ever been. There is no lower to go before they are handing money out. It seems that this mess we are tangled in now may shed light on many of the policies we have enacted and we may discover more of what works and what clearly does not. Maybe the whole problem derived from lax lending laws and the government trying to stimulate the number of home owners in America? Maybe there is nothing we can do for this problem but lower interest rates for the time being and wait for people to stop being so fearful of the market?

Only time will tell,

Matthew James

Fail

It seems that the auto industry is all that can compel me to speak out via this forum. As I am sure you have all heard, earlier this week president Obama offered an ultimatum to present a great plan to congress, or face bankruptcy. As I have said multiple times before, I think it is finally time to face the music for GM and Chrysler in Detroit.

I hope everyone understands the gravity of the situation as the government essentially fired C.E.O. of GM Rick Wagner earlier this week. This is a government intervention in the private sector that is not a necessity to the economy as a whole (as the banking system was). This sets precedence for this type of situation to potentially happen again. We are sitting in the defining moments of the American economy today and what happens in these next few years, even months could shape the American economy for decades to come.

I must congratulate President Obama for not throwing good money after bad as some may put it. The government has given loans to the private sector before to stabilize the economy, but never have they had complete oversight of future operations, as denoted by the riddance of Wagner. As my father so eloquently put it, “Fool me once, shame on you. Fool me twice, shame on me.” Finally, the President has acknowledged that failure in the private sector may be catastrophic in the short term, but it may be necessary for long term sustainability. Maybe a failure now will pave the way for companies like Tesla Motors to shape the electric car industry in the Unites States, or maybe I am completely wrong.

Either way, I feel like had we acknowledged the depth of the auto industries problems months ago, we may not be out billions of dollars with the potential crisis in Detroit still looming. What would have happened if these companies failed three months ago and the government pumped the money that would have gone to the auto industry into employing Detroit citizens in public works projects that clean up the city and make it a desirable place for new businesses to want to locate? Could the short term problem turn into a long term success story for the city? Only time will tell, but for now, give Obama a pat on the back for acknowledging that maybe he was wrong earlier, and maybe it is not too late to correct the situation.

Detroit, and Obama, I wish you the best of luck. I look forward to seeing the scenario play out and I will be here every step of the way to criticize every mover you make. After all, that is the American way.

Peace,

Matthew James

Short Term Memory Could Be Long Term Destruction

Okay, so I know posts have been few and far between in the last month, but I promise I cannot become that busy ever again; it is not humanly possible.

In today’s Wall St. Journal I found some very interesting support for the premise America has a short term memory with gas prices: General Manager of a Honda Dealership in Florida comments in reference to July sales on fuel efficient models, “When one would come in it would be out the door same day, practically.” About 8 months later the General Manager cannot even get customers near the row of cars as they browse.

This example illustrates the problems all car companies are having: overstock of fuel efficient sedans in lots across the country. The problem is no longer with GM, and Chrysler, it has hit Toyota and Honda. These companies have stockpiles of sedans sitting on lots because they overestimated last summer’s effects on the consumers mind. This once again illustrates the need for the United States to free themselves from OPEC’s chains. We are currently falling into the pattern we have for the last 40 years.

Once again American consumers will forget the problems that we are trying to get out of and once again the stronghold of the oil leaders will push us down. Had the US government let GM, Chrysler, and Ford fail, Honda and Toyota would be prevalent in the United States and the invisible hand would have pushed the market toward the small cars they make with no option to buy big. Clearly, that has not happened.

However, like Professor Ken Smetters of the Wharton School discussed in his Economic Crisis Panel in October, the government must either be lax or aggressive; they cannot play the middle. Because they chose to be aggressive and help the big 3 because it would have hurt the economy too much to let them fail, they also need to create more subsidies for green technology. They now bear more responsibility for freeing the country from the cycle they prevented pure capitalism from breaking.

I hope this yields a little more insight into the debate about our country increasingly socialist. This doesn’t mean it is a problem that we are edging closer and closer, but we must realize the ramifications if we cannot pick a side.

Matt

P.S. Keep an eye out for discussions about Geithner’s plans for troubled assets.

Konarka and Power Plastic

For many years scientists have recognized that that human civilization is doomed to fail to maintain their standard of living unless they can hatch a master research and development program. This destined failure I am referring to happens to be the world’s addiction to fossil fuel. Unfortunately a small organization you may have heard of, OPEC (Organization of the Petroleum Exporting Countries), controls much of what the entire planet needs to live: oil. I use oil to heat my house; I use it to get to work every morning; I use it to fly on vacations; and sometimes I throw a little in my hair when I have had a bad day. The bottom line is I am not the only one building my whole life off this substance that has a finite lifespan. On top of this, I happen to believe that the people at the Nobel Prize committee were justified in giving Al Gore and his team of scientists the honor of the prize for their work in reducing the carbon imprints in the world and slowing down this global warming phenomenon. Luckily, a startup company named after a temple dedicated to a Hindu sun god (Konarka) has come to be the Messiah of the modern world with the development of power plastic.

Power plastic utilizes light to create energy. This technology has been around for quite some time, but there has never been enough research and development to make it worthwhile and profitable for anyone to invest in it. The beauty of power plastic is that it removes all of the drawbacks of solar energy that were in the way before: Huge immovable objects that are aesthetically unattractive as well as extremely expensive and some consider a relatively bad investment. On top of looking weird and taking twenty years to pay for itself, the old solar technology was extremely delicate and had only one real use in heating an immovable object (generally a house). Power plastic is completely the opposite: it is lightweight, portable, flexible, durable, and even water resistant. The prices have not been release, but experts are saying the fact that power plastic has reached 6% light efficiency means that their technological leaps will allow them to be a major contributor in the energy market. Power plastic has the potential to be put in fabric and charge your laptop in your book bag, maybe even put it in a shirt so that you can charge your phone while it’s in your pocket. This is extremely important because it gives the average person like you or me a chance to help save the environment by eliminating our carbon footprint, while not investing the huge amounts of capital it once required to buy solar. Further, book bags are going to be bought either way, so why not have the added feature of ability to charge your bag in the sun. However, Konarka is not stopping with providing the average person with these capabilities; they are also working on putting this technology on skyscrapers windows so that they can power the entire building. These capabilities are just the start of the good things this company can do for us.

Any way to diminish our addiction to oil could reduce OPEC’s choking grip around the entire world. Over the past thirty years OPEC has completely manipulated the price of oil in American, so much so that it may have caused our current auto crisis in Detroit. What I mean by this is the volatility of the price of gas because of the controlled oil output. The first time we tried to use solar technology was the early 80’s when gas prices soared in relation to previous prices. When OPEC realized there were other capabilities to knock off their monopoly, they dropped prices. Americans forgot about the scare because they didn’t realize how tight OPEC’s control really was. Thus, we started returning to our gas guzzling form: bigger houses and bigger cars. In the early 90’s OPEC struck again, and soon after Americans forgot the grip once more. This time we didn’t just make gas guzzling cars and create bigger houses, we fed into this truck and SUV frenzy. This past summer when OPEC raised the price of a barrel of oil over $200 we finally realized the problem. Our consumer’s stopped buying SUV’s and trucks altogether, but because this was all Americans used to want, the companies were not prepared with anything else. Thus we are here in the crisis we are today. Given this crisis is far more complicated than the auto industry, we cannot allow the American short term memory on oil prices lead us on this path of destruction led by those who control oil. This is the bottom line reason that will resonate with consumers: it will be a good investment because it will put money in your pocket. However, Konarka can still give more to the community at large.

In addition competing with oil prices, provided we can keep this technology profiting the country, it could easily open up hundreds of thousands of jobs in the new green sector that is currently growing larger with each passing day. If the technology does catch on, millions of chips will need to be distributed across the country. Even if the technology is complete, the company will continue to pour cash into research and development employing countless engineers and scientists. Who knows how many jobs it can create, and everyone knows we need them now more than ever with the state of the economy. Further, we could help save the world from this global warming phenomenon that seems to be only recognized in the mind of scientists and liberal democrats (Al Gore and Barrack Obama). By starting to do simple things like use clean energy to charge phones and laptops, we are reducing the amount of energy created by other non-clean meathods. This ultimately helps the environment. Hopefully as the idea catches on entire skyscrapers will be eliminating carbon emissions and this could make a difference fast.

I guess the only argument that could be made against a company like this is the timeline of change. Cars produce the most carbon emissions, how long is it going to take to make a difference with our cell phones and laptops. In addition, if we were to start integrating this technology in our cars, would everyone in the United States have to buy a new car? To these people I say you are missing the point. This technology is in its infancy and that alone is extremely important. The book bags and plastic cases have not yet hit the market, but the technology is accelerating rapidly. Soon we will be able to help on a grand scale.

Soon may not be soon enough, but when someone asks me what type of technology I think will be most important in the future, I don’t hesitate when I say the one that is going to save the world: green energy, power plastic, and renewable resources. On day I will be telling my grandchildren what it was like to live in a world smog filled because of cars, just as my grandfather tells me of the time before cars were mainstream. Times are changing and I hope the country isn’t stubborn enough to ignore it. Until we are there sit back and enjoy the path we are treading and admire the changes that soon will be taken for granted.

China Qick to Point During Economic Council

This week kicked off an annual economic council held in Davos, Switzerland. This is a huge conference that hears from political leaders as well as the private sector. Even many celebs have been present in the past, but this year China Premier came and pushed a lot of the blame on the United States for the state of the world economy as well as the huge losses china suffered in the US financial sector. I could not help but find this comical because they invested in us! They deemed Morgan Stanley, Freddie Mac, and Fannie Mae good investments despite not fully understanding them just as much as we did! You cannot just point the finger and say WTF, you need to do your homework just as much as we should have fully understood what it was that was going on.

From some things that I have hear among the market, there was a crash in 1907 because of the derivates trading that essentially allows insuring investments using advanced mathematics. This was outlawed after it caused the market horrors and then was passed again by President Clinton on his way out of the office. Yes the crisis may be American based, but don’t blame us because you can’t stimulate your own economy.

Bentley Investment Group

Okay, this has really been bugging me over the past few days. This year I joined the Bentley Investment Group, aka BIG, and unlike most freshmen this was not my first time participating in an investment club that plays with real money. This week I sat in on the E-Board meeting where we discussed our current strategy due to the economic conditions facing the market. For anyone who is not familiar with the money that the group invests, it is part of the endowment. Essentially we play with (used to be more before the market crash) just above $500,000 of the schools money. Personally I believe that this is the only way that students are going to be able to understand investing in their personal and professional careers. No matter how many times you read about the best strategies and the fool proof methods to making millions in your IRA, you will never understand what it is like to front your own capital in the market or understand the feeling in the pit of your stomach when you make a bad choice.

Regardless, the essential mission of the club is to provide students with a learning opportunity. The club has performed an annualized return of just under 10% before the market crashed this year. This is unbelievable considering the goal is to teach students about investing. However, the topic this week was the accepted decision to sit out of the market at least in the short term. I understand that we are playing monopoly with hundreds of thousands of dollars, and I understand that the problems the market is facing may have been the worst we have ever seen. Another Waltham institution, Brandeis University, could potentially face selling off parts of their museum because they are so financially unsound (many of their longtime donors are victims of the Madoff scheme). Sitting out is not the solution. Nothing can be learned from this. I refuse to see the benefit to the students in simply studying the market trends for the next year to see what is happening; THAT IS WHAT WE DO IN CLASS EVERY DAY! The real value of this club and this institution is being able to walk up to a Fidelity recruiter and have him ask me about my experiences in the club, “What are you bullish on right now?” “Well I recently pitched Apple when it was down below $80 because I love the fundamentals and I feel that the market is overly scared about Steve Jobs health problems.” Then we could engage in a discussion that I have had a learning experience from. Maybe I will have to explain my biggest mistake as pitching Starbucks at $18 because I believed that the brand name and strong market share among those impenetrable to the recession. These are the types of experiences that are going to help students learn and grow and give them something to talk about. It would be irresponsible for the group to sit out just because the market is performing horribly because over the long run markets perform predictably.

Another problem I have with the club is their strategy, although they say that like to look for value companies. I cannot see how they can possibly look for value in one year (the lifespan they say they hold stocks). Given I have only invested since I was 16, everything I have read which ranges from Peter Lynch, to Warren Buffet analysis, to Monish Pabrai, to wealth managers like Robert Kiyosaki and Robert Shemin, as well as conversations I have had with analysts and C.E.O.s at small firms like Sentinal Securities, to large firms like Fidelity have reaffirmed my believe that the market does not perform reasonably in the short term. It is almost impossible to time the market in the short term and as their definition of short term refers to a year or less, medium length refers to one to three years, and long term means more than three years. Since the days of Benjamin Graham, value investing has been recognized as the smartest way to invest because the market moves predictably over the long term. Eventually if you buy an undervalued stock, the price will reflect the true value. How can BIG teach its students value investing if it is making plans for the short to medium time frame. IT CAN’T. This is an issue that needs to be addressed.

Thanks as always,

Matt

Steve Jobs is the Only Employee at Apple?

Good evening everyone,

I promise I will try to refrain from my usual rants on the economy and all of its problems today. My most recent observation has to do with a small company call Apple, you may have heard of it. My love for for this stock dates back to my first semester of junior year (in high school). In my first year of an investment club at my high school I decided to make a pitch for this stock because of strong fundamentals. I love their products, I love their design, and I loved that they cornered the mp3 market. When people refer to any device that plays music, they don't call it an mp3, but rather an Ipod. This simple fact is a testiment to the entire marketing team at Apple.

Simillarly, when the iphone was released my senior year in high school, people raved about all of the things it was capable of: playing music, browsing the internet, keeping track of everything from your photo album to stock portfolio, and of course the simple task of providing you with a phone service. In reality, these features had been out for years, but as far as the American public is concerned the iphone is the only phone that does it. Once again the beauty of Apple.

Within the last five years sales for the Macintosh brand of computers have been slowly rising in market share for personal computers and laptops. One reason it has been helping create large profits for the company is the restructuring of the manufacturing by senior executive Tim Cook.

Cook is not the only executive to play a large behind the scenes role, Johnathan Ive serves as Senior VP of Industrial design at Apple, as well as believed to be the mastermind behind the ipod, iphone, and new imacs. These two are some that receive the most recognition among an unbelievably talented team at Apple.

To me it was no surprise that the company's stock price soared to above $200 at the end of 2007. However, nowadays the company is trading somewhere around the $80 dollar range largely because of the economic slump as well as the health problems with Steve Jobs, C.E.O.

Jobs is arguably one of the best leaders in business today and seems to have taken on a role greater than the face of the franchise. There is no one like him in business today. With the exception of Bill Gates as the face of Microsoft for the past two decades, there may not be anyone that has ever been regarded to as responsible for the success of his company. It is no surprise that when there are rumors about Jobs health arose that the stock tumbled blelow $80 for the first time in a long time. Does this mean that the entire vision of the company is lost?

No one can replace Steve Jobs at Apple, ever. Yet, if he were to step down tomorrow as head of the company, I don't forsee much changing. The company's place in the market is already established and with the minds of Ive and Cook in the drivers seat, not to mention the talent of the entire Apple team this company looks like they will remain a large player in the electronics market for a long time.

Oh and in terms of the stock now, it seems like a great time to buy with the company consistantly weathering the economic storm and the current price drop due to Job's health conditions. Needless to say I was bullish on this stock months ago when I bought in at $105. This is a strong company with great leadership and quality fundamentals, don't miss out on a bargain simply because someone caught a cold.

keep on keeping on young minds,

Matt

Obama to Pass on Gas Tax?

Just over a year ago I was planning on voting for Barrack Obama as President of the United States, my logic behind this had nothing to do with the current economic crisis we have fallen into today, nor any political ties to the democratic party; the sole logic behind my perceived necessity of Obama as president was for his proposed energy policy. He proposed a plan that would give tax cuts to the private sector if they could find a way to utilize renewable energy as well as throw millions of dollars at the research and development sector for finding more profitable ways to create renewable energy. However, it seems like President elect Obama may have stood in his own way by taking the idea of increasing the gasoline tax off the table.

For as long as I can remember I have been a proponent of raising the gas tax so that the entire economy would not fall prey to the volatility of fossil fuels. Once again I believe we have something to learn from Europeans as they have had gas taxes that help stabilize the economy for years. By instituting a tax that would hold the price of gas at let’s call it $5.00 per gallon. If the real price of gas was $1.50 then the government could collect $3.50 in taxes. However, if the real price of gas rose to $4.00 then the government would collect $1.00 in taxes. The public would not even realize the swings. Further, this would push our economy to find more fuel efficient cars. Once again we are faced with the realization that Europe has had an average mile per gallon of 40 in recent years and we are by no stretch of the imagination left in the dust. Maybe this has contributed to our current crisis in Detroit?

I am sorry to say that although we may not be in the best financial shape right now, I do believe that this tax is necessary to provide some stability to the economy in the long term. Further, if the new gas tax proposed is going to be that much of a problem, why not cycle the money generated by the taxes back into the economy in some form.

For a more complete look at this argument please refer to Steve Mufson’s article:
http://newsweek.washingtonpost.com/postglobal/energywire/2009/01/obamas_gas_taxing_problem.html

Better luck to the stock market this week,

Matt

Where Can We Learn About Money?

My first experience with this concept came from real estate guru Robert Kiyosaki through his book, “Rich Dad Poor Dad.” Kiyosaki’s book compelled me to want to learn more about business. The overriding theory that I walked away from his work with was the idea that money runs our life but we are never fully educated about it. When people actually think about that concept it makes sense. Scholars may study history at Brown or Medicine at John’s Hopkins, but they still may get sucked into that adjustable rate mortgage that helped trigger the subprime crisis that we have on our hands today. As Kiyosaki uses the phrase in his book, “People are taught to work for money, not have their money work for them.”

Coming in to study business my freshman year I assumed that because we were business students, we could not fall into the trap of working for money. As the preliminary weeks grew on I quickly familiarized myself with the notion that despite what business schools try to do, many only turn over the next batch of businessmen that fall prey to the cycle. Of course there is nothing wrong with choosing this lifestyle; many people prefer the security of a weekly pay check and two weeks’ vacation each year. The point I am getting at has nothing to do with the right or wrong path to tread, but rather the recognition that despite how hard you work as an accountant at a big firm, someone else is always going to be reaping the benefits. Maybe you say to yourself, I’ll work my butt off this year so I can get that promotion and then I can take it easy. Maybe you do get it and then you’re working twice as hard trying to impress the new boss, all the while there is still someone collecting dividends on your hard work. My outlook has always been look to the end of the line, JP Morgan was a banker, what is the difference between him and everyone that now works for JP Morgan & Chase. Finally, graduating from a good school does not mean that you cannot fall into the cycle.

In his essay, “Against School” John Taylor Gatto explores the concept of the educational system as a whole and whether it serves its purpose. Gatto talks about the founding father’s lack of schooling and how we still follow what they have created today, he also talks about how the school system creates a structure that we are taught to follow, but his most compelling argument may be in the history of the American school system.

The American school system is based upon that of the Prussians many years ago. This system was designed to deny leadership roles and to create a manageable population that could maintain peace. As we can clearly see in the history of our school system, not much has changed. This further backs the theories about my peers falling into the trap of a job because they feel like they need its structure. That leads me once again to my question, where can I go to learn about money?

If our educational system fails to show us what we need to learn then the load is left on our shoulders. There are volumes written about business, and writers like Kiyosaki make some valid points about not only our educational system (or lack there of) but also ways to build wealth in our economy.

Bottom Line: Get out and supplement your education with voluntary learning because you can’t rely on formal schooling to get you through life.

I hope I at least raised some interesting points for you,

Thanks for reading,

Matt