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Wall Street + Washington

The intersection of global politics and economics

A Note on the U.S. Economy

The biggest debate in financial markets at the moment is over the need for further government stimulus in the global economy, especially in the United States.  Here are the major arguments:

  • More Government Stimulus: Championing the case for more government spending to stimulate the global economy is Paul Krugman, winner of the 2008 Nobel Prize in Economics.  In a recent article titled The Third Depression, Krugman argues that “while long-term fiscal responsibility is important, slashing [government] spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.”
  • Less Government Spending: Although not a direct response to Krugman, one of the more interesting arguments that I found against government stimulus was from the editorial team at the Wall Street Journal: “For going on three years, the developed world’s economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity.  It hasn’t turned out that way.”
  • Video (5 mins): Nouriel Roubini debates Nassim Nicholas Taleb on the role of government in an economy

My take: A quick examination of the components of the U.S. economy/GDP:

Personal consumption

  • Most important component of U.S. GDP (over 60% of all economic activity)
  • High unemployment rate: According to data from the Bureau of Labor Statistics, the average unemployment rate between 1985 and 2005 was 5.7%.  Today, it is about 9.5%
  • Deleveraging (debt reduction) by U.S. households: Earlier today, the Federal Reserve announced that consumer credit declined by $9.1 billion in May and by $14.1 billion in April.  Less borrowing implies weaker consumer spending
  • Based on the above, the current status of personal consumption: WEAK

Private investment

  • According to the Wall Street Journal, “nonfinancial companies [have] socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952.  Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.”
  • In addition to the hoarding of cash by U.S. companies, the current capacity utilization rate remains below 75%.  Thus, given that U.S. companies have room to increase production, capital expenditures – a major part of private investments-  might remain weak.  As a result, companies are more likely to use their cash holdings to engage in financial transactions, such as stock buybacks and strategic acquisitions, rather than on capex
  • Greg Mankiw, professor of economics at Harvard, tries to explain why companies might be holding on to so much cash: “[B]usinesses may be reluctant to invest in an economy that they expect to be distorted by historically unprecedented levels of taxation in the future.  The more the government borrows, the higher taxes will need to go, the more distorted the future economy will be, and the less attractive is investment today.”
  • Based on the above, the current status of private investment: WEAK

Net exports

  • Not much is happening here to stimulate the U.S. economy
  • U.S. exports declined from $149.8 billion in March to $148.8 billion in April, the most recent period for which data is available
  • A recent quote (06/29/2010) from New York University professor Nouriel Roubini: “A double-dip recession looks likely in the euro zone, it looks like Japan right now is falling off the cliff … and now there is evidence of a slowdown in economic growth also in China.”  Given that these are major trading partners of the U.S., net exports probably won’t spur growth in the U.S. economy anytime soon
  • Based on the above, the current status of net exports: WEAK

Government expenditures

  • This is the final component of GDP that the current debate is revolving around because it is one that policy makers can directly influence in the short-term
  • Informative PowerPoint on U.S. government expenditures (Short & Long Term Budget Trends)
  • In Government to the Economic Rescue, Alan S. Blinder, professor of economics at Princeton, argues that government intervention (TARP, stimulus package, etc) has been good for the economy
  • 2009 Stimulus bill ($787 billion): Tax cuts represented one-third of the total package, fiscal relief to state governments and other social benefits also accounted for one-third, and public investment spending, the “centerpiece” of the bill, ended up being only a third of the final package with the actual outflows spread over multiple years.  Compared to the U.S.’ annual GDP of $14 trillion or the $50 trillion decline in global financial assets in 2008 alone, it is no surprise that some prominent economists  have argued that the stimulus package was too small.  That said, it appears the stimulus has been a great success as it has helped to create almost 2.7 million jobs in the U.S.


  • On monetary stimulus: In their 1963 book, “A Monetary History of the United States, 1867-1960,” Nobel Laureate Milton Friedman and Anna Schwartz argue that a contraction in U.S. money supply contributed to the Great Depression.  Given that the Federal Reserve acted promptly at the height of the recent financial crisis by embarking on expansionary monetary policies, i.e., slashing of interest rates and opening of the discount window to more financial institutions, government intervention here seems justified.  As a matter of fact, the Fed has been transferring record profits to the U.S. Treasury for the benefit of taxpayers.  That said, going forward, the Fed’s ability to successfully exit these expansionary policies remains an open question
  • On fiscal stimulus: Keynesianism lives on, and the debate continues

Abraham Tiamiyu

Financial reform legislation

On May 20, 2010, the United States Senate passed the most important regulatory reform of the financial system since the Banking Act of 1933. Here are some of the critical components of the legislation:

  • The bill explicitly prohibits future government bailouts of financial institutions and it requires that the financial industry be responsible for the cost of unwinding failing banks
  • Resolution Authority: According to Bloomberg, “the Senate bill would give the Federal Deposit Insurance Corp., which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms whose collapse would roil the economy.”
  • Creation of a Consumer Financial Protection Agency at the Federal Reserve to protect consumers from abusive credit-card and mortgage lenders
  • Establishment of a Financial Stability Oversight Council to monitor major financial institutions so that the failure of one large bank does not pose a systemic risk to the entire financial system
  • U.S. banks are now banned from engaging in proprietary trading as well as from owning hedge funds and private-equity funds (The “Volcker rule,” named after the former Fed Chairman Paul Volcker)
  • Greater transparency in the $615 trillion derivatives market as most trades will now have to be conducted on regulated exchanges, where trades are made public, instead of the current over-the-counter system (In addition, banks with access to the Federal Reserve discount window would be required to spin off  their swaps trading operations)
  • Creation of a credit ratings board that would randomly assign ratings agencies for securities to reduce conflict of interest (Currently, banks are responsible for choosing and paying the agencies that rate their securities)
  • Hedge funds with $100 million or more in assets would be required to register with the Securities and Exchange Commission and those deemed too risky will be supervised by the Federal Reserve

Note that the Senate bill needs to be reconciled in conference with the version passed by the House last December.

Sources: Bloomberg, CNN

Abraham Tiamiyu

Seeking a safe haven

Thanks to the resurgence in the United States’ economy (consecutive quarters of positive GDP growth + the surge in equity markets since March 2009 lows), coupled with the current fiscal crisis engulfing the European Union, global investors – governments and organizations – are increasingly flocking to U.S. financial assets as a safe haven. Here are some stats from a recent Bloomberg article:

  • Total foreign purchases of U.S. treasury notes and bonds were $108.5 billion in March 2010, up from $48.1 billion in February
  • China increased its holdings of U.S. debt (treasuries), by 2 percent, to $895.2 billion in March
  • Japan, the second-largest investor in U.S. debt, increased its holdings by $16.4 billion to $784.9 billion in March
  • The U.K. increased its holdings by $45.5 billion to $279 billion
  • The Organization of Petroleum Exporting Countries (OPEC)’s holdings rose to $229.5 billion, an increase of $10.7 billion
  • Russia increased the amount of dollars in its currency reserves to 44.5 percent, up from 41.5 percent
  • Finally, foreign demand for U.S. agency debt, those issued by organizations such as Fannie Mae and Freddie Mac, resulted in net purchases of $22 billion in March, the biggest gain since June 2008

All data are as of March 2010

Sources: U.S. TreasuryBloomberg, BusinessWeek

Abraham Tiamiyu

Back in the game

UBS AG, the global financial services firm, recently released its 2010 first quarter financial results :

  • Highest quarterly profit in almost three years: net earnings was 2.2 billion Swiss francs ($2 billion) in the first quarter of 2010, up from a loss of 1.98 billion francs a year earlier
  • Strong performance driven by UBS’s investment bank, especially its fixed income, currencies and commodities (FICC) business
  • Revenue of 752 million francs from credit trading, a business built from scratch over the past year
  • At the end of Q1 2010, core tier 1 capital ratio increased to 12.5%, up  from 11.9% as at Q4 2009
  • Balance sheet with total assets of 1.4 trillion Swiss francs ($1.3 trillion)
  • All business divisions reported a pre-tax profit

Sources: UBS, Bloomberg, Wall Street Journal

Abraham Tiamiyu

Paul Krugman on Healthcare

Paul Krugman, winner of the 2008 Nobel Prize in Economics, has written quite a few articles on the topic of healthcare reform in the United States.  Over the last 12 months, I have read most, if not all, of his articles in the New York Times and here are my top six (in chronological order):

1.) Why markets can’t cure healthcare (July 25, 2009)

2.) Health Care Realities (July 30, 2009)

3.) Numerical notes on health care reform (December 26, 2009)

4.) Health Reform Myths (March 11, 2010)

5.) Why We Reform (March 18, 2010)

6.) Fear Strikes Out (March 21, 2010)

Abraham Tiamiyu

Harvard African Law & Development Conference

Date: April 16-18, 2010

Location: Harvard Law School



  • The Financial Crisis and Africa’s Development
  • National Resources: Use and Misuse
  • Conflict and Development
  • Regional Legal Integration: A Tool for Development?
  • Business in Africa: Navigating the Legal Environment
  • National Health Insurance: Is it necessary for development?
  • Supreme Court Justices: Ghana, Uganda and South Africa

Abraham Tiamiyu

Africa focus at Harvard

Theme: “Reimagine, Redefine, Reinvent: A New Paradigm for Africa’s Leaders.”

Date: April 5-18, 2010


Major events:

  • US-Africa Relations in the Age of Obama
  • Media and Social Change in Africa
  • Engaging Africa as a Strategic Partner: Diplomacy, Development, and Defense
  • Roundtable Discussion: Rebranding Africa through the Youth
  • Panel Discussion: Sustaining Good Governance and Political Stability in Africa
  • Developing Next Generation Leaders: The Archbishop Desmond Tutu Fellowship (Information Session)
  • Inter-Harvard Soccer Tournament
  • HGSE 8TH Annual Voice of Education Conference: Youth and Emergencies
  • HASA Africa Night: An African Odyssey
  • Careers in Africa Panel
  • Transforming Lagos State: A Conversation with Governor Babatunde Fashola
  • Research and Action: Innovative Projects by Scholars and Students
  • From U.S. to Africa: Health Care in the African Context
  • The 2010 Harvard African Law and Development Conference

Abraham Tiamiyu

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