Month: October 2011

I recently read a post on Herb Greenberg’s blog, Market Watch, which critisized the US government’s decision to take executives of Citigroup, Merill Lynch, and Countrywide to hearing on CEO Pay and its adverse effects on the mortgage crisis.

The post took the position that CEO pay has absolutely nothing to do with the mortgage crisis and that it is merely the government who is stirring up a fuss about nothing. It backs up this position with the argument that the compensation structure of a company is available to all potential investors in the annual proxy. If the investors did not like the structure, they could simpy choose not to buy the stock. Moreover, even when they do take part in buying the stock, they could still influence the injustice by taking an activist role and kicking out the management and board.

“It’s really that simple.” The blogger comments.

I, on the other hand, do not completely agree with this idea. CEOs being paid enormous amounts of money for the work they do is not just a matter of a ‘simple solution’. It shows just how much these higher level management people are able to influence society. As I had mentioned in my very first post on the unethical actions of AIG, higher level executives have the incentive to make decisions that may cause enormous collateral damage on society. Their compensation rewards them in such a way that would be beneficial to them to disregard the needs of others.  

Therefore, I believe that the government did no wrong in subjecting the actions of these executives to questioning. After all, no single stock holder has as great an influence on the future of a company as its CEO. Moreover, due to the potential conflicts of interest between different stakeholders, it is highly unprobable that they would cooperate to oust an entire management team and put their own investments on the line. It’s not really “that simple” and sometimes there does need to be a intermediary who steps in to correct the unbalance.

Photo credit: http://vator.tv/news/2010-08-31-what-a-ceo-does
Credit: http://blogs.marketwatch.com/greenberg/2008/03/ceo-pay-congress-butt-out/

A recent post I read written by fellow Sauderite Lisa Wu (Occupy Wall Street: UNEMPLOYED, INDEBT, AND FRUSTRATED) mentioned many interesting opinions on why people are so angry with the actions of Wall Street in recent years. To provide some background: recently, there has been many protests against the coporate greed, political dominance, and immoral behaviour of Wall Street. Wall Street has been identified as a culprit of American Recession, which has widened the income gap in America and left many unemployed without a means for making ends meet.

I completely agree with Lisa’s suggestion of reducing the ridiculous amount of money paid out to higher command employees by corporate companies. In my opinion, these ‘higher-ups’ are being paid much more than they deserve. Managing entire coporations may be difficult, but there are millions of workers who are working just as hard and yet are being compensated on a much smaller scale. I feel as if people at the higher end of the corporate ladder are taking advantage of their power within the coporation for selfish reasons. Many are gaining wealth at the expense of growing unemployment and increasing debt. Moreover, the public is, in a roundabout way, forced to pay for the mistakes that Wall Street commanders are making through taxation. The government pays large bailouts for the businesses that have failed because of the excessive greed of those who run them. This is all at the expense of meeting the needs of the very citizens whose lives are most affected by these failures.

Many see the situation of the Wall Street ‘dictatorship’ as flaw of capitalism. Wealth is being taken from the poor by those who are in control of the economy, who also have enough power to influence important political decisions. I think this is a time where the government needs to step in and  ensure that basic equality within society is still being observed.

Credit and Photo Credit: http://wearethe99percent.tumblr.com/
Credit: https://blogs.ubc.ca/lisawu/2011/10/10/occupy-wall-street-unemployed-in-debt-and-frustrated/ (Lisa’s blog)
https://blogs.ubc.ca/lisawu/2011/10/10/occupy-wall-street-unemployed-in-debt-and-frustrated/

“The departure of real commodity prices from their mean has been so great that Grantham suggests there is a prospect for a significant correction…[such correction] will be amplified by speculation and will develop bubble-like overshooting” Says Marshall Auerback, global strategist at hedge fund Madison Street Partners. What does this mean? It means that the reason commodities such as cotton and minerals have had such a sharp rise in recent years may be due to the fact that there exists a commodity bubble not different from the housing bubble that set off financial distaster in the United States. There may come a day in the future when the prices of these goods ‘crash’ to very cheap levels.  According to Grantham’s findings, commodity prices have been declining at a rate of 1% each year since the 20th century.  In just the past ten years, however, the prices have gone up significantly.

However, as Globe and Mail columnist Eric Reguly argues, oil is a special exception when it comes to analyzing the future trends of commodity pricing.  The reason that oil prices are remaining relatviely high through the global financial crisis of 2008 and the European debt crisis is because of a pervasive resource deficit. According to the oil analysts at Barclays Capital in London, a global oil supply deficit is an enormous issue that is not being acknowledged to scale. The theme of global economic slowdown is wrongly the predominant theme within markets.

In the future, according to Reguly, it may be possible that oil prices will fall in order ot comply with their long-term average price. However, I don’t this this does much to solve the real problem: the global oil scarcity. I believe that the correct pricing of oil should be determined by its scarcity value.

This Globe and Mail column provides a great, detailed account of the situation.

Photo credit: http://www.seanews.com.tr/article/MARKETS/47957/Markets-Oil-prices/
Credit: http://www.theglobeandmail.com/report-on-business/commentary/eric-reguly/why-oil-isnt-behaving-like-other-commodities/article2201928/

Having only the notion that the European debt crisis was “bad”, I never quite understood the specific mechanisms which gave rise to the problem. After doing some research on this issue, however, I realize that it’s not as complicated as it’s made out to be. It all has to do with the faulty financial decisions of each country that got tangled up into an international frenzy of lending and borrowing.

It all started when…

Members of the EU decided to use a universal currency: the euro. This allowed countries such as Greece, Portugal, Italy, Ireland, and Spain to borrow money at the same interest rates as Germany.  As American writer Michael Lewis put it: “The rest of Europe, in effect, used Germany’s credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn’t afford.”

To exacerbate the problem…

Inflation rates for each country was different; namely, inflation is higher for countries like Greece and Italy than for Germany. Moreover, the inflation rate for these countries were higher than the interest rate charged on their loans.

Countries started borrowing excessively…

Because it was such a good deal to take loans, both the citizens and governnments of these countries started to accumulate enormous amounts of debt. To get an idea of how much, Greece currently owes 160% of its GDP. Spain, on the other hand, has real estate debt that amounts to 50% of its GDP..

Now the European Central Bank has to step in…

Even though Greece is rated 126th with debt (the least likely country to pay off their loans) ECB will continue to buy its government bonds and give out loans. Countries like Germany end up giving money to indebted governments so that the money can somehow end up in banks which will be able to repay the loans. The whole process is convulated and bordering on bizarre.

So why doesn’t the other European countries just switch back to their old currencies?

Switching would at a glance seem to solve the problem altogether. Countries like Germany can just reissue large amounts of its own currency to pay off the banks right? In reality, however, switching would produce a large burden on citizens. They will be forced to convert their current euros to other valuables, which will lead to a full-on bank-run.

Thus…the only solution the EU has at present, is to continue using the ECB to supply countries like Greece and Spain with the money they need.

Photo Credits:
1) http://www.thedigeratilife.com/blog/european-sovereign-debt-crisis-investments/
2) http://www.tradingpetroleum.com/currency_exchange_euros.htm

References:
http://www.rediff.com/business/slide-show/slide-show-1-all-about-european-debt-crisis-in-simple-terms/20110819.htm
http://www.cbc.ca/news/world/story/2011/09/26/f-voices-euro-debt-crisis.html
http://news.yahoo.com/greece-europe-struggle-contain-debt-crisis-061201682.html