Third Week of November

Wednesday: It was interesting grading the other papers in class. I liked that we were able to give input on how the rubric was constructed and see how it could possibly be changed.

Friday: I found the presentation very interesting, even if it was a bit over my head. I'm really not into money or economics or any thing of the sort, and its really difficult for me to wrap my mind around the rationality of all of it...but the presentation helped me understand the current economic situation a bit more. 

In the presentation, it was explained that the current economic situation can be contributed to rising oil prices (up to $ 145 a barrel and $4 at the pump), the tripling or more of grain prices, ad the spike in prices of many raw materials such as copper and cotton. Gas prices finally went down to about $55 a barrel and $2 at the pump. This situation provides relief for consumers but could potentially hinder the progress of conservation gains. 

It is too late to avoid a recession, but lower prices may make the recession itself milder. There also could be possible conflict with economic recovery with the use of price floors, green market solutions, cap and trade, and carbon taxes. Some believe however that Green spending could possibly help economic recovery. 

In terms of the housing market issues:

Homebuilding is down nearly two-thirds. House prices are down nearly 20 % and could fall even lower. Mortgages are very hard to obtain at this point. Many homeowners can't pay their loans, which is causing foreclosures to double to a near 3 million annual rate. Mortgage "paper" were loans that turned into security, clogging world banking and portfolios with 11 trillion of "bad papers". 

There will always be credit cycles. Credit busts are preceded by credit booms. But now banks will not lend to customers or each other. Sectors are now credit starved, including non-Frannie/Freddie mortgages, mergers, acquisitions, local government projects, auto + consumer lending. 

There have also been problems in over-investing. An investor could guess wrong on technology, not know competitors' investments, misjudge pricing power, costs, + profits, or misjudge future market sizes. These small misses can drastically affect business. People do not know how to value things anymore because many new products are complex and there is no regulated way to trade them. Accountants do not know how to price these items. If accountants don't know how to price them, neither do many CEO regulators and rating agencies don't know either. Problems worsen with prepayments, bad collateral, and by simply pretending that the problem is not there. Other problems have resulted from insurance abuses. Its a good idea for insurers to have reserves to pay out losses and be regulated. However, Frannie and Freddie wrote 3.6 trillion of mortgage pool insurance with no reserves. 

What can we do about this economic situation? We can "spend like crazy", embrace infrastructure and temporary tax cuts, forget the budget, while still helping the poor and saving the environment. We can rethink corporate leadership and governance, remove perverse incentives, and even become comfortable with bankruptcy because after all, its not liquidation, its protection from creditors.