NYSE: The New York Stock Exchange

The NYSE was first housed at a rented room at 40 Wall Street in 1817. A 5-story building at 10 Broad Street opened in 1865. It was enlarged and remodeled during the 1870s and 1880s, then was demolished in 1901 to make way for the current building. The new Exchange building at 18 Broad Street opened in 1903. Styled in the classical-revival manner popular at the time, it was designed by George B. Post, a well-known architect and engineer. The sculptor John Quincy Adams Ward designed the pediment. The eleven figures in the pediment are emblems of American commerce and industry.

The central figure symbolizes integrity, bordered by figures representing sources of wealth. Other figures personify agriculture, mining, science, industry and invention. The view of lower Manhattan from the NYSE building includes the intersection of Nassau, Broad and Wall Streets and looks directly on Federal Hall, the historic site of George Washington’s inauguration in 1789. It also includes Trinity Church at the end of Wall Street. The Main Floor occupies 36,000 square feet with a ceiling of 86 feet, including the Garage, Blue Room and Expanded Blue Room.

It consists of 17 trading posts, 340 trading positions and 3,000 people who work on the trading floor. Trowbridge & Livingston designed a 23-story building on 11 Wall Street. The Garage was added as a second trading room when the Exchange opened in 1922. 20 Broad Street opened in 1956. Added as a third trading room, the Blue Room opened in 1969 and was expanded in 1988. The Garage, Blue Room, and the Expanded Blue Room each measure 7,000 square feet. Each trading post represents the auction market for many different securities.

Buy and sell orders are received on the terminals and executed in the open market. There are nearly 3,000 NYSE-listed companies and about 400 of them are non-US listed companies. There are more than 10,000 institutions investing in the NYSE. The total dollar value of the corporate size of all NYSE listed companies is more than $17. 3 trillion. The broker booths occupy the perimeter of the floor and are owned and operated by member firms. The NYSE trading floor contains 1,500 booth spaces. There are about 500 member firms in the NYSE.

NYSE member firms employ 100,000 registered workers. Originally, only members and their guests were allowed to view the trading floor from the balcony known as the Members Gallery, high above the floor. The media and guests of the NYSE now use it. The Ramp, NYSEs new, Three-Dimensional Trading Floor (3DTF) is a computer-generated trading floor representation used for operations control, information sharing and information distribution. Its the first large-scale virtual reality environment for business applications.

The 3-D image is depicted on nine 25-inch PixelVision high-resolution, flat-panel monitors, including three monitors that allow the user to understand specific activities. The Advanced Trading Floor Operations Center, which houses the 3DTF, utilizes 6 Silicon Graphics high-powered Onyx2 graphics visualization supercomputers, 43 PixelVision high-resolution, flat-panel monitors, highly advanced software and innovative application code. The Interactive Education Center provides visitors with a technology-driven, user-friendly learning experience.

The center features information booths, interactive stock trading exhibits, news feeds, stock prices and a view of the trading floor. The trading floor hosts 8,000 phone circuits, 5,000 electronic devices and 200 miles of fiber optic cable. 1,100 tons of air conditioning are needed daily on the NYSE trading floor. About 3,500 kilowatts of power are consumed daily on the NYSE trading floor. One of the most familiar features of the New York Stock Exchange, the bell’s loud ring signals the beginning and ending of trading each day.

There is one large bell in each of the four trading areas of the NYSE. The bells are operated synchronously from a single control. The G. S. Edwards Company of Norwalk, Connecticut manufactured the bells, measuring 18 inches in diameter. In the late 1980s, the NYSE decided to refurbish the bells and have an extra bell made as a back up. While Edwards agreed to make a special replica for the NYSE, an older, larger bell was discovered in a crawl space above the main trading floor.

Measuring 24 inches in diameter, this 1903 bell had most likely been put away because it was too loud, even for the New York Stock Exchange. After being cleaned and refurbished, this giant bell was toned down. It now gleams on a platform above the trading floor, ready for use should it ever be called into action. The bell is a part of the NYSE’s heritage, and it is considered an honor to be invited to ring the opening or closing bell. The constant development of this high-quality and cost-effective self-regulated marketplace has secured the confidence of almost 60 million individual investors in the US.

The Securities And Exchange Commission

In 1934 the Securities Exchange Act created the SEC (Securities and Exchange Commission) in response to the stock market crash of 1929 and the Great Depression of the 1930s. It was created to protect U. S. investors against malpractice in securities and financial markets. The purpose of the SEC was and still is to carry out the mandates of the Securities Act of 1933: To protect investors and maintain the integrity of the securities market by amending the current laws, creating new laws and seeing to it that those laws are enforced.

During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply.

In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing. ”

Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first. Franklin Delano Roosevelt defeated Herbert Hoover in a landslide in the 1932 election and began to work on his “New Deal”. In the New Deal four key regulatory bodies were established: The National Labor Relations Board, Civil Aeronautics Authority, Federal Communications Commission, and the Securities and Exchange Commission. Wall Street was not enamored with the coming regulation, but Congress was confident that the Street was seen as an easy target for the Crash and the Depression that followed.

In response, the SEC was created by Congress on June 6, 1934 for the purpose of protecting the public and the individual investors against malpractice in the financial markets. Commenting on the creation of the SEC, Texas Congressman and future Speaker Sam Rayburn admitted3 “he didn’t know whether the legislation passed so readily because it was so good or so incomprehensible. ” However, historian David Kennedy viewed the SEC as “ingeniously simple”. In his book Freedom From Fear he states that “For all the complexity of its enabling legislation, the power of the SEC resided principally in just two provisions, both of them ingeniously simple.

The first mandated detailed information, such as balance sheets, profit and loss statements, and the names and compensation of corporate officers, about firms whose securities were publicly traded. ” The second “required verification of that information by independent auditors using standardized accounting procedures. ” These two simple concepts ended the monopoly enjoyed by the House of Morgan and their like on investment information. Wall Street was saturated with data that was relevant, accessible, and comparable across firms and transactions.

The SEC’s regulations unarguably imposed new reporting requirements on businesses. They also gave a huge boost to the status of the accounting profession. But they hardly constituted a wholesale assault on the theory or practice of free- market capitalism. The SEC’s regulations dramatically improved the economic efficiency of the financial markets by making buy and sell decisions well-informed decisions, provided that the contracting parties consulted the data that was then so copiously available. It was less reform than it was the rationalization of capitalism. “5

The SEC prohibited the “pools” and other devices used by the likes of Joseph Kennedy to amass their fortunes. While manipulation of the markets was still possible, there were now risks. FDR decided that instead of naming Kennedy Secretary of Treasury, he would name him the first commissioner of the SEC. Thus, Joseph Kennedy was appointed to oversee the very activities he had participated in. A position appointed from FDR that was long overdue after the contributions of over $250,000 to FDR’s convention campaigns. However, this resulted in FDR initially being accused of selling out to Wall Street.

However, Kennedy was the right choice since he was the only one with the intimate knowledge of the very acts that the SEC was set up to prevent. It was a classic case of “the fox guarding the henhouse. ” Joseph Kennedy proved to be a highly effective leader of the SEC. As one of his first official duties he delivered a national radio address: “We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterpriseWe do not start with the belief that every enterprise is crooked and that those behind it are crooks. ” At this Wall Street realized that regulation didn’t necessarily mean persecution.

Although Kennedy only stayed one year as commissioner, he was most effective in establishing the credibility of the organization. Historian John Steele Gordon described his time in office: “Kennedy knew where the bodies were buried. But he regarded his job to be not only to restore the confidence of the country in Wall Street, but, equally important, to restore the confidence of Wall Street in the American economy and government. ” In addition to the importance of the commissioner’s personality there were also the laws that governed the commission.

There are six main laws that govern the Securities Industry, but only four that are relevant to the majority of people. The first law is the Securities Act of 1933, which is often referred to as the “truth in securities”. The Security Act of 1933 has two basic objectives: to require investors to receive significant information concerning securities being offered for public sale; and to prohibit deceit, misrepresentation, and other fraud in the sale of securities. These two objectives are accomplished primarily by registration which discloses important financial information.

While the SEC requires this information to be accurate, there is no guarantee that it will be. However, if investors purchase securities and suffer losses due to the fact that the information given was incomplete or inaccurate they have recovery rights. The registration process requires corporations to supply the essential facts while minimizing the burden and expense of complying with the law. These requirements include a description of the company’s properties and the security to be offered for sale, information about the management of the company and financial statements certified by independent accountants.

If U. S. domestic companies file this information, the statements are available on the EDGAR database. (Electronic Data Gathering, Analysis, and Retrieval system) “Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, distribution, and analysis of time-sensitive corporate information filed with the agency. ” The second law, the Securities and Exchange Act of 1934, created the SEC.

The Act grants the SEC authority over the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies. The Act also prohibits dishonorable conduct in the market and gives the Commission the disciplinary power to regulate all companies and individuals associated. The Act also allows the SEC to require periodic reporting of information by companies with publicly traded securities. Under this Act corporations are required to file additional periodic reports that are available to the public through the SEC’s EDGAR database.

Companies required to file Corporate Reporting are those having more than $10 million in assets and whose securities are held by more than 500 owners. One of the most important parts of this Act is the disallowance of any kind of fraudulent behavior including any kind of connection with the offer, purchase, or sale of securities. “These provisions are the basis for many types of disciplinary action, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

The Investment Company Act of 1940 regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. This was designed to minimize conflicts of interest that arise in these complex operations by requiring these companies to disclose their financial condition and investment policies to investors when stock is initially sold and periodically afterwards.

The Act focuses on the disclosure of information to the investing public about the funds and its investment objectives as well as the investment companies’ structure and operations. The law that regulated investment advisors is the Investment Advisers Act of 1940. This Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.

When the Act was amended in 1996, only advisors with at least $25 million in assets under management or who advise a registered investment company must register with the commission. ) The SEC is comprised of five presidentially appointed Commissioners, four divisions and 18 offices. There is approximately 2,900 staff in the Washington DC headquarters. The SEC has 11 regional district offices throughout the country. The Commissioners are appointed by the President with the consent of the Senate. Their terms are five years in length and are staggered so the Commission remains non-partisan.

No more than three commissioners can belong to a single political party. There is also one designated commissioner who is the Chairman, which is the top executive office. The Commissioner’s job is to interpret federal securities laws, amend existing rules, propose new rules to address changing market conditions and enforce the existing rules and laws. The SEC is organized in a hierarchy. Beneath the Commissioners are the eighteen divisions and offices. A key division of the SEC is the Division of Enforcement. This division enables the SEC to enforce the laws.

The division investigates possible violations of securities laws and recommends Commission action when necessary, either in a federal court or before an administrative law judge, and negotiates settlements. This is the division which gives the SEC its authority. There are six common violations of the laws in which the SEC will investigate: insider trading, inaccurate or incomplete trading information, manipulation of prices, stealing funds or securities, unfair treatment of the customer and sale of securities without proper registration.

If found guilty the SEC has the authority to disallow any further buying or selling of securities, and confiscate existing securities if there is just cause to this. The primary mission of the SEC has been to protect investors and maintain the integrity of the market. This has been accomplished through the combined efforts of the divisions of the SEC and its Commissioners. The economy and economic welfare of the U. S. has depended upon the effectiveness of the Securities and Exchange Commission, and the success of the Commission has been seen in that there has not been any repeat of the Crash of 1929 nor the Depression that followed.

Generally Accepted Accounting Principles

Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organization’s strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization. The central challenge that budget developers encounter is predicting what the future holds for the internal business and external factors.

Reading the future is something that can never be done with perfect precision. The fast pace of technological change, the complexities of global competition and world events make developing effective budgets both more difficult and more important. Important benefits of improving the budgeting process include better companywide understanding of strategic goals, more coordinated support for those goals, and an improved ability to respond quickly to competition. (Gruner & Jahr, 2003 Inc Magazine).

If good budgeting is important for every successful business or organization, can we expect to have industry standard and general practices that are followed in every type of organization? Probable not, but certain standard can be expected, which is the direction of this term paper. Are there a difference or should there be a difference in the way a for-profit and a not-for-profit conduct their budgeting procedures. In both cases, they have income and expenses, employees and goals and objectives of the organization.

The hypothesis is that there is no difference in the budgeting procedures nor is there a need to find a variance in the General Accepted Accounting Principals between the two types of organization. This paper will examine budgeting procedures for profit and non-profit businesses and compare similarities, and if they exist, differences in accounting practices. This paper will also attempt to review what is Generally Accepted Accounting Procedures (GAAP) for budgeting for any organization to be successful.

Through research, I found the following information from an article from Arthur Anderson accounting firm who has studied successful organizations, both profit and non-profit, and discovered what budgeting practices are used. Important benefits of improving the budgeting process include better companywide understanding of strategic goals, more coordinated support for those goals, and an improved ability to respond quickly to competition. A discussion of best practices used by leading companies to develop budgets follows. (Gruner & Jahr, 2003, Inc Magazine).

Link cost management efforts to budgeting. By linking cost management efforts to budgeting, companies improve the quality of information available for managers to use in developing their budgets. Accurate cost information is fundamental to budgeting. Companies that use accurate cost management techniques and provide budget developers with ready access to cost information improve both the accuracy and the speed of their budget process. Standardizing the cost management system companywide is an important step in improving the link between cost management and budgeting.

Many companies also have found activity-based costing (ABC) helpful in identifying the real cost of producing, selling, and delivering products and services. Even small- to medium-size companies are exploring the potential of ABC, as packaged software becomes more widely available and brings down the cost of engaging in this type of analysis. Another best practice in linking cost management to budgeting is the strategic use of variance analysis. Variance analysis is the study of differences between budgeted and actual costs, or the study of costs at one company compared with industry averages.

By using variance analysis to identify weaknesses, managers can identify areas where their organization needs to improve its performance. However, managers must focus on those variances that have a significant impact. Otherwise, decision making and budgeting can become bogged down in trivial detail. Link budget development to corporate strategy. Because the budget expresses how resources will be allocated and what measures will be used to evaluate progress, budget development is more effective when linked to overall corporate strategy. Linking the two gives all managers and employees a clearer understanding of strategic goals.

This understanding, in turn, leads to greater support for goals, better coordination of tactics, and, ultimately, to stronger companywide performance. Companies that apply best practices find that communication plays an important role. Top management must take the lead in developing and communicating strategic goals. However, to develop those goals, top management needs information about customers, competitors, economic and technological change information that must come from customer-contact and support units. Companies that establish effective channels for communication find it easier to set challenging yet achievable strategic goals.

Setting goals before budgeting begins makes it easier for budget developers at all levels. When this happens, budget developers create from the start budgets that support strategic goals and that, therefore, need fewer revisions. Budget development then becomes not only faster and less costly but also far less frustrating. Design procedures that allocate resources strategically. Within any company, competition for resources is inevitable. Every function and business unit needs funding for both capital and operating expenses usually in excess of the actual resources available.

This makes it critically important for companies to design procedures so that resources are allocated to support key strategies. Best practice companies find that resource allocation is part science, part art. Fortunately, following certain best practices leads to better results. One such practice is coordinating the review of operating and capital budgets. Doing this gives managers insight into the ways in which changes in one budget affect the other. Another practice is to develop sophisticated measures for evaluating proposed budgets.

The measures used tend to vary by industry, but most take into account the company’s weighted average cost of capital. Many measures also assess the degree of risk involved in competing plans of action, the costs or advantages associated with deferring action, as well as factors such as expected developments in interest rates. By using such measures, and by using cross-functional teams to examine action plans, companies can better select plans whose benefits will produce desired results. Finally, by monitoring the results of allocation efforts, companies can refine and improve their procedures.

Tie incentives to performance measures other than meeting budget targets. Many companies still evaluate managers primarily on how closely they hit budget targets. While this may seem logical, in reality this type of one-dimensional evaluation tempts managers to “win” by playing games with budget targets. Such game playing isn’t always in the company’s best interest. At best practice companies, meeting budget targets is secondary to other performance measures. Such companies use a balanced set of performance measures to chart progress toward strategic goals, and use the same measures in their incentive programs.

This reinforces the importance of key strategies and communicates what results will be rewarded. At many companies, business unit managers are involved in identifying the measures that are most relevant for their operations. Typically, some measures are financial, while others track progress in other efforts. For example, an appropriate nonfinancial measure for one business unit may be product defect rate; for another, speed to market for new products. Once the measures are identified, higher-level management clarifies what targets each manager is expected to meet.

Managers and employees receive training on the company’s incentive program so that they understand the reason behind the rewards. Link cost management efforts to budgeting By linking cost management efforts to budgeting, companies improve the quality of information available for managers to use in developing their budgets. Accurate cost information is fundamental to budgeting. Companies that use accurate cost management techniques and provide budget developers with ready access to cost information improve both the accuracy and the speed of their budget process.

Standardizing the cost management system companywide is an important step in improving the link between cost management and budgeting. Many companies also have found activity-based costing (ABC) helpful in identifying the real cost of producing, selling, and delivering products and services. Even small- to medium-size companies are exploring the potential of ABC, as packaged software becomes more widely available and brings down the cost of engaging in this type of analysis. Another best practice in linking cost management to budgeting is the strategic use of variance analysis.

Variance analysis is the study of differences between budgeted and actual costs, or the study of costs at one company compared with industry averages. By using variance analysis to identify weaknesses, managers can identify areas where their organization needs to improve its performance. But managers must focus on those variances that have a significant impact. Otherwise, decision making and budgeting can become bogged down in trivial detail. Reduce budget complexity and cycle time

Best practice companies strive to reduce budget complexity and streamline budgeting procedures. Such streamlining allows management to collect budget information, make allocation decisions, and communicate final targets in less time, at lower cost, and with less disruption to the company’s core activities. By controlling the number of budgets that are needed and by standardizing budgeting methods, companies take important steps toward streamlining budgeting. Another key step is to minimize the amount of detail included in the reports used to develop budgets.

Also, in their effort to streamline budgeting, leading companies use information technology to automate budgeting and facilitate workflow. These companies make sure that budget developers are thoroughly trained in new technologies. This training, together with ongoing monitoring of information needs companywide, helps best practice companies deliver the right information to managers, on time and at the right cost. Develop budgets that accommodate change. By developing budgets that accommodate change, companies can respond to competitive threats or opportunities more quickly and with greater precision.

They can use resources efficiently to take advantage of the most promising opportunities. Furthermore, knowing that budgets have some flexibility frees budget developers from the need to “pad” budgets to cover a wide variety of possible developments. This leads to leaner, more realistic budgets. Companies typically review budgets quarterly, monthly, or even weekly. By including in these reviews reports on changes in business conditions, companies alert managers that new tactics may be called for, if they are to meet their targets for the year.

While it is important that budgets not be revised to cover up for poor performance or poor planning, best practice companies choose to revise budgets rather than adhere to budgets that do not reflect current conditions. Some companies rely on “rolling” or “continuous” forecasts rather than on traditional annual budgets. The chief difference between such forecasts and traditional budgets is that the forecast is updated with actual results as the company moves through the year. Figures for three or more subsequent quarters are projected in decreasing degree of detail.

One way in which companies build flexibility into budgets is to prioritize according to strategic importance action plans that were rejected due to resource limitations. By doing this, they can act swiftly and decisively if additional resources become available. Another way in which best practice companies develop budgets that accommodate change is to require managers to create scenarios based on a variety of assumptions about business conditions. The affordability of powerful information technology allows for the creation of many “what if” scenarios.

This practice makes it possible for companies to respond more quickly and effectively if actual conditions follow the pattern of a particular scenario. Companies also build flexibility into budgets by setting aside funds at the business-unit level to take advantage of competitive opportunities. Some companies even establish separate subsidiaries to look into promising products or technologies. Considering all of the suggestions from Arthur Anderson pertain to any type of organization, there is a case that my hypothesis is correct that there is not budgeting differences between profit and non-profit organizations.

College Costs Essay

It’s no secret that financing a college education is getting tougher. College costs have skyrocketed over the past decade or so, and there’s no relief in sight. Average tuition at four-year colleges will increase 7 percent this school year, double the rate of inflation. Student aid is not increasing fast enough to plug the growing gap between tuition and family finances. In addition, there is a growing number of older students entering college today. These students have families that they need to support. I know, because I am a family man who has returned to school. I wish to finish my egree at the Rochester Institute of Technology.

The only problems I face are financial in nature. It is with this in mind that I set about this research. The not so simple question: Is financial aid available to older students, and if so, how do they go about obtaining it? The Cost Of Education The cost of higher education varies by type of institution. Tuition is highest at private 4-year institutions, and lowest at public 2-year institutions. The private 4-year colleges nearly quadrupled their average tuition rates between 1975 and 1996. For private 4-year colleges, tuition and ees for the 1995-96 academic year averaged about $15,400, compared with about $5006 at public 4-year colleges.

The cost of attending an institution of higher education includes not only tuition and fees, however, but also books and supplies, transportation, personal expenses and, sometimes, room and board. Although tuition and fees generally are substantially lower at public institutions than at private ones, the other student costs are about the same. According to MS-Encarta94,”the average cost for tuition, fees, and room and board for the 1995-96 academic year at private 4-year colleges was about $20,165. At public 4-year colleges the average combined cost was about $9290″ (Encarta94).

The cost of attending RIT is approximately $15700 per year. This does not include room and board, or books, and supplies . This cost falls in line with the national average. However , according to Rachel Shuman of the RIT Financial Aid Department,”the increase in cost at RIT was 4. 8 percent for the 1996-97 academic year over the 1995-96 academic year. ” This falls 2. 2 percent below the national average for 4 year private institutions. Still, $15700 is a lot of dollars for an unemployed family man or woman with little or no income.

The Cost Of Living Factor Though the Cost Of Living is not directly related to tuition it is still a major player in the decision making process. Is it possible to maintain a family financial structure while paying for an education? The cost of a mortgage, or rent, and other bills that are associated with living adds up to many thousands of dollars per year. These costs in addition to what the tuition, books, and supplies total are expected, and have to be dealt with. The financial burden alone can seem over-whelming to some. But let us consider what the total cost of living and attending a four year private nstitution are.

The Bureau of Census statistics for the County of Monroe indicate “that the approximate average income for a family of four is $50964. The poverty level for a family of four is approximately $15455”. These are statistics calculated for the 1995 calendar year. No newer statistics were available. With these statistics in mind we can then determine the financial model we must follow. This model will determine what the total yearly outlay a family of four must shoulder in order to send a person to RIT. The Financial Burden First and foremost a family has to live.

The Census data ndicates that the minimum a family must earn is “a poverty level income. ” So, let’s assume a family needs $16000 per year for living expenses. The cost of attending RIT is $15651 per year. Books and supplies are approximately $1200 per year. Finally, travel expenses will be approximately $500 per year. I am assuming that one spouse will be working to cover the living expenses. So, I am excluding medical and dental costs. These costs are partially or fully covered by an employer. In the event they are not let us include them in the poverty scenario, which basically means the family must pay the costs.

The total amount of funds needed are $17700 the first year. If you increase that number by 4. 8% each year thereafter you can come up with the projected amount for each school year. The $17700 figure remains the obstacle to overcome. This cost has to be covered by Financial Aid. If this cost cannot be covered by the available system, the student will not be able to pursue a standard four year degree at RIT. Family’s Will Strain It’s going to be tougher to pay for college in 1996, and that’s going to widen the gap in enrollment between rich and poor students that the nation has struggled three decades to close.

Average tuition at four-year colleges will increase 6 percent this school year, double the rate of inflation. But family income isn’t keeping pace; “after adjusting for inflation, the average family has gained hardly any ground in the 1990s,” says the Department of Labor. As a result, says the Department of Education,”sending a student to a private college in 1996 without any grants or loans will require more than a third of a typical family’s income and nearly two thirds of the income of a working-poor family.

The Government Student aid is not increasing fast enough to plug the growing ap between tuition and family finances. The federal government supplies 75 percent of student aid. But the value of federal grants has eroded sharply, covering only 10 percent of tuition today, compared with 20 percent a decade ago. The Financial Aid Page explains that: Congress’s budget-cutting Republicans want to spend $450 million less in 1996 on student grants, a move that education officials say would take nearly 200,000 student off the grant rolls.

Also at risk: a new federal program that helps less affluent students by permitting them to repay federal loans over a longer period if their incomes’ after raduation are modest (Kantrowitz). Not surprisingly, the American Council on Education an organization of colleges and universities, recently reported that fewer colleges than in the early 1990’s report enrollment increases among black and Hispanic students, who are generally less able to pay for college. Once in school, more and more students must work to pay their tuition bills.

At least 40 percent of full-time undergraduate students are earning while they learn, says the ACE. The prognosis isn’t encouraging. “The tuition spiral is not likely to end, nor is student aid likely to catch up anytime soon,” write ollege cost experts Lawrence Gladieux and Arthur Hauptman in a new report, “The College Aid Quandary. ” To a nation that likes to think of itself as a meritocracy, not merely a bastion of privilege, that’s a disturbing message (Kantrowitz). Well, that’s a lot of important statistical information.

Enough I think that most people would like to throw this paper out and forget the whole idea of returning to school. But not so fast, there is a light at the end of this tunnel! Where Should I Begin My Search? The financial aid office at the school you plan to attend is the est place to begin your search for free information. The financial aid administrator can tell you about student aid available from the federal government, your state government, the school itself, and other sources.

You can also find free information about student aid in the reference section of your local library (usually listed under “student aid” or “financial aid”). These materials usually include information about federal, state, institutional, and private aid. The major source of student financial aid is the U. S. Department of Education. Nearly 70 percent of the student aid that is awarded each year omes from the U. S. Department of Education programs (approximately $23. 4 billion in 1992-93).

Student aid is also available from other federal agencies, such as the U. S. Public Health Service and the U. S. Department of Veterans Affairs. The free student financial aid materials available in the financial aid office at your school include The Student Guide, a free booklet about financial aid from the U. S. Department of Education, and the Free Application for Federal Student Aid (FAFSA). (Education) Financial Aid for Older Students Many scholarship and fellowship programs do not have age restrictions. If there are restrictions, they are expressed in terms of the student’s year in school (e. g. , high school senior) and not as an age limit.

Thus there are many awards for which older students are eligible, simply because the awards do not disqualify students based on age. Older students should conduct a search for aid just like younger students. There are no,”age restrictions on eligibility for federal student financial aid. Although many schools restrict eligibility for the school’s own financial aid programs to the first Bachelor’s degree, some schools will waive the restrictions when the tudent is an adult returning to school to earn a second degree in preparation for a career change” (Kantrowitz).

The Financial Aid Office Following the advice of the sources I have used for compiling this research paper I contacted the Financial Aid Office at RIT and set up an interview. While waiting for the date of my appointment I compiled a list of questions I would ask the Financial Aid Officer(FAO). When the day of the interview was at hand I was prepared. The FAO’s at RIT are assigned to students alphabetically. My FAO is Rachel Schuman and she was genuinely surprised that I ad a prepared list of questions. Here is a synopsis of that interview.

I asked her what the total cost of attending RIT would be for the coming school year? What expenses are incurred? What are the chances of being turned down? She was fairly straightforward about answering most of the questions that I posed. However on some sticky issues she was reserved. At one point she had to check with her boss for an answer. I wondered if she was merely asking her boss if it was against policy to answer certain questions. There were a number times that she simply pointed across the hall to admissions. Indicating that they could answer my questions better.

The basic answers were that Yes RIT gives Merit Scholarships, and that probably some type of loans and/or work study program would be required. Mrs. Schuman then told me that if you are eligible for aid you will receive it. I was not particularly encouraged by her explanations and as I found out later I as right. The first thing you have to do is get accepted by the College Admissions Department. This in itself is another bureaucratic nightmare. I talked to Al Biles the Assistant Dean of Computer Information Technology and aid, “Just go over to admissions and sign up.

Well when I got to admissions I paid my fee and waited for three weeks for a letter that never came. Instead I got a postcard telling me I need to get my GED. I went back to see Mrs. Schuman. Rachel then explained to me that there is a process for obtaining financial aid. You must first fill out all necessary forms and applications. Then according to the information you supply you will be assigned a Student Aid Report(SAR). The SAR will show your Expected Family Contribution(EFC).

Then your EFC is subtracted from the schools Cost of Attendance which gives your FAO the students Financial need. Based on my interview with Rachel Schuman it became apparent that I needed to arrange an interview with admissions. In order to clear up the two unanswered questions. But, before I left, Mrs. Schuman gave me three applications to fill out. The FAFSA, the New York State Tuition Assistance(TAP) application, and the RIT Application For 1997-98 Financial Aid For Continuing Undergraduate Students. At this point it was becoming very clear to me that there is money available, but the process is slow and filled with bureaucratic red tape.

I guess if you want to play though, you might as well play with the big kids. Admissions Shortly after my talk with Rachel Schuman I telephoned Renee Minnich. Renee Minnich is the Assistant Director of the Office of Admissions for RIT. I asked her,”What portion of the most recently admitted class is paying full tuition? ” Her reply, “Practically nil. Most of our students receive aid. Those that do are working full time and attend class at night. But they are usually subsidized by their employers. ” “Do you package preferentially? ” “Yes we have merit based scholarships for outstanding students.

But we attempt to meet the needs of each student individually. ” Conclusion Well there we have it. The system at RIT is set up as a meritocracy for the most part. Those students which have proven themselves in High School or are transfer students have a far better chance of receiving grants and scholarships. The rest of the students will receive some sort of loan relief. Still others will receive aid based on their financial situation. The system is complicated and you the student are at its mercy. Remember also, you must get admitted first before you need apply for financial aid.

Deficit Spending: The Deficit Good or Bad

“Spending financed not by current tax receipts, but by borrowing or drawing upon past tax reserves. ” , Is it a good idea? Why does the U. S. run a deficit? Since 1980 the deficit has grown enormously. Some say its a bad thing, and predict impending doom, others say it is a safe and stable necessity to maintain a healthy economy. When the U. S. government came into existence and for about a 150 years thereafter the government managed to keep a balanced budget.

The only times a budget deficit existed during these first 150 years were in times of war or ther catastrophic events. The Government, for instance, generated deficits during the War of 1812, the recession of 1837, the Civil War, the depression of the 1890s, and World War I. However, as soon as the war ended the deficit would be eliminated and the economy which was much larger than the amounted debt would quickly absorb it. The last time the budget ran a surplus was in 1969 during Nixon’s presidency. Budget deficits have grown larger and more frequent in the last half-century.

In the 1980s they soared to record levels. The Government cut income tax rates, greatly increased defense spending, and didn’t cut domestic spending enough to make up the difference. Also, the deep recession of the early 1980s reduced revenues, raising the deficit and forcing the Government to spend much more on paying interest for the national debt at a time when interest rates were high. As a result, the national debt grew in size after 1980. It grew from $709 billion to $3. 6 trillion in 1990, only one decade later.

Federal spending has grown over the years, especially starting in the 1930s in actual dollars and in proportion to the economy (Gross Domestic Product, or GDP). Beginning with the “New Deal” in the 1930s, the Federal Government came to play a much larger role in American life. President Franklin D. Roosevelt sought to use the full powers of his office to end the Great Depression. He and Congress greatly expanded Federal programs. Federal spending, which totaled less than $4 billion in 1931, went up to nearly $7 billion in 1934 and to over $8 billion in 1936.

Then, U. S. entry into World War II sent annual Federal spending oaring to over $91 billion by 1944. Thus began the ever increasing debt of the United States. What if the debt is not increasing as fast as we think it is? The dollar amount of the debt may increase but often times so does the amount of money or GDP to pay for the debt. This brings up the idea that the deficit could be run without cost. How could a deficit increase productivity without any cost? The idea of having a balanced budget is challenged by the ideas of Keynesian Economics.

Keynesian economics is an economic model that predicts in times of low demand and high unemployment a deficit will not cost anything. Instead a deficit would allow more people to work, increasing productivity. A deficit does this because it is invested into the economy by government. For example if the government spends deficit money on new highways, trucking will benefit and more jobs will be produced. When an economic system is in recession all of its resources are not being used.

For example if the government did not build highways we could not ship goods and there would be less demand for them. The supply remains low even though we have the ability to produce more because we cannot ship them. This non-productivity comes at a cost to the whole economic ystem. If deficit spending eliminates non-productivity then its direct monetary cost will be offset if not surpassed by increased productivity. For example in the 1980’s when the huge deficits were adding up the actual additions to the public capital or increased productivity were often as big, or bigger than the deficit.

This means as long as the government spends the money it gains from a deficit on assets that increase its wealth and productivity, the debt actually benefits the economy. But, what if the government spends money on programs that do not increase its assets or productivity. For instance consider small businesses. If the company invests money to higher a new salesman then he will probably increase sales and the company will regain what it spent hiring him. If the company spends money on a paper clips when they have staplers they will just lose the money spent on the paper clips. This frivolous spending is what makes a deficit dangerous.

Then the governments net worth decreases putting it into serious debt. Debt should not be a problem because we can just borrow more, right? This statement would be correct if our ability to borrow was unlimited, but it is not. At first the government borrowed internally from private sectors. The government did this by selling bonds to the private sectors essentially reallocating its own countries funds to spend on its country. This works fine in a recession, but when the country is at or near its full capability for production it cannot increase supply through investment of deficit dollars.

Deficit dollars then translate into demand for goods that aren’t being produced. Referring back to the small business example, if a company is selling all the products it can produce they can still higher another salesman. But since there re no more goods to be sold the salesman only increases the number of consumers demanding the product. Without actually increasing sales. The problems of deficit spending out of a recession even out through two negative possibilities, inflation and crowding out.

Inflation means there is more demand or money than there are goods this causes an increase in prices and drives down the worth of the dollar. This depreciation of the dollar counters the cost of the deficit but destroys the purchasing power of the dollar. A five dollar debt is still a five dollar debt even if the five dollars are only worth hat used to be a five cent piece of bubblegum. Despite its dangers inflation is used to some extent to curb the debt. Crowding out is when the government is looking for the same capital that the business sector wants to invest.

This causes fierce competition for funds to invest. The fierce competition causes an increase in interest rates and often business will decide against further investment and growth. The government may have the money to build new highways but the truckers cannot afford trucks to use on them. The governments needs will crowd out business needs. This turns potential assets into waste. However, there is a third option which would allow the government to run a deficit and avoid the negative aspects of inflation and crowding out. Borrowing from foreign sources is a tangible and recently very common practice.

Attracted by high interest rates and stability, foreigners now buy huge amounts of U. S. national debt. Of course this cannot be the perfect solution otherwise no one would be concerned about the debt. The problem with borrowing from external sources is the lack of control the government has over foreign currency and debts. Internal debts can be paid with increased taxes, inflation, and other onetary controls the government has but external debts can extremely damaging to a country if it cannot buy enough of the foreign currency to pay the interest.

Running a deficit is apparently good for an economy that is operating inside its production possibilities curve but it can be damaging to an economy operating on the curve. A deficit managed properly has the effect of increasing demands. An economy inside its curve can increase supplies in reaction. An economy on the curve can increase demand but its supplies cannot increase causing prices to rise, or inflation. If there is no deficit and the curve hifts to the right then supplies will not increase and the country will no longer be operating on the curve.

A deficit must be maintained to insure that the economy grows with its resources. Is the U. S. ‘s current debt bad or good? The trick is finding out how large the deficit should be in order to allow for growth without waste. The U. S. ‘s deficit is bad at this point because the U. S. is close to its maximum production capabilities, and deficit money is being wasted. For example two of the largest portions of the budget: defense and social security. Defense spending produces little or nothing except in times of war.

Judging by the current status of the United States as the only existing Nuclear Super Power war is not a tangible event in the near or distant future. The way social security is managed creates a huge waste. As managed, social security is money spent to immobilize a large and fairly capable part of the work force. It encourages elderly people not to work by spending deficit money on them. Reducing productivity and increasing the debt at the same time. In its current state the U. S. should attempt to reduce its deficit but eliminating it is not necessary and could do more damage than good.

Budget Deficit & National Debt

The purpose of this paper is to discuss the short- and long-term effects of current budget deficits and the nation debt. In order to do this; I first had to find out exactly what they were. I will also discuss whether I think the government should operate with a balanced budget.

Budget deficit is the amount by which total government spending is more than government income during a specified period; the amount of money which the government has to raise by borrowing or currency emission in order to make up for the shortfall in tax revenues.

National debt denotes the total sum of the outstanding debt obligations of a country’s central government. I discovered that many people use the term somewhat more broadly to refer to the total indebtedness of all levels of government, including regional and local governments and sometimes also the indebtedness of government owned business entities such as local transit and communications systems or nationalized industries as well.

The national debt represents the accumulated total of all the government budget deficits of past years, less the accumulated total of all the government budget surpluses of past years. In the United States, the national debt consists almost entirely of interest-bearing “IOU” instruments that are usually re-sellable on organized financial markets such as, for example, U.S. bonds, U.S. treasury notes, and U.S. treasury bills. These IOUs are originally purchased from the Treasury by private individuals, private corporations, insurance companies, pension funds and banks (both inside the United States and outside its borders), and the Treasury then uses the money it raised to bridge its spending gap when its budget is in deficit.

The Treasury also sells IOUs to other Federal agencies that operate so-called trust funds — primarily the Social Security Administration and other Federal retirement programs. The complication here is that since this is money that the government “owes to itself,” it is not counted as part of the national debt in any realistic system of accounting. I find this to be really strange. Money to pay the annual interest owed to the owners of the government’s debt instruments has to be provided through appropriations in every year’s Federal budget. These interest payments on the national debt constitute as one of the largest spending categories in the budget.

Gross Domestic Product (GDP) is an estimate of the total money value of the entire final goods and services produced in a given one-year period using the factors of production located within a particular country’s borders.

Running budget deficits has been a primary method for stimulating economies that have high unemployment rates. Many articles that I read indicate that the budget should return to balance or surplus during boom times. “The Reagan administration discredited this notion, cutting taxes to such a degree that the United States would face perpetually high deficits, regardless of how hot the economy was,” according to economist John Maynard Keynes.

The answer does not appear to be a balanced-budget amendment, unless you want to prevent the federal government from fighting recessions. This would just make things worse, because then the federal government would be forced to make recessions worse. When the economy slows down, income and Social Security tax revenues drop, due to falling wages and profits. Meanwhile, costs for some programs, such as unemployment compensation, rise.

These changes automatically put the federal budget into deficit, even if a balanced budget had been planned at the beginning of the fiscal year. If a constitutional amendment requires the government to balance spending and revenues at the end of the year (not just in the original plan), then the White House would be forced to cut spending or raise tax rates. This would then slow the economy down, just at the time when it is most in need of stimulus.

The Balanced Budget Constitutional Amendment, Center on Budget and Policy Priorities, January 9, 1995 states that in 1962 the federal budget was $100 billion and it doubled by 1971. It doubled again by 1977 and again by 1983. It then doubled again in 1997. It also states that this year the federal government will spend $240 billion just to pay the interest on the federal debt.

Another interesting statistic found is that a child born this year will have to pay $187,000 in taxes to pay his share of the debt. Because of the federal deficit’s effect on families, they’ll only make an average of $35,000 a year instead of the $50,500 they’d make without it.

According to the “U.S. NATIONAL DEBT CLOCK” the outstanding public debt as of 17 Aug 1999 at 09:12:14 PM PDT was $5,635,435,597,521.14. With the estimated population of the United States at 273,277,316 each citizen’s share of this debt is $20,621.67.

The National Debt has continued to increase an average of $202 million per day since August 31, 1998. It is currently $3.6 Trillion. I personally do not think that we should even entertain the notion of operating with a balanced budget. Why, you may say – because my limited knowledge of this subject indicates to me that the government has always overspent and in incapable of pulling in the purse strings.

Political Campaign Funding

“No matter what your social issue, if you want to solve it get the money out of politics. Only then will lawmakers vote for their people rather than their pocketbooks. ” Jack E. Lohman. Money corrupts politics, and when contributions are being made to candidates it is not in the best interest of the American people. Campaign Finance is out of control in todays political races. Candidates are taking money from wherever and whoever they can get it. Soft money is flowing through elections without care or caution. People who make these contributions do not share the views of the average citizen, so oliticians end up representing the wrong people.

Money decides races, sometimes leaving the better man but lighter spender out of a position. Candidates make decisions based on what will help them financially that what is better for the people. Contributions by industry are made not in the interest of the people, sometimes hurting them in ways they dont even know. No matter what the opposition may say campaign finance reform is needed urgently to keep our democracy as our founders intended it. People and corporations that make the largest donations to campaigns do not share views with the general population.

Politicians will listen to those who give them money so that they can depend on that money being there again when it is time for reelection. Yet individual donors making a $200 dollar or more contribution make up only . 33% of the population. This extremely small percentage of mostly wealthy individuals gain the power to influence politicians to their liking. The idea that these people should have power to affect government more than those with less money goes against the concept of equality for all, which is what made this country great.

People who make large donations do not share the same views on most issues as he general population. Robert L. Borosage and Ruy Teixeira report that while 53 percent of voters want stricter regulations on businesses and corporations, to give workers a fair salary and working conditions, 58 percent of campaign donors want to see less control over the businesses and corporations of America. Donors also want less government spending with lower taxes, while the majority of citizens want a larger, more powerful government.

A very tiny part of our population is giving money to campaigns telling candidates what they have to do to continue getting campaign contributions, yet these people do not represent he ideology and sentiment of the people as a whole. There must be a change in the way that campaigns are financed if democracy is to survive. If we do not reform campaign finance we will have politicians working only for those who can afford to contribute. Money is the major factor in any political race. It can sway a decision very strongly depending on how well it is used.

In the House, the candidate who spends the most money on his or her campaign wins 92% of the time. Things are no different in the Senate, here 88% of the time the bigger spender wins. Incumbents are usually the tip money spender, because they raise more money. Paul Starr, writer for The American Prospect , estimates that it would take $1,000,000 for a challenger to defeat the incumbent. The only way a challenger could get this kind of money would be to appeal to big business and the wealthy, who have radically different ideas about government than the general public.

A challenger, to even have a chance, would have to turn to business and wealth to win. With this great difficulty to de-seat an incumbent, turnover in congress drops, and members become stagnant, winning on name alone. All the while, they are giving breaks to the corporations and wealthy people who got them there. With campaigns finance reform, we could get challengers and incumbents on a level playing field so that the candidate with the better ideas who will honestly help the majority will end up the victor.

It would not matter much where candidates got the money from for their campaigns except that when elected, politicians act on in accordance to the wishes of those who have made donations. 71% of citizens say that a politicians choices and votes are made on the basis of money. 61% of donors agree with this. Its been explained that a small percentage of people make donations, and these people do not represent the population as a whole. If politicians make decisions based on this small group of people they are not representing the entire population ,or doing what is best for the majority, as they were hired to do.

Politicians realize where they get funding and work to please those with the money. Robert Reich estimates that half of all Americans with a million dollar a year income or greater have had their picture taken with the president. All this attention is going to a group hat consists of less than 90,000. This cannot be healthy for a government that is supposed to work for all Americans. When congress persons make decisions based on whether it will fill their campaign fund, it is not representative of the people that they should be representing.

The decisions that they make may be harmful to the people, but that does not matter to some politicians. All that matter to them is dollars. The people dont know this though because those dollars are spent trying to convince everyone that their representative did a good job and worked for their best interest. Money does matter to politicians and they remember and reward those who get them into office. Donations made by corporations often hurt individuals either financially or even medically. Corporations make up a large portion of the groups that give generous donations.

These corporations do not care what is good for the people, all they care about is their own bottom line. If this means shipping unsafe or unhealthy products, that is what will be done. Food companies have donated $41 million dollars on the promise by candidates, that once in office, will not make stricter regulations on e-coli protection. E-coli is a deadly bacteria that infects numerous people every year. But as a result of donations by food companies, government will not regulate these companies to protect Americans.

Food companies are not alone, the cotton industry is also at fault. Safety standards that some companies include on night wear voluntarily because of the great risk of burns, are not national law. The cotton industry gives generous contributions to Congress in hopes that any legislation concerning safety standards will be shut down. These are safety standards that have already saved dozens of lives and could save many more. Campaign money from industries stops laws that would help out every American. New drugs are released into the market for public use everyday.

The company that originated the drug holds a patent on that drug for an amount of time, after this time any company can make this drug and offer it at a competitive price. Competitive prices would be of great help to those who are on a fixed income, such as the elderly population, and cannot afford the high price of medications. Contributions of ! 8. 4 million going to campaigns and 8. 4 million in soft money from medicine developing companies have influenced oliticians to lengthen the amount of time that patents on drugs last, costing Americans millions.

These are just three examples of how industries hurt the people of America by donating to campaigns. There are many more hurting average citizens everyday, without them even knowing it. In the end taxpayer pay for these contributions that hurt them so much anyway. When a large business makes a donation, they must make up for the lost money. They do this by raising the prices that they charge consumers. Congress gives the contributions back to companies through corporate welfare. 67 billion dollars a year is given to companies that donated to campaigns. This money has to come from somewhere.

It comes from the taxes every year of John Q. Public. So we are not only paying higher prices as a result of campaign contributions, but we are paying the corporations again through corporate welfare. Consumer safety is commonly ignored because of special interest industries. Higher prices are put upon us a the cash register every time we buy something from a company that funds campaigns. Taxes are high because of corporate welfare. Reform is needed to save Americans from this kind of treatment from the big businesses. Opponents of Campaign finance reform have many reasons that they feel reform is bad.

But most of these arguments boil down to; contributions are an expression of freedom of speech, and reform would not help as illegal contributions take place now and would only be increased with more laws. The voices of those who fund advertisements that do not go on campaign reports are those of a small minority. These voices are being heard above all the voices of the greater majority of people who cannot afford to have their voices heard. Letting one persons opinion be louder than another goes against the ideas of equality for all, infringing upon the rights of others.

If reform is to take place we must enforce the laws that we set in place. Laws that are not enforced are worthless. We must be ready to punish a candidate and make him or her face the consequences, whether it be elimination from the race or removal from office. Reform is needed to fix our crooked and corrupt congress, and we must be willing to punish those who break the law. One option that we should consider is that of Jack E. Lohman, a usiness man from Milwaukee, WI. Under his plan special interest and corporate donations would be eliminated. Instead, taxpayers would fund political campaigns.

Special interests and corporations spend 750 million on campaigns. As it was explained, this hurts taxpayers when purchasing goods and when paying taxes for corporate welfare. By eliminating these donors politicians would not be affected by outside interests and would be free to do what is best for the people. The 750 million dollars for campaigns would come from the taxpayers and only cost $5 dollars a year. After cuts from corporate welfare and wasteful government spending this would save taxpayers 495 to 995 dollars a year, not to mention price drops as a result of reduced corporate spending on political campaigns.

This would put more money in the hands of the taxpayer to buy more products helping the economy. Most important, politicians would not be swayed by monetary interest offered to them for help in other areas. Donors not representing the public, money, not people and issues deciding races, politicians voting for campaign funds instead of the public, corporations isking the safety of people, these are all problems that could be fixed by reforming campaign finance.

Campaign finance is an urgent problem that must be remedied soon or we will be facing a situation in government where the power lies in the hand of those who have money to donate to campaigns. If something is not done we will be heading straight into a corrupt and contemptible government whose only care is that of being reelected. Action must be taken now before it is too late and scandalous congressmen will only support scandalous policy. If our government is to be saved, we must have campaign finance reform.

Economic Growth

Economic Growth is defined as the way that the real income of an economy increases over time. This generally signifies that the economy is wealthier and producing more, individuals are better off, and that living standards are higher.

A more technical definition would go into the way that Economic Growth is measured – usually in terms of the Gross Domestic Product – the sum total of the value of a country’s output over the course of a year. However GDP figures can be misleading – for example, a growing economy may have rising output levels but also may have a growing birth rate which negates any positive effect on the standards of living. Alternatively, figures that show clear growth in terms of wealth may be ignoring the fact that inflation rates are rising also, thereby negating the power of said growth.

Normally, Real Income as used when looking at Economic Growth takes the GDP figures and then takes out the effect of inflation rates (by forming an index) thereby creating a reasonable set of statistics from which to draw conclusions.

Economic Growth is clearly seen as a desirable objective for all economies. It is obviously important for the UK to keep growing at a similar rate as other rich economies globally, in order to remain competitive in terms of trade. The main advantages of economic growth include:

a) Higher levels of Employment – or lower unemployment, however you look at it! An economy where demand is rising and businesses are growing is likely to have in it ample capacity to employ more and more people in its growing industry.

b) If growth leads to higher employment and higher wages, then it follows that Gov’t tax revenues increase also. This might allow the Gov’t to replenish some of the Budget Deficit.

c) Living Standards – tend to improve in a growing economy. Living Standards are generally measured in real GDP per capita, so if Real GDP really is increasing positively against the birth rate, it follows that at least on paper, living standards would improve! However, derived wealth such as that gotten through (fast) economic growth, is not always evenly distributed, so an increase in living standards might be optimistic generalising in a way.
Other benefits include increased opportunity for investment, increased business success and confidence (especially overseas), etc.

Reasons for growth are complex and numerous. Basically, Growth comes about as a result of the increased efficiency in the use of resources or Factors of Production. There are a few factors that can directly affect the levels of growth.

Firstly, Investment. Capital Investment into a firm or an economy provides the opportunity for development, expansion, research, and possible higher levels of Productivity. This ties in with the second, Technological Advances. These lead to the availability of better equipment, which improve the manufacturing of goods or services, or help to create better ways of managing jobs and people. Investment can also be stretched to link with the third factor, Education and training. Education and training work to make people more productive and effectively, act as investments into what is known as Human Capital’. These three interlinked factors have significant effects on growth rates.

Every government uses various policies based around the afore-mentioned factors to try to increase [or at the very least stabilise] growth rates.

1) Reduction in Interest rates. The Monetary Policy Committees job of manipulating the Interest Rates has a huge and outward rippling effect on the whole economy. Firstly a reduction in Interest Rates would discourage saving as the returns on a sum of money in the bank would decrease. Therefore spending by the individual would increase. This is supplemented by the fact that it would be cheaper to borrow money as loans are cheaper to pay off if the interest rates are lower.

This includes mortgages on houses, so for homeowners, the good news would be more disposable income. Of course, Loans would become cheaper to business firms also, so perhaps they would be more encouraged to make those large capital investments, in research and development – buying more up to date equipment etc. that higher interest/payback rates had made seem an unsavoury prospect.

A decrease in the UK Interest Rates could also discourage speculative investment into the currency. This means that the value of the Pound Sterling would fall, or not grow as fast as before. For our economy, that would be a fairly positive thing, as it would make our goods and services more affordable abroad (and indeed nationally, maybe even discouraging the buying of so many imported goods/services).

Economically, so far this all sounds very positive. Increased Business Investment can only mean increased productivity and efficiency, so UK goods and services would become better and cheaper – in other words, more competitive. If money was used to develop the workforce through training and education, it would undoubtedly go towards strengthening the productivity of the nation in a long-term way. More spending by the individual consumer would also translate as higher revenue for firms, allowing them to make similar productive investment and creating easier opportunity to expand and develop. If the currency factor was big enough such that it had an impact on our export levels and general consumption of UK goods & services, this would surely lead to higher GDP figures.

However the negative and quite probable effect of manipulating the Interest Rates in this manner is to do with Inflation. Inflation is the sustained increase in the average price of goods/services in an economy over time. Increased Spending can be traced back to Increased Demand. If Aggregate Demand (appearing as spending) increases at such a pace that production cannot keep up, businesses will be forced to raise their prices in order to control it. This sort of Inflation is known as Demand-Pull Inflation.
Inflation has numerous consequences for the economy. Briefly –

– If wages weren’t accordingly increased, Real Earnings would effectively go down, i.e, the purchasing power of a wage is decreased so it is not of the same value anymore. Although wages are likely to be negotiated with significant rises in inflation rates, this problem does manifest especially in positions that aren’t particularly highly paid in the first place, increasing the poverty Gap and, in the worst cases, having a detrimental effect on the standard of living for individuals.

– Inflation increases Uncertainty. Tampering with the interest rates causes the inflation rate to be more volatile and susceptible to change. This makes it very difficult for firms and even individuals, to plan their spending and for firms only, expected revenue.

– Due to workers and Trade Union Leaders putting pressure on firms to increase wages in accordance with inflation, Industrial Relations can deteriorate. If this leads to strike action in times of high demand, the consequences can be very bad indeed, causing prices to spiral upwards.

All in all, intervention in the interest rates could quite possibly increase Growth figures, but it could have a negative effect on the economy through its knock-on effect on Inflation Rates. Economists such as Milton Friedman and Keynes looked into gov’t intervention in the circular flow of money this way, and advised prudent management’ of the monetary system.

2) The New Deal – The New Deal plan was originally formulated to get more young people (18-25 yr olds) off the “dole” and into work, contributing to the economy. From a certain angle, every person who is out of work and claiming Unemployment Benefits/Job Seekers Allowance acts as a drain on the economy, hampering its growth and leeching on resources/money that could otherwise be used to expand and improve the country generally. New Deal is something of a cross between an employment agency (with guaranteed placements!) and a training service. It quotes itself as being “created to help the unemployed get into work, by closing the gap between the skills employers want and the skills people can offer”

Once you sign up for New Deal, you are more or less immediately put into a position where you (or will be in a better position to) give back something to the economy. You more or less can’t get off that track until you are in real long-term employment. The options are:

1) Full time Education and Training – This aims for people to gain skills and qualifications to help them prove themselves to be fit for work and to make them more employable.

2) Voluntary Sector – this puts people into a position where they are serving the community/economy in some way, which is then rewarded with a wage’ from the government. This allows people to have some time to think about what kind of work they’d like to go into eventually without being a total drain on the economy. Also it allows people to show future employers favourable qualities such as motivation and commitment.

3) Environment Task Force – this is similar to the previous option except that the work is more environmental based. Again it allows productive time for reflection, and helps people develop/prove favourable personal qualities.

4) Employment Option – It could be that New Deal find a work placement for you. If this happens, accepting the job is imperative.

Recently New Deal has expanded to encompass in its target: Over-25s, Disabled Persons, the Self-Unemployed (!) and Lone Parents
The New Deal seems like a good long-term strategy to increase the output of the country by getting more people putting into it. Some of the leakage on the economy is eradicated, and so more of what is created gets to stay in the country. (the Circular Flow is maintained and allowed to grow, slowly but sustained)

However the Main Drawback would be the cost that it takes to set up the New Deal in the first place. It is costing the UK Government – a substantial investment for a system that only shows its benefits in the long-term! The risk would be the drain on the economy whilst this money is “work in progress”.

3) Emphasis on Key Skills in Education – The Education and Employment Secretary David Blunkett announced reforms to raise the skill levels of the workforce. This theme of raising skill levels begins in Education, and is a theme that has provoked a lot of study and development in recent months, and recognised particularly by the DfEE. Originally developed by the NCVQ (National Council for Vocational Qualifications), they include:
Communication, Numeracy skills, Information Technology and Computer literacy, team-work, problem solving, being able to improve on their own learning and performance, and handling/presenting data

These skills are common to most jobs in varying proportions; acquiring them would make one more aware of their own strengths & weaknesses, more motivated, productive and employable.

The development of these skills is being made integral to GNVQ, NVQ and A-level courses. Their importance is being pushed in other higher/further education areas also, as they are seen to be universally positive human qualities. The official definition being “essential skills which people need to order to function effectively as members of a flexible, adaptable and competitive workforce. They are also invaluable in helping people function within society and for lifelong learning.”

Again, this seems like a strategy with solid foundations BUT once implemented would take a long time to show its effects, as the people whom it would effect would still be moving through education. Also, again, it could take a lot of money if the Gov’t is to ensure that the principles are carried out to any substantial effect at all. A lot of money Is being used on developing programs for common implementation in education establishments and on studies at numerous universities into the effects of honing these skills.

There are some possible drawbacks to Economic Growth, including the inflationary risk discussed earlier. Other disadvantages include increased levels of inequality, as wealth does not tend to be equally distributed, and the possibility of externalities, such as pollution & congestion from a more active economy, having a detrimental effect on society. However these are risks outweighed by the benefits of maintaining a prosperous and growing economy, and creating a wealthier, healthier population.

From the above mentioned strategies I would probably advocate the second option – that is, the New Deal.

I have not opted for monetary intervention as I think that manipulating the economy in this way can be very volatile and dangerous. In recent times, the trend for maintaining the economy, which has been steadily growing, has included gradual increases to the interest rates, or leaving it at a static rate. Although it would definitely have big and fast effects, lowering the Interest Rate goes completely against the grain of what seems to be working well enough and I think it is a bad idea to upset this contented situation. I think the risk of inflation would be quite imminent and devastating if it happened, hitting the poor hardest as always. The Gov’t would then be forced to pay out a lot of money through Welfare, which defies the whole point of maintaining/boosting the circular flow anyway.

I have not chosen the option of improving key Skills. Though I definitely agree with it in principle, and I firmly advocate the use of long-term development strategy, I would not choose it as a significant way to boost the growth of the economy as any effect it would have on growth would take a long time to manifest. However I don’t deny that improving the skills of the workforce is a good way to increase the productivity of the economy. But if asked to choose a strategy with growth in mind, this would not be fast or substantial enough.

To get the best of both worlds then? New Deal is also a long-term strategy and I think it works in a very similar way to The key Skills option, though not in such a focused way. It still works on developing the workforce, which should slowly and surely lead to growth in the GDP for the economy and has the added bonus of de-leeching the economy and getting unemployment down, getting more people putting something back in! I think it’s a good idea in particular to develop the younger workforce so they can carry the principles through, so the economy can reap the fullest value of its investment. The amount of money involved could have been enough to turn me against this if it became a strain on the economy. However the money is not to be and has not been raised by sudden tax increases, it has been from a chest of carefully saved Gov’t spending money. Thus I am encouraged and convinced that this is the most sensible option to help to give a healthy sustained level of growth.

The Structure of a Financial Crisis

The year 2001 had been unlucky for Turkey. Apart from the crisis in 1994 and November 2000, the country had to face another financial crisis, causing problems in the management of its economy. Why does a country delve deep into financial crisis? What are the possible immediate triggers for both the current and potential new crises? What precautions should be taken for the key issues like the fragility of the financial and banking system, belated reforms and privatisation, rampant corruption, exchange rate policy? And how can the governments satisfy the markets and people to undertake these reforms?

The current crisis has not hit the country overnight. This article figures out the weakness of the system, years of neglect and mismanagement, possible solutions for other developing countries. One has to bear in my mind that even evaluating the aftermath of the 1994 crisis, Turkey was a rising star, with aspirations towards full membership to the European Union. Among the potential applicants of EU membership, – mostly the Transition Economies of Eastern Europe- Turkey was the mere applicant with a functioning Customs Union with the EU back in 1995.

With a relatively large and dynamic market, having high hopes for rapid economic and social progress, Turkey seemed a valuable candidate for the European Integration. Now after the 2000 November and 2001 February crises, the shrinking of the economy suggests that Turkey can only catch up with the figures of year 2000, as far as the year 2004, let alone the EU membership and further growth. To indicate why such a failure has been suffered, we have to go back to the roots of mismanagement. And that begins with the problems of Privatisation practices.

Privatisation has proved to be a successful method for improving institutions and maintaining corporate efficiency all around the world. But under certain conditions either privatised firms can get into serious difficulties or delaying the privatisation programs could trigger economic crises, together with the impact caused by years of mismanagement, not undertaking the progressive reforms and corruption – as experienced in some of the transition economies of Eastern Europe, Central Asia, Far East, and as is the case in this article, in Turkey

The past decade forced the public sector to its knees, all around the world. Though Turkey was not a transition economy, the winds of change has affected the public sector like in all other developed and developing economies. However, unlike the Transition Economies, Turkey embarked on a prospective plan to privatise a major part of the public sector in the mid 80’s and laws enacting and enabling the privatisation of the State Owned Enterprises (SOE) in late 1985, was an important breakthrough.

In the 1990’s privatisation went ahead but caused disappointment in many sectors. Most privatised firms could not improve their performance and some that succeeded, had been profitable already as SOEs. But that was not the only problem the country had to face. Turkey had already begun to face significant problems regarding the Privatisation Policy in the 1990’s. These mentioned problems not only aroused from the aggregate demand concerning the SOE, and the negative effect of investment but the ongoing debate carried by the opposing political parties in the Parliament.

The governments have overcome several difficulties and successfully resumed privatisation in the beginning of the second decade. Though the outcome was promising, the program proceeded more slowly than the original plan. In 1993 for example, a net revenue of US$ 543 millions was raised through several privatised firms including two electric companies, two communications equipment manufacturers, a supermarket chain and four cement factories.

In 1994 a total of approximately US$ 412 million was raised through the sale of an automobile manufacturer, remaining cement factories by international offering resulted in US$ 330 Million. In 1995, a total of US$ 573 million was raised. Sales during this year included entities in the sugar, cement and magnesium industries, as well as a state bank. In 1996, a total of approximately US$ 300 million resulting from disposal of entities in the cement, zinc, forestry and textile industries had been realised.

A major problem of the Turkish economy — shared with many of the transition and developing economies — is the high inflation rate. In a low inflation rate economy, the income redistribution effect of privatisation is substantial, thus can gain large public support. In many developed economies, including the most obvious example in Britain, unlike the developing economies, privatisation had clearly improved both the overall economic performance and corporate efficiency. In the developed countries, even the privatised large firms have marginal consequences in terms of the whole economy.

Government interference had been minimised thanks to the relatively transparency of the process. Most economies with high inflation rates also suffer from rampant corruption, so neither efficiency nor transparency can be maintained in these countries. Corrupt management practices prevent a radical reform of corporate management. And the slowdown of economic growth affects the public negatively. Following the Turk Telecom failure, in 1999, the negotiations for the privatisation of several large SOEs was still going on.

Yet the major reason for the economic crisis that occurred in 2001 – and is still continuing with several impacts – was proved to be the banking sector. The Turkish private banking sector went awry rapidly; and many banks – some of them privatised in the last decade- were gutted of their funds; illegal loans were thought to be granted; while the bank owners were accused of transferring money to their own companies – some of which were again privatised in the last decade- and capital was completely wasted due to the loans not being repaid.

A number of bank owners were taken into custody for questioning and even formally arrested and charged; and banks went into state receivership overnight. These momentous operations resulted in new regulations for the banking & financial sector. Nineteen private banks, which were thought to have been robbed and whose capital structures were found out to be fragile, were turned over to the Savings Deposits Insurance Fund (SDIF). A new Institution called as BBR (Board of Banking Regulations) was installed to inspect and audit the operations of SDIF.

The government’s aim was to strengthen the capital structures of these banks and sell the appropriate ones immediately. During the process various banks merged under the same roof and the government succeeded in selling some of these banks. The net gains from these selling operations helped to net approximately $20 billion for SDIF. But the need for deeper reforms in the financial sector has assumed much greater urgency since the dramatic crises of November 2000 and February 2001.

The economic crisis created by the somewhat poor state of governance in the financial sector, has brought to a boil the long simmering potential of the sector to undermine macroeconomic stability. Inasmuch as the gradual balance sheet strengthening of the large state banks, prior to their privatisation dominated concerns until recently, the need to analyse and solve the crisis in private banking seems to impose very large fiscal costs on the budget. The impact of the crisis on inflation control proved to be grave.

Turkey experienced another failure of an exchange rate-based stabilisation, originally a three year program announced approximately 14 months prior to the February 2001 crisis. The principal aim of the government was to end high inflation dominating the economy for two decades. The government was forced in February 2001 to abandon the currency peg at once, which had been based the anchor of the fiscal strategy, thus sparking an immediate devaluation of the national currency, the lira, by around 32% in the following week.

The program had started out with unprecedented political backing, managed to achieve some highly impressive initial results and the public opinion widely held provided a far better chance of prosperity than several previous internationally supported programs. Yet the outcome was the worst failure in the history of the country. Considering past events, it’s clearly figured out that the weakened banking system and tendency to over-reliance on inflows of hot money left the country defenceless and highly vulnerable to potential crises of confidence.

This has resulted in the currency peg’s failure to hold position when the inevitable tensions of such a rapid adjustment emerged. The unpredicted devaluation delayed the government’s plan and promise to achieve single-digit inflation. The simultaneous interest rate increase and the banks’ liquidity preference indicted large bank balance sheet losses and severe fiscal stress.

The tensions climaxed in a crisis first in late November 2000. This first crisis was also deeply rooted in the country’s lacking economic system, but the primary cause of the stress was a mixture of the banks’ portfolio losses and liquidity problems in a few banks, which addressed a loss of confidence in the entire banking system both in the markets and public eye, as well as the foreign investors.

The Central Bank then acted to inject massive liquidity into the system, violating its own quasi-currency board rules effective for several decades, it created fears that the program and currency peg were no longer sustainable, and the extra liquidity merely flowed out through the capital account and drained reserves. This first panic was arrested only with a $7. 5 billion IMF emergency funding package which is over and above the original and standard $4 billion stand-by loan.

Then the coalition government backed and reaffirmed the commitment to the previous inflation package expectations, promised to speed up privatisation efforts and financial sector reforms, eventually took over a major bank assumed to be the origin of the current liquidity problems, and announced a new and unpredicted guarantee for all liabilities of the banking sector, either private or state owned. The grave situation experienced seemed to stabilise by January 2001, while the government claimed nearly all of the $6 billion that had assumed to exit the domestic markets in the crisis flowed back and national reserves were again reconstituted.

Nonetheless, the investors were now demanding incredibly higher interest rates as compared with these before the crisis, while indicating an upward shift in the current country risk premium. What’s more, virtually the recent capital inflow was fixed on short-terms, mostly overnight basis, deprived of suggestions towards a possible residual devaluation fear. The investors’ confidence in the ongoing programme was not positively restored, despite several government pronouncements and IMF support.

In this defined critical financial environment, a public row between President and Prime Minister occurred on February 19 2001, seemingly centred on the President’s anti-corruption campaign, at once guided the way to the perception that the governing coalition and consequently the programme was threatened and found deciphered. Renewed crisis followed. Nevertheless, the Central Bank stuck well to its quasi-currency board rules, seemed reluctant to act as lender of last chance, and assumed that banks would be eager to expend their foreign exchange reserves for the purpose of obtaining national currency.

However this misadministration resulted in record overnight interest rates, peaking at approximately 5000% on February 21. The banking system, already intensely depressed by the first crisis, faced a terrible breakdown as the markets experienced the interbank payments system’s ceasing to function altogether. The following day the distressed coalition government concluded a floating for lira, and publicly announced the official end of the exchange rate-based stabilisation programme.

Free floating of the currency was presumably the only convenient solution. The market confidence that would have been required to sustain the crawling peg strategy was not present. Acknowledging this certainty as soon as possible has allowed the government to initiate such floating regime with most of the intact possible reserves, instead of depleting them in a futile attempt to defend the peg. The authorities were forced to initiate anew to plan the outlines of a programme in light of the new currency framework.

Consequential quasi-fiscal programs mandating the large state banks to provide subsidies and preferential credit highly influenced by short term domestic politics, led to significant accumulation of government obligations to the state banks which has shown to increase from 2. 2 percent of GNP in 1995 to 13 percent of GNP by 1999. The so – called problem of “duty losses” is being addressed through measures taken to solely securitize the existing stock of duty losses and to merely phase out substantial credit subsidies and fully budget for any duty losses in 2002.

With the cost of money increasing, the real sector could not produce properly due to the lacking bank loans and some other negative events in the economy. When all circles accepted that economic stability could not be provided in an environment in which there was no production, the real sector and the government held long meetings and tried to find solutions for the problems of the real sector and regulations to increase production. Nonetheless, the quasi-fiscal operation had a high cost repugnant impact on the state banks and thus on the budget.

The lack of liquidity experienced in these two huge state banks resulted in increasing costs and delayed remuneration for the huge amount of duty losses which were imposed as part of the governmental quasi-fiscal policy contributed to distortions in the financial market. These mentioned two state banks concluded to borrow liquidity in the overnight market and from the Central Bank, and this was a very risky step, merely increasing the costs especially in the aftermath of the financial crises of November 2000 and February 2001.

It has to be noted that between the crucial years 1995 and 1999, these two banks received only 10 percent of their total duty loss amount due from government. However the inconsistency continued after February and in May 2001, both banks were first estimated and then judged to be unable to pay their outstanding debts. The settlement of the outstanding government liabilities to the two banks and the relatively costs of injecting new capital in order to reach 8 percent capital adequacy imposed a consequential burden on the new budget.

But back in early December 2000, the government had introduced a new legislation to privatise the three main state banks Ziraat Bank, Halkbank and Emlakbank ( the Housing Credit Bank which was amalgamated later into Ziraat Bank)The Parliament eagerly approved the legislation, but concluded in enabling the restructuring of the banks prior to privatisation. A critical article of this legislation obliged the state banks not to undertake ‘duties’ not having the suitable compensation included in the new budget.

The privatisation of Ziraat and Halk banks would arouse new hopes to remove the vicious cycle of the quasi- fiscal policy, but these dreams have turned sour. The apparent lesson from this experience is that the non-transparency inherent in such a deep rooted quasi-fiscal policy would result in frustrating and costly consequences both for the financial sector and the budget.

By the summer of 2001 total budgetary outlays for re-capitalising all three state banks had reached to approximately 25 Billion US$. As the handicapped quasi-fiscal relationship between government and state banks carried significant risks, the government was also denounced to risks from the rest of the banking and financial sector mostly from the private banks as a result of an extensive environment mismanagement, and accountability.

Subsequent to the 1994-95 banking crisis, the government had initiated a very risky100 percent deposit insurance scheme for household deposits, and thus caused a moral hazard. Implicitly large contingent liabilities were then tied to the fluctuating health of the financial sector. The threatening result was the rapid growth of the banking system with assets of US$58 billion in late 1994 rising to US$156 billion in late 2000. Nonetheless, judicious regulations were insufficient and enforcement was significantly weak.

This resulted in various banking practices which caused an increase in the liability of the banking system to the interest rates and more important exchange rate behaviours. Incautious banking practices like, deficiency in diversification and disproportionate exposure to foreign currency risk, non-performing loans going unchecked, and the insider lending and criminal frauds committed added new risks. Then government attempted to rehabilitate the public banking sector.

The risk management of assets and liabilities by developing countries

Greater access to the international financial markets has bestowed many benefits on developing countries, but it has also exposed them to the vicissitudes of these markets. In addition to the macroeconomic challenges posed by large, potentially volatile flows, the sizable external foreign currency debt of many developing countries makes them vulnerable to swings in international exchange rates and interest rates and, often, they are tempted to speculative currency attacks. Indeed, prudent macroeconomic policies have at times been compromised by the fiscal consequences of losses associated with these exposures.

Most recent of such policies is the one embarked upon by Russia. Russia had defaulted on domestic debt, devalued the rubble and frozen payments on some previous Soviet-era commercial debt. The U. S and a few European banks, which lost some $10 billion to the debt default alone, vowed never to go near Russia again. Yet, it is striking to learn through Business Week magazine that due to a change in macro-economic policies, Russia has been able to have some their defaulted debts forgiven.

Now many of the same banks that vowed not to do business in Russia are hailing the administration of this countrys first step toward a return to international bond markets in the form of a massive issue of restructured commercial debt. These financial pundits are hoping for an unprecedented economic rebound. The main economic and financial initiative that has encouraged investors is that Russia has the best performing fixed income market in the world for this year as well as last year. J. P. Morgans Emerging Markets Benchmark Index reported this performance.

Other areas of policy changes involved the devaluation of the rubble at a time when oil prices have surged. Russia has also recently restructured $32 billion in soviet- era commercial debt. Banks wrote off $10. 6 billion and Russia issued two new trenches i. e. an $18. 2 billion30-year issue and a $2. 8 billion10-year issue for the balance. As other defaulted nations looked on, they find themselves in not so fortunate a position, and as the struggle for finding economic policies that will woo their creditors continues, they find themselves in unfortunate uncompromising positions.

According to Newsweek, exposure of developing countries to currency risk can be broadly gauged by the amount of external public debt they have incurred. In 1996, the outstanding stock of sovereign debt issued or guaranteed by developing countries amounted to $1. 5 trillion, or 25 percent of their total GNP and to 300 percent of their foreign currency reserves. Roughly one-half of their external debt was exposed to foreign interest rate risk: one-fifth of this was short term (maturities of less than one year), and two-fifths of the remaining long-term debt was at variable rates.

During the past two decades, a number of emerging markets specifically from the developing countries have been hurt by adverse movements in exchange rates and international interest rates. In the early 1980s, the debt-servicing burdens of some countries in Africa, Southeast Asia, and Latin America were severely affected by the dollar’s appreciation, a worldwide increase in interest rates, and a decline in commodity prices. Several Asian countries saw significant increases in their debt burdens in the early 1990s because of their large, unhedged exposures to Japanese yen.

A third of the increase in the dollar value of Indonesia’s external debt between 1993 and 1995, for example, was attributable to cross-currency movements, particularly the steep appreciation of the yen. At the time, 37 percent of Indonesia’s external debt was denominated in yen, while about 90 percent of its export revenues were denominated in dollars. (The depreciation of the yen in 1996 offset some of the losses incurred by these countries. )

A report by the Organization for Economic Cooperation and Development claimed that maturity profile of public debt contributes as much as the total volume of the debt to a country’s vulnerability to external shocks, such as that experienced by Mexico. Mexico’s public debt was relatively low by Organization for Economic Cooperation and Development (OECD) standards, -51 percent of GDP, compared with an average of 71 percent for the OECD countries. The Mexican crisis underscored the difficulty and cost of refinancing a substantial volume of foreign currency debt maturing in turbulent foreign exchange markets.

The Mexican economy’s vulnerability to a financial crisis was exacerbated by the fact that Mexico’s foreign exchange reserves totaled $6. 3 billion at the end of 1994 and that tesobonos (short-term securities indexed to the dollar) worth $29 billion were due to mature in 1995. The large foreign currency exposure of emerging markets can be explained by a number of factors, including low domestic saving rates; the lack of domestic borrowing instruments; and the high proportion of official financing (multilateral and bilateral), which tends to be denominated in donor countries’ currencies.

Governments also issue debt in foreign currencies to signal their commitment to a policy of stable exchange rates or prices; the credibility of their policies is enhanced by raising the cost of reneging on their commitments as seen in many third world countries. Alternatively, policymakers may signal a commitment to stable prices by issuing inflation-indexed bonds. These bonds tend to serve the interest of the country and sometimes the returns are not encouraging to the foreign investors or lendor.

At times the terms even tend to serve the interest of the administration and not the population affiliated membership countries. More recently, as emerging markets have regained access to international debt markets, the choice of currencies and maturity structures of their external borrowings have often been driven by a desire to reap the immediate fiscal benefits of borrowing in currencies with low coupon rates. The administration of these developing countries often underestimate the risks associated with unstable foreign currency borrowing for several reasons.

First, the capacity of governments to generate foreign currency revenues to repay their obligations is generally limited, (especially if the country lacks natural resources), as government assets will consist predominantly of the discounted value of future taxes denominated in local currency. Second, it is unlikely that the costs in terms of output, welfare, and reputation that a developing country may incur in the event of an adverse external shock is fully taken into account in emerging markets’ external borrowing strategies.

Although the likelihood of crises is small except in the case of natural disasters, the potential disruption to an economy is substantial as seen in many unstable third world regimes. A net foreign exchange exposure accelerates the economic impact of external shocks and limits the financial policy options available during a financial crisis. For example, a country with a large net foreign currency obligation would have difficulty pursuing an aggressive monetary policy during a financial crisis because it might cause a sharp decline in the domestic currency, which ultimately limits investment at home as well as abroad.

A depreciation of the currency could worsen the country’s indebtedness and risk profile and solidify the financial crisis. In the event of a real exchange rate shock, a government may be faced simultaneously with the escalation of its external debt-servicing costs and a decline in the foreign currency value of its revenues. In addition to the potential capital losses that a government may incur on its debt portfolio, its ability to access international markets to refinance its maturing debt is likely to be hindered.

Taking the above mentioned issues into consideration it will be advantageous for the lender as well as the borrower, which often is a sovereign nation to be knowledgeable on the risks involved, and commitment by parties in order to understand their obligations, since both could end up as losers. On the other hand the O. E. C. D also believes that risks associated with a large net currency exposure and the existence of deep and liquid domestic capital markets are the main reasons why the governments of most industrial countries have limited their issuance of foreign currency debt.

These Governments have established well-documented legal clauses in their contracts. Such clauses are supported by policies enacted by the lawmakers of the land. According to the IMFs Monetary and Exchange Affairs Department, large advanced economies such as, Germany, Japan, and the United States do not issue foreign currency debt, while France and the United Kingdom issue only a small fraction of their debt in ecus.

In Canada, foreign currency debt represents about 3 percent of total public debt (reflecting debt accumulated in the past and debt issues to finance foreign exchange reserves), and the budget deficit is funded entirely in domestic currency. In recent years, a number of small advanced economies, including Belgium, Denmark, and New Zealand, have stopped issuing foreign currency debt, except to replenish their foreign currency reserves. In Ireland, gross foreign currency borrowing is limited to the level of maturing foreign currency debt. Spain and Sweden issue foreign currency debt but hedge their currency risk through swaps or swap options.

In developing countries, however, governments often need to access international debt markets to offset a shortage of local savings, lengthen the maturity of their debt, diversify their interest rate risk exposure across various asset markets, accumulate foreign exchange reserves, or develop instruments that would allow domestic private entities to issue abroad. The foreign currency can be swapped into the domestic currency, or, when this is difficult, into a currency that is closely co-related to the domestic currency and for which liquid optional markets exist.

Issuing currency-hedged foreign debt would prevent a borrowing strategy targeted solely at reducing interest rates and softening internal budget constraints. As the international derivative markets have grown in sophistication, the possibilities of hedging the risks associated with borrowing in foreign currencies have greatly expanded. Borrowers can respond to opportunities to exploit market niches and expand their investor base without incurring exchange rate risk. Similarly, they can use the interest rate swap market to manage the maturity structure of their external debt.

The amount that can be hedged is limited, however, because counter-parties are usually subject to a ceiling on total exposure to any individual country. However the developing countries have limited possibilities of exploiting market niches, moreover to expand their investor base. These countries seem to be at financial risks all the time,regardless of the attractive opportunities. They just cannot seem to meet their financial obligations but they continue to take lengthy financial risks in the form of loans from the World Bank, the I. M. F and other expatriate organizations.

Since it would seem that they do not fully understand the risks involved, they are often faced with harsh and depressing financial repayment obligations. Many underdeveloped countries that have borrowed heavily in foreign currencies are now faced with important policy challenges, such as on how to manage their currencies, interest rates, and maturity risks associated with their debts. However in order to implement policies that will help fulfil their obligation to external creditors, it requires management by non-political and non bi-partisan sections of their community.

This is not an easy task for administrations whose goal is earn the highest return from their resources, and satisfy their domestic demands. In addition of self-centered objectives, management of the risks associated with external exposures requires significant technical expertise, sophisticated information technology, and strictly controlled internal management procedures, with disciplined enforcement of internal trading and exposure limits. These requirements are difficult to satisfy in the best of circumstances; they are particularly difficult in emerging market countries.

Some emerging markets have found it hard to attract qualified and experienced staff, build adequate information and control systems, and develop the administrative controls necessary to manage overall exposures since they start out without the necessary financial tools to support these initiatives. Also, the influence of a countrys external position on its creditworthiness is measured in terms of the scale of its existing obligations. According to the World Bank the scale of a countrys external payment obligation is measured by the ratio of its external debt to GDP.

As is the case with high inflation /high debt countries, credit rating agencies tend to rate them differently than low debt countries. The countrys capacity to service its external obligations is assumed to be reflected in the growth rate of its exports, its current account position, the ratio of its non-gold international reserves to imports and its real exchange. In many instances the developing countries have low ratings in all of these areas. Since they will not qualify in these areas it is incumbent upon them to manage the other areas of ratings.

Did the Bank War cause the Panic of 1837

Richard Hofstadter from The American Political Tradition and the Men Who Made It believes President Andrew Jacksons refusal to recharter the Bank of the United States was politically popular but economically harmful to the long-term growth of the United States. Peter Tenim, from The Jacksonian Economy, believes international factors, such as changes in the monetary policies of the Bank of England, the supply of silver from Mexico, and the price of southern cotton, were far more important than Jacksons banking policies in determining fluctuations in the 1830s economy.

The two intelligent men present their facts and arguments ell and make it hard for the reader to mold their opinion for either side. After reading both arguments and thoroughly reviewing the facts stated, I took the side of Peter Tenim by saying that the war against the Bank of the United States was not the cause of the Panic of 1837. I have to agree with Mr. Tenim simply because there were more factors present in his opinion involving the Panic of 1837. The opinion of Mr. Hofstadter revolved around one factor, which was the war against the Bank of the United States. In order to somewhat disprove Mr.

Hofstadters theory, I believe we have to analyze the relationship between President Andrew Jackson and Nicholas Biddle, who at the time was the President of the Bank. Mr. Jackson was very much a man of the middle class. He believed in the American dream of becoming an entrepreneur and the opportunity to create wealth for oneself. He disliked the cheap and sometimes-worthless paper money the banks printed. The only money he trusted was hard money, gold and silver. He was especially bitter against the Bank of the United States, which with its monopoly of the governments business was a symbol of all hated special privilege.

He thought it was evil as well as unconstitutional, and he loathed it. More impo! rtantly though, he was a person who had experience using the so-called capital makers of the time and trying to start businesses. For example, the one time in his career President Jackson owned land, which he sold to various individual and received notes as payments. Unfortunately, these buyers were unable to pay back the notes and President Jackson lost his land. He then had to start from scratch. He also had become a debtor and due to financial hardships, he was unable to pay off his own debts.

President Jackson was faced with a double-sided sword because eople were unable to repay the debts owed to him, while at the same time he could not pay the debts he owed to others. Nicholas Biddle, on the other hand, was an entirely different man. Biddle knew how Jackson felt about the Bank but wanted the President to be on good terms with it. Henry Clay, though, saw the Bank issue as a way to defeat Jackson in the 1832 election. Clay induced Biddle to apply for a new charte! r for the Bank early in 1832. He believed that if Jackson dared to veto the recharter bill, he would lose the election.

The plan did not go according for Mr. Clay and Mr. Biddle and Jackson was still the favorite among the people. President Jackson and Nicholas Biddle were never met good terms with each other and their relationship was one of argument and disagreement. In my opinion, Biddle wanted to keep the Bank of the United States intact for the sole purpose of benefiting the aristocrats and the politically involved. Biddle was not, though, the cause of the Panic of 1837. The depression of the early 1840s was neither as serious as historians assume nor the fault of Biddle.

It was primarily a deflation, as opposed to a decline in production, and it was produced by events over which Biddle had little control over. Mr. Jacksons view of banks was a very distressing one. He, along with the people of his party, believed the same ideology that the banks were in favor of the wealthy and those with political advantage. The only people who benefited from the banks were the wall-street types and people who had a rather great influence in the political arena. I believe that President Jackson wanted to de-centralize the bank and make it into a more state level.

While Biddle was a major force behind the powerful Bank of the United States becoming more centralized. As far as I can see, the Bank War was basically summed up in the following question. Should the United States Bank act as king over the smaller banks? This was a very political debate and I believe it aided in the Panic of 1837, but was not the primary cause. During these times, there was a great boom period. Farmers and trade people were looking forward to making their own businesses and sharing in the wealth available.

With industrialization taking place, economic growth in the United States was at an all time high. This boom was one of the largest producers of the Panic of 1837. It resulted from a combination of large capital imports from England a change in the Chinese desire for silver, which together roduced a rapid increase in the quantity of silver in the United States. Banks did not expand their operations because they were treating the government deposits as reserves. They expanded because their specie reserves had risen.

The Panic of 1837 was not caused by President Jacksons actions. The destruction of the Bank of the United States did not produce the crisis because it did not produce the boom. Many opinions on the subject of the Bank War have been used and quoted but none as often as those of Nicholas Biddle and Albert Gallatin. Biddle is quoted on saying: In my judgment, the main cause of it (the crisis) is the ismanagement of the revenue. Mismanagement in two respects: the mode of executing the distribution law, and the order requiring specie for the public lands.

Gallatin took another road by announcing Overtrading has been the primary cause of the present crisis in America. The two did not agree with each other nor did they think of each others opinions. I believe that international factors were the main cause of the Panic of 1837. The Bank War coincided with two developments, one in England and one in China that together produced inflation. A large series of good harvests in England initiated a boom in the country around 1832. The British became eager to invest in the United States and to buy American cotton.

In order for the British to export capital to the United States, the United States had to buy more in Britain than it sold, which would result in a trade deficit. And in order for the American demand for British goods to rise, prices in the United States had to rise to make imported goods cheaper than domestically produced ones. The demand for cotton in Britain caused prices in America to rise higher than they would have. At the same ime, American exports were increasing as were American imports, therefore a trade deficit was harder to produce.

Alongside this problem, changes were taking place in China. Opium p! urchases were increasing and no longer wanted silver to hoard. They wanted to trade silver for opium and any silver sent by the United States would then be sent to England in payment for Indian opium. This transshipment was avoided by substituting American credit for Mexican silver. The silver from Mexico went into bank reserves in America, allowing prices to rise and the demand for imports to increase. The final international problem I will discuss is the British demand for our cotton.

This demand helped to increase the inflation by reducing the American trade deficit, but it also put down the inflation by setting off a land boom. The price of cotton soared, land sales rose dramatically and part of the increase in money supply went into land purchases. The government continued to sell land at a constant price, and funds that otherwise would have been used to raise prices just stayed in the governments surplus. The boom caused inflation to run rampant and the American! economy was beginning to give way to a panic.

Computers and Finance

Computers have made financial bookkeeping much easier, and people no longer have to spend hours tracking investments or pay someone else to do their taxes. Moreover, the advancement in technology has allowed governments to cut back on the number of big companies and employees hired to process tax returns, resulting in the saving of millions of dollars. Although these advancements are extraordinary, they are not without their shortcomings. The IRS has had increased trouble in tracking fraudulent tax returns, and has had to revamp its detection system.

The most surprising part of Microsoft’s current purchase of Intuit, the maker of the Quicken line of personal finance software was not the $1. 5 billion price, which was fifty percent over the market value (Schlender 14). It was not even the fact that Bill Gates, America’s richest entrepreneur, is in a position to become America’s richest banker (14). The most surprising thing was that it did not happen earlier (14). For years Gates has had a dream of putting “electronic commerce at the core of personal computing,” and now he finally has the software to accompany that dream (14).

His idea includes a “Wallet PC” that can be carried around with people at all times (14). Microsoft believes that it can provide what executive VP Mike Maples refers to as a “whole new value chain” that will allow customers to interact by modem with banks, insurance companies, pension funds, etc. (14). Quicken is already being used by six million people to pay bills, manage credit, write checks, and handle taxes (14). For those of you scoring at home, it has 5. 2 million more users than Microsoft’s Money software (14).

That is a prime reason that Gates basically wanted to give up the product and donate it to his competitor Novell (14). Programs such as Quicken are excellent for keeping track of what is spent at home, but can be a big hassle for keeping track of the money spent on business trips (Baig 20). One way to solve the problem would be to carry a notebook computer with Quicken on it, but as Edward Baig states “It’s just not practical to boot up a laptop each time I step out of a taxi” (20). Intuit has released Pocket Quicken, a “Quicken Lite” for those who carry around digital assistants to help alleviate that problem (20).

Pocket Quicken is built into the new Hewlett-Packard 200LX palmtop, the Tandy/Casio Zoomer PDA’s, and the AST Gridpad 2390, but is not sold as a separate product just yet (20). Eventually this will also be available on the Motorola Envoy (20). Pocket Quicken allows users to categorically follow expenditures such as food, gas, and rent by creating checking, credit card, and cash accounts (20). Pocket Quicken lets travelers sequester what is spent into areas such as trip, client, project, or class (20).

People can share data with regular Quicken with the HP 200LX’s $119 optional cable and software package, or with the $30 addition to the Zoomer (20). However, Pocket Quicken does have its shortcomings because it does not allow for the set up of budgets or the following of investments (20). It also does not compute net worth or tax summaries, and does not have all the graphs with which Quicken comes equipped (20). If Pocket Quicken is not of interest, another option would be to record expenditures at the end of each day (20). Yet, another possibility would be QuickXpense for Windows from Portable Software (20).

This program allows users to work with the exact expense form they would like to use because many of the forms from large corporations have been previously loaded into the program (20). Another of its qualities is that if a specific company’s form was not included, they will put it on a disk for customers if they send blank copy of the form to Portable Software (20). All entries are entered the same as Quicken, but this program will also figure mileage cost for driving, convert foreign currency, and catalog each type of expense included on hotel bills (20).

QuickXpense will also let the user know when it is time to file an expense report (20). Computer and technology outsource companies typically handle the dirty work behind tax collecting; however, with the recent advances in technology, the state of New York was able to hire a financial group to handle the responsibility (Halper 63). The New York State Department of Taxation gave Fleet Financial Group a $197 million contract to handle computerized tax collections and refunds for the next ten years (63).

This contract does not totally ignore the traditional outsourcing company because Computer Science Corp. (CSC) of El Segundo California is responsible for developing the software (63). Arthur Gross, deputy commissioner for revenue and management, said that because the process involved “so many banking procedures it simply made more sense to hire a bank” (63). The inefficiencies of the current system would not have been done away with if a traditional technology company had been hired (63).

The state will receive more than ten million personal income tax returns accompanied by two million checks (63). Those checks are sent to one of nearly forty banks that will deposit the checks, capture data, and then return that information to the state (63). Gross questioned that since the bank will end up with much of the information then “Why shouldn’t they get it directly instead of it banging around all over the place? ” (63). Experts have given New York credit for a fresh idea, but say that it is too early to know if a bank can handle all the challenges presented by the technology (63).

This contract will cut the cost of processing by an estimated $80 million during the next ten years (63). Gross is impressed with the new technology, but added that “the focal point was not necessarily the technology” (63). Fleet Financial will carry out the same tasks for the state that banks already do for their customers (63). Because of this, the bank is able to do a better and more efficient job than the state ever could (63). In fact, the new imaging and scanning equipment will allow Fleet Financial to do the job forty percent faster (63).

CSC will play a large part in the process of cutting cost because the department will still depend on its IBM and Unisys Corp. mainframes (63). The new equipment for improving the process comes from the new imaging and scanning technology being installed by CSC and Fleet Financial (63). The first item installed will be the AT&T Global Information Solutions 7780 scanning system (63). This will be used to read the data from the 2. 3 million different coupons sent by self-employers, who are required to file their estimated earnings, and all checks that might accompany them (63).

New York state law states that residents of New York City or Yonkers must use special filing procedures, so the bank will check addresses to be sure that the filer claimed residence in the proper place (63). Currently the state must check ten million forms manually to sort out approximately two million false forms (63). The cost-savings will allow the state to redistribute about 300 employees to jobs that create revenue — i. e. , disproving taxpayer complaints of inaccuracies — from their processing jobs (63). The new technology will allow the state to cut back from 1400 tax season workers to about 300 (63).

According to the IRS filing taxes from home with the use of a PC and modem may be possible within five years (Kantra 47). The IRS also expects to process roughly eighty million electronic tax returns (47). In 1993, almost ten percent of everyone that filed individually used some form of electronic or computerized filing system (47). Approximately twelve million people filed with a professional tax preparer for refunds or some kind of third party that uses personal tax preparation software — a process that must have a verification form (47).

Furthermore, 1040PC forms, printouts from tax software packages, were sent by another 4. 8 million people (47). The most widely used software packages are Chipsofts TurboTax and Meca Software’s TaxCut; however, it is now possible to obtain a competitors package for the cost of shipping (47). Several of these programs can pull data in automatically from other programs like Quicken (47). With the invention of electronic filing, more fraudulent attempts have been made to cheat the IRS. The U. S.

General Accounting Office (GAO) noted a major increase in the amount of fraud attempts in the IRS’ electronic filing program by saying that “The growth of [fraudulent] returns is very high, but it is unclear how much of the growth is due to an increase in fraudulent activity rather than improvement in fraud detection” said GAO special assistant James F. Hinchman (Anthes 28). The worse part of everything is the uncertainty about the number of false returns that go undetected (28). An experimental system was instituted in 1990 without having certain “edit-and-validation” rules (28).

An illustration of this would be that taxpayers names and Social Security numbers on the returns were not checked with the internal IRS records (28). When that omission was corrected, 200,000 returns were rejected; however, Hincman says the system is still in need of “stronger validity checks” (28). Aggressive plans have been taken by the IRS in order to automate fraud detection (28). They have, with the help of computer scientists at Los Alamos National Laboratory, developed artificial intelligence techniques to notice suspicious returns (28).

A new “electronic fraud detection system” will be implemented next year (28). A system that will allow for greater taxpayer and tax-return data on-line (28). Finally, more documents will be compared with each other for the purpose of making it easier to find more fraud attempts before the IRS makes refunds (28). The world of computers is always expanding, and computers are a part of almost everything that people do. This is evidenced by the way in which companies such as Microsoft have expanded into the world of finance.

Computer programs like Quicken have made financial bookkeeping much easier because of its great versatility, and new computer technology has allowed the state of New York to hire a bank to work the state tax system. Furthermore, the invention of electronic tax filing has allowed people to file more quickly and get returns more quickly, but it has also caused an increase in tax fraud. This has forced the IRS to go look at and totally redesign its process of detecting fraud. All this is evidence that the world is becoming more computer oriented.

Campaign Funding Essay

What We Dont Know About Campaign Finance Does Hurt Us. No matter what your social issue, if you want to solve it get the money out of politics. Only then will lawmakers vote for their people rather than their pocketbooks. Jack E. Lohman. Money corrupts politics, and when contributions are being made to candidates it is not in the best interest of the American people. Campaign Finance is out of control in todays political races. Candidates are taking money from wherever and whoever they can get it. Soft money is flowing through elections without care or caution.

People who make these contributions do not share the views of the average citizen, so politicians end up representing the wrong people. Money decides races, sometimes leaving the better man but lighter spender out of a position. Candidates make decisions based on what will help them financially that what is better for the people. Contributions by industry are made not in the interest of the people, sometimes hurting them in ways they dont even know. No matter what the opposition may say campaign finance reform is needed urgently to keep our democracy as our founders intended it.

People and corporations that make the largest donations to campaigns do not share views with the general population. Politicians will listen to those who give them money so that they can depend on that money being there again when it is time for reelection. Yet individual donors making a $200 dollar or more contribution make up only . 33% of the population. This extremely small percentage of mostly wealthy individuals gain the power to influence politicians to their liking.

The idea that these people should have power to affect government more than those with less money goes against the concept of equality for all, which is what made this country great. People who make large donations do not share the same views on most issues as the general population. Robert L. Borosage and Ruy Teixeira report that while 53 percent of voters want stricter regulations on businesses and corporations, to give workers a fair salary and working conditions, 58 percent of campaign donors want to see less control over the businesses and corporations of America.

Donors also want less government spending with lower taxes, while the majority of citizens want a larger, more powerful government. A very tiny part of our population is giving money to campaigns telling candidates what they have to do to continue getting campaign contributions, yet these people do not represent the ideology and sentiment of the people as a whole. There must be a change in the way that campaigns are financed if democracy is to survive. If we do not reform campaign finance we will have politicians working only for those who can afford to contribute. Money is the major factor in any political race.

It can sway a decision very strongly depending on how well it is used. In the House, the candidate who spends the most money on his or her campaign wins 92% of the time. Things are no different in the Senate, here 88% of the time the bigger spender wins. Incumbents are usually the tip money spender, because they raise more money. Paul Starr, writer for The American Prospect , estimates that it would take $1,000,000 for a challenger to defeat the incumbent. The only way a challenger could get this kind of money would be to appeal to big business and the wealthy, who have radically different ideas about government than the general public.

A challenger, to even have a chance, would have to turn to business and wealth to win. With this great difficulty to de-seat an incumbent, turnover in congress drops, and members become stagnant, winning on name alone. All the while, they are giving breaks to the corporations and wealthy people who got them there. With campaigns finance reform, we could get challengers and incumbents on a level playing field so that the candidate with the better ideas who will honestly help the majority will end up the victor.

It would not matter much where candidates got the money from for their campaigns except that when elected, politicians act on in accordance to the wishes of those who have made donations. 71% of citizens say that a politicians choices and votes are made on the basis of money. 61% of donors agree with this. Its been explained that a small percentage of people make donations, and these people do not represent the population as a whole. If politicians make decisions based on this small group of people they are not representing the entire population ,or doing what is best for the majority, as they were hired to do.

Politicians realize where they get funding and work to please those with the money. Robert Reich estimates that half of all Americans with a million dollar a year income or greater have had their picture taken with the president. All this attention is going to a group that consists of less than 90,000. This cannot be healthy for a government that is supposed to work for all Americans. When congress persons make decisions based on whether it will fill their campaign fund, it is not representative of the people that they should be representing.

The decisions that they make may be harmful to the people, but that does not matter to some politicians. All that matter to them is dollars. The people dont know this though because those dollars are sepnt trying to convince everyone that their representative did a good job and worked for their best interest. Money does matter to politicians and they remember and reward those who get them into office. Donations made by corporations often hurt individuals either financially or even medically. Corporations make up a large portion of the groups that give generous donations.

These corporations do not care what is good for the people, all they care about is their own bottom line. If this means shipping unsafe or unhealthy products, that is what will be done. Food companies have donated $41 million dollars on the promise by candidates, that once in office, will not make stricter regulations on e-coli protection. E-coli is a deadly bacteria that infects numerous people every year. But as a result of donatoins by food companies, goverment will not regulate these companies to protect Americans.

Food companies are not alone, the cotton industry is also at fault. Safety standards that some companies include on night wear voluntarily because of the great risk of burns, are not national law. The cotton industry gives generous contributions to Congress in hopes that any legislation concerning safety standards will be shut down. These are safety standards that have already saved dozens of lives and could save many more. Campaign money from industries stops laws that would help out every American. New drugs are released into the market for public use everyday.

The company that originated the drug holds a patent on that drug for an amount of time, after this time any company can make this drug and offer it at a competitive price. Competitive prices would be of great help to those who are on a fixed income, such as the elderly population, and cannot afford the high price of medications. Contributions of ! 8. 4 million going to campaigns and 8. 4 million in soft money from medicine developing companies have influenced politicians to lengthen the amount of time that patents on drugs last, costing Americans millions.

These are just three examples of how industries hurt the people of America by donating to campaigns. There are many more hurting average citizens everyday, without them even knowing it. In the end taxpayer pay for these contributions that hurt them so much anyway. When a large business makes a donation, they must make up for the lost money. They do this by raising the prices that they charge consumers. Congress gives the contributions back to companies through corporate welfare. 167 billion dollars a year is given to companies that donated to campaigns. This money has to come from somewhere.

It comes from the taxes every year of John Q. Public. So we are not only paying higher prices as a result of campaign contributions, but we are paying the corporations again through corporate welfare. Consumer safety is commonly ignored because of special interest industries. Higher prices are put upon us a the cash register every time we buy something from a company that funds campaigns. Taxes are high because of corporate welfare. Reform is needed to save Americans from this kind of treatment from the big businesses. Opponents of Campaign finance reform have many reasons that they feel reform is bad.

But most of these arguments boil down to; contributions are an expression of freedom of speech, and reform would not help as illegal contributions take place now and would only be increased with more laws. The voices of those who fund advertisements that do not go on campaign reports are those of a small minority. These voices are being heard above all the voices of the greater majority of people who cannot afford to have their voices heard. Letting one persons opinion be louder than another goes against the ideas of equality for all, infringing upon the rights of others.

If reform is to take place we must enforce the laws that we set in place. Laws that are not enforced are worthless. We must be ready to punish a candidate and make him or her face the consequences, whether it be elimination from the race or removal from office. Reform is needed to fix our crooked and corrupt congress, and we must be willing to punish those who break the law. One option that we should consider is that of Jack E. Lohman, a business man from Milwaukee, WI. Under his plan special interest and corporate donations would be eliminated. Instead, taxpayers would fund political campaigns.

Special interests and corporations spend 750 million on campaigns. As it was explained, this hurts taxpayers when purchasing goods and when paying taxes for corporate welfare. By eliminating these donors politicians would not be affected by outside interests and would be free to do what is best for the people. The 750 million dollars for campaigns would come from the taxpayers and only cost $5 dollars a year. After cuts from corporate welfare and wasteful government spending this would save taxpayers 495 to 995 dollars a year, not to mention price drops as a result of reduced corporate spending on political campaigns.

This would put more money in the hands of the taxpayer to buy more products helping the economy. Most important, politicians would not be swayed by monetary interest offered to them for help in other areas. Donors not representing the public, money, not people and issues deciding races, politicians voting for campaign funds instead of the public, corporations risking the safety of people, these are all problems that could be fixed by reforming campaign finance.

Campaign finance is an urgent problem that must be remedied soon or we will be facing a situation in government where the power lies in the hand of those who have money to donate to campaigns. If something is not done we will be heading straight into a corrupt and contemptible government whose only care is that of being reelected. Action must be taken now before it is too late and scandalous congressmen will only support scandalous policy. If our government is to be saved, we must have campaign finance reform.

The IMF And The Bretton Woods Agreements

The international financial system has been radically altered since the worldwide depression of the late 1920s and early 1930s. This change is due in large part to the inception of the International Monetary Fund (IMF) and its subsequent control over the international financial system. In this paper I will examine the extensive role of the Bretton Woods system of exchange rates and the gold standard. Additionally, I will examine the role that the IMF has taken on since the demise of the gold standard.

To begin, we must examine the circumstances that surround the creation of the IMF, who the actors are and what each of their roles are as member countries. The IMF was created as a result of the worldwide market collapse that took place initially in October of 1929. The domino effect that took place when the first market crashed was seen to be a situation so severe that world powers felt that drastic measures needed to be taken to ensure that this was the last global financial crisis that the world would face.

Its creation in 1944 was the beginning of a new era for the international financial system. The creation of the IMF occurred at Bretton Woods along with the World Bank and the system of fixed exchange rates and the gold standard for currency. Under this system, the US dollar was tied to gold by a United States government commitment to buy it at $35. 00 and ounce and sell to central banks at the same price (excluding handling and other charges).

Other participating countries maintained the exchange values of their currencies at prices which were almost fixed in terms of the dollar (the values fluctuate normally not more than one percent on either side of their parities), with the result that exchange rates were almost universally fixed. Other governments carried out their commitments by selling internationally acceptable liquid resources when there was an excess demand for foreign currencies in terms of their own currencies, and by buying liquid resources when there was an excess supply.

What constituted internationally acceptable resources for this purpose were gold, and other liquid assets denominated in key or reserve currencies, principally US dollars or UK pounds sterling. The IMF was to ensure that these standards were being followed as well as being the lender for temporary deficits, and balance of payment problems. Each member country contributed a predefined amount, or quotas, of national currencies and gold. This quota also determines the voting power on the IMF and the amount of resources that they may draw on from the Fund.

Designed to foster monetary cooperation, the IMF sought to enforce strict rules of behaviour in a world based on the gold standard and fixed currency-exchange rates. The Fund had, in theory, strict rules regarding how much to lend and when it was to be repaid. In reality, however, the Fund had discretion to waive any normal limitations. In 1961 with the advent of the General Arrangements to Borrow (GAB), the Fund increased its ability to lend through arrangements to borrow from 10 major industrial countries. At the time, these agreements had enabled the IMF to have and additional $6 billion at its disposal.

The Gold Standard, in theory, functioned to limit the ability of governments to issue currency at will, hence decreasing the purchasing power of money. It existed before the Bretton Woods agreement, but was suspended for reasons that we will see later. If, for example, the US dollar were defined as equal to 1/20 of an ounce of gold, then the number of dollars that the United States could issue would be constrained by its holdings of gold reserves. Moreover, if the UK defined its currency, the pound sterling, as 5/20 of an ounce of gold, the fixed exchange rate between the US and the UK, quite obviously would be $5 USD=1 sterling.

One specific problem with specie standards (that is a currency convertible into a standardised unit of a non-monetary commodity) is that the value of money is only as valuable as the specie backing it. When worldwide gold production was low in the 1870s and 1880s, the money supply grew slowly, leading to a general deflation. This situation changed radically in the 1890s following the discovery of gold in Alaska and in South Africa. The result was rapid money growth and inflation up until the outbreak of World War I. Furthermore, linking currencies to gold did not totally restrain governments from manipulating the value of their currencies.

First, in order to finance expenditures by printing money, governments would frequently suspend the gold standard during times of war. Second, even without officially abandoning gold, some nations periodically redefined the value of their currencies in terms of gold. Instead of allowing for gold or foreign reserves to be consistently depleted, the countries would choose instead to devalue their currencies. It might seem, by this previous line of argument that countries had no real restrictions on their behaviour when it came to currencies, since they could devalue them at will.

However, there was a serious price to pay for devaluation. Should a country threaten to devalue its currency, a speculative attack on that countrys currency would surely follow as investors attempted to rid themselves of that currency. Such countries would ultimately lose large amounts of reserves. This is exactly what occurred in the UK in 1966 and 1967. Confidence in the value of the pound sterling crashed and the subsequent loss of gold reserves amounted to 28 million ounces. In one day alone (November 17, 1967) the British government lost reserves valued at over $1 billion.

On August 15, 1971, in the midst of a major international monetary crisis, President Richard M. Nixon announced a new policy suspending indefinitely the U. S. ‘s commitment to redeem gold for dollars. This commitment was the lynchpin of the international monetary system in which the U. S. dollar served as the key currency by which the value of other currencies would be determined. Nixon’s decision to break the link between the dollar and gold effectively pulled the rug out from under the other world currencies, forcing them to re-determine their values, and thus forcing devaluation of the dollar.

This event is generally regarded as marking the demise of the system of fixed exchange rates. The fall of the Bretton Woods system represents an important transitional stage in the history of international economic relations. It represents a change from a hegemonic system dominated by the U. S. intended to lay the foundation for an open, competitive world economy to the current system of floating exchange rates and expanding global capitalism. The Fall of the Bretton Woods System President Nixon’s announcement in 1971 and then the subsequent collapse of the system in 1973 were hardly spontaneous occurrences.

The fall of Bretton Woods was simply the culmination of a chain of economic and political developments that were quite predictable. From flaws in the design of the system that made it inherently unstable, to the spin-off of international capital markets that exploited its weaknesses, the collapse of Bretton Woods was inevitable. Because of the U. S. pledge to back dollars with gold, the stability of the system was based on the ratio of foreign-held dollars to the value of gold held by the United States. If the amount of foreign dollars exceeded the amount of U. S. gold, the U. S. uld not pay all of its claimants without changing the price of gold.

So as the ratio of foreign dollars to U. S. gold increased, so did pressure to devalue the dollar. As such, the stability of the system was gauged by the U. S. balance of payments. Considering this, confidence in the dollar became an essential element of the Bretton Woods system. The decade following the signing Bretton Woods agreement would see the U. S. balance of payments shift from surplus to deficit, producing new pressures on the system. From 1948 to 1958, several new and significant features surfaced in the international system.

These features included development of new institutions for economic cooperation, dramatic economic growth in Europe, rising U. S. military spending, U. S. foreign aid to the Third World, and the emergence of U. S. -based multinational corporations (MNCs). These new additions to the international landscape helped to generate the stability and prosperity that gave nations the confidence to participate in this liberal system. But at the same time, each factor contributed to an outflow of dollars, pushing the U. S. balance of payments in the direction of larger deficits, meaning more dollars abroad and more potential claimants on U. S. gold, thereby destabilizing the system.

The balance of payments difficulties posed a unique problem for the United States. As the hegemon of the system, the U. S. had an obligation to provide economic and military security for itself, its allies, and the system. In the 1960s U. S. leaders faced the dilemma of trying to solve the balance of payments problem while still fulfilling the country’s responsibilities as hegemon. The initial deficits of the 1950s, which were created through military and economic aid, were actually seen as beneficial at the time in that they helped close the gap with the still economically weak Europeans.

By the end of the 1950s, Europe had recovered and the deficit became a problem. Before 1958 and 1959, large surpluses in goods and services and investment income had helped to offset the costs of providing foreign aid, military expenditures abroad, and private overseas investment. When the U. S. surpluses suddenly shrank, the payments deficit became even wider. Clearly the burden of hegemony was taking its toll on the United States. One of President John F. Kennedy’s economic advisers warned, [we] will not be able to sustain in the 1960s a world position without solving the balance of payments problem.

This assessment proved to be accurate as U. S. efforts to meet its global responsibilities further damaged its balance of payments, undermining its ability to act as hegemon. The increase in U. S. deficits meant money was leaving the country and as such, it had to go somewhere. This is evidenced by the surpluses experienced by Japan and Western European countries, such as West Germany, which were growing rapidly. The surpluses, combined with the U. S. deficit, meant decreasing liquidity in the world economy, as the U. S. , in its role as central banker to the world, had supplied much of the liquidity from its reserve assets, mainly gold.

To remedy this situation, a devaluation of the dollar would have been seemingly appropriate. However, the U. S. could not devalue the dollar without horribly upsetting the other currencies of the world. Another way to help correct the disequilibrium in world payments would have been to have surplus countries like Germany and Japan revalue their currencies, effectively devaluing the dollar in the process. Because these countries were persistently reluctant to change their own rates, the payments imbalances increased until a breaking point was reached in 1971.

The fact that the surplus countries did not wish to revalue their currencies emphasizes an important flaw in the design of the Bretton Woods system. Orin Kirshner writes, It was becoming uncomfortably clear that a system of fixed exchange rates, in which gold and the dollar… were the main components, was rather asymmetrical in its pressures for adjustment. The deficit countries were under pressure to adjust when they ran out of reserves and had to go to the [IMF] or to the central bankers for aid; but there were no similar pressures on the creditors to reduce their surpluses.

Another interesting development that played a large part in the breakdown of the Bretton Woods system is the Eurodollar phenomenon. The Eurodollar, or Eurocurrency (other currencies were also involved), market was a by-product of the large-scale accumulation of dollars in foreign banks following the shift from a dollar shortage (U. S. payment surplus) to a dollar surplus (U. S. payments deficit) in 1957-1958. It was then that London bankers decided to lend these dollars out, rather than return them to the U. S. (which would have helped to stabilize the situation by improving the U. S. balance of payments).

Thus, Lairson says, was born the Eurodollar… market — essentially an unregulated money supply. When the U. S. government acted in 1963 to address this problem by enacting the interest equalization tax to slow the outflow of dollars for loans, U. S. banks then opened overseas branches to continue their foreign lending. Lairson writes, because no single state could regulate it effectively and because of the unceasing U. S. payments deficits, a Euromarket system developed consisting of the dollar and other currencies, a system of bank credit, and a Eurobond market (bonds denominated in dollars floated outside the United States).

A massive volume of funds emerged that, without much restriction, could move across borders in search of the highest yields available on a global basis. The emergence of this new, unregulated concentration of capital made even more difficult than before for the U. S. to get a handle on the system. Lairson suggests that two main reasons can be identified for the decline and fall of the Bretton Woods system. First, he writes, the system was inherently unstable because the mechanisms for adjustment of exchange rates were so inflexible.

He states the economic relations that developed after 1948 were structured by these fixed values even as the shift from U. S. surplus to deficit increasingly demanded adjustment of exchange rates. He continues, the world of 1971 was significantly different from the world of 1945-1950, but the Bretton Woods system made few accommodations to that reality. Lairson’s second reason, which he regards as perhaps most reflective of those changes, was the massive growth of the market power of international capital and its impact on fixed rates.

The transnational actors who emerged over the years reflect this notion. By 1973, the Eurocurrency market had grown to nine times the size of U. S. reserves. Such an immense collection of resources, he says, was capable of overwhelming even concerted government action. The immense pressure these forces put on the dollar and the fixed-rate system itself finally led to an international monetary crisis, forcing Nixon to temporarily take the dollar off the gold standard. Then on March 19, 1973, the system collapsed entirely, even while major efforts to reform the system were in progress.

By this time, the powerful new transnational actors collectively lost confidence in the fixed-rate system and in the ability of governments to create any viable system. Finally, Kirshner states, financial officials of the main industrial countries, including the United States, found it preferable, and inevitable, to let their exchange rates float. The Bretton Woods system was at an end. In hindsight, it becomes apparent that the Bretton Woods system, by the 1970s, had served its purpose and the time had come for it to give way to a system better suited to the realities of the time.

The Bretton Woods’ agreements and institutions were designed to stabilize the world economy in the aftermath of World War II, so that countries could eventually interact, grow, and compete as equals in a world of open markets. This system, which was dependent on U. S. hegemony for its success, had progressed to the point where the distribution of economic and political power had become more widespread among other countries.

This process can be viewed as a maturation of the international system as U. S. gemony was no longer practical in the monetary system, and, as we would later see, it was becoming less necessary in other aspects of the international system. The move to floating exchange rates in Western economies forced the IMF to end its role as traffic cop of the world monetary system and to concentrate instead on providing advice and information to its members, which in 1998 numbered 182 countries. That role was key in helping nations in Latin America, Africa, Asia, and Central Europe restructure their economies following the 1982 debt crisis.

Here, we will focus on the effects of the debt crisis on Sub-Saharan Africa (SSA). Although much focus has been given to the effects of the 1982 debt crisis in Mexico and other Latin American countries, the effects on Africa have nonetheless been strongly felt, and the consequences of that period linger on today. In Mexico the crisis was solved in 1987 through the Baker plan, funded by the Japanese and private creditors. The plan was targeted towards the commercial debt of the countries to which the banks were most exposed-middle income countries.

As a result of this initiative, commercial activity was no longer at risk and the threat of the Latin American countries forming a debt cartel was assuaged. In SSA, however, the effects of the crisis have not yet been addressed as wholly as the Baker plan did for the Latin American countries. Some questions have arisen regarding the role of the IMFs lending practices in the SSA region. Whether or not the IMF has focused enough on LDCs development and growth as their main objectives. While this was not the purpose for the creation of the IMF, many have sought to make it so.

Later the IMF sought a more ambitious role as an international lender of last resort to the world economy. The lender of last resort is an institution that will lend during times of financial crisis that will allow the market to return to equilibrium through its lending practices. Allan Meltzer has established five criteria that a lender of last resort at the domestic level must adhere to. We will use the analysis of Stanley Fisher, an important figure with the IMF to determine how these characteristics apply to the international case later on.

The first is that the central bank is the only lender of last resort in a monetary system such as that of the United States. Second, to prevent illiquid organizations from closing, the central bank should lend on any collateral that is marketable in the ordinary course of business when there is no panic. It should not restrict lending to paper eligible for discount at the central bank in normal periods. Third, the lenders loans, or advances, should be made in large amounts, on demand, at a rate of interest above the market rate. This discourages borrowing by those who can obtain accommodation in the market.

Fourth, the above three principles should be stated in advance and followed in a crisis. Finally, insolvent financial institutions should be sold at the market price or liquidated if there are no bids for the firm as an integrated unit. The losses should be borne by owners equity, subordinated debentures, and debt, uninsured depositors, and the deposit insurance corporations as in any bankruptcy. The argument for the need of an international lender of last resort rests not only on the volatility of capital markets but on the inherent financial panics that ensue from them.

The importance of regulating these volatile markets was seen at Bretton Woods through the controls over capital inflows, yet it could not regulate the capital outflows. Fisher argues that not only does there need to be an international lender of last resort, but that increasingly the IMF has been playing that role since it first assumed that position in the international bailout of Mexico in 1995. Fisher proceeds to dismiss the argument that the lender of last resort need necessarily be a central bank.

He divides the category of lender into two when financial crisis occurs. On the one hand, there are crisis lenders, who could be central banks. Fisher argues that there exists no requirement for them to be central banks. The only requirement is that enough liquidity exists within a particular institution such that it is able to supply the loans necessary to return the market to equilibrium. On the other hand we have crisis managers who are responsible for directly managing to whom the loans are given, and how best to deal with the crisis at hand.

Fisher argues that in terms of international crises the IMF is perfectly suited to deal with such crises both as a crisis lender and as a crisis manager. Clearly the role of the IMF as international lender of last resort has presented itself, initially Mexico and as we will see the structure has been established for these activities to continue. In return for the imposition of an economic austerity plan in Mexico, the fund, along with the U. S. and other major industrial countries’ central banks, provided credit lines and other facilities totalling $47. illion.

Although the assistance gave rise to criticism that the IMF was bailing out international investors and not the Mexican economy, the fund in 1997 and 1998 increased the amount each member contributed and expanded its lending activities further by establishing a $47 billion line of credit–called the New Arrangements to Borrow–with two dozen countries. The increase in borrowing authority would allow troubled IMF members to draw well in excess of what would normally be allowed, a move that was well timed.

In the 1990s capital had flooded into emerging economies–such as Thailand, Indonesia, and South Korea–with little attention to borrowers’ creditworthiness. When economic problems started to occur, foreign and domestic investors alike rushed to get their money out of those countries. In the ensuing panic, currencies and stock and bond markets imploded, cutting off financing and swiftly throwing entire economies into recession. The crisis persisted, even amid billions of dollars in IMF and Western loan commitments.

With the IMF estimating that world economic growth was only 2. in 1998, half what it had forecast in late 1997, it became apparent that more forceful moves would be required. Along with the IMF’s fortified capital base and widened lending authority, it still was unclear whether widening the disclosure of emerging economies’ foreign-currency reserve levels, publicizing their growth estimates, and announcing capital inflows and outflows would help forestall the next crisis–much less put a decisive end to the one that drew headlines in 1998. This was because the entire face of international finance had changed since the IMF was created.

Financial flows were once controlled by a handful of major banks that could be easily corralled into restructuring problem loans in cooperation with relatively modest IMF assistance. In the late 1990s, however, flows were dominated by thousands of banks; securities firms; and mutual, pension, and hedge funds that could move capital in and out of countries with a click of a computer mouse. The number of countries seeking international investment, meanwhile, had proliferated, as had the diversity of debt, equity, and other financial instruments.

This array of investors and instruments made coordinating any response to financial crises extremely difficult, concluded Moody’s Investors Service Inc. , a major global credit-rating agency. The IMF, meanwhile, continued to face criticism that it was secretive in its dealings, undemocratic in its makeup, and unresponsive to the needs of poorer members. Many critics noted that the economic austerity programs that were typically attached to any IMF assistance were not always appropriate. In some cases spending cuts only deepened local recessions and made the task of necessary financial and industrial restructurings all the more difficult.

Some economists, including Jeffrey D. Sachs, the director of the Harvard Institute for International Development, believed the IMF should permit countries to essentially go bankrupt, imposing formal suspensions of loan payments while creditors and debtors negotiated the value of the loans and determined whether any loans could be exchanged for equity. During the negotiations a troubled country could continue to obtain new financing and exporters could conduct business, selling their goods and earning foreign currencies vital to a country’s economic revival.

Suggestions such as these, if they were accepted, might require years to be put into practice. If the crisis of 1998 had one lesson, it was that nothing short of a cooperative effort by the entire world community is needed to repair the major shortcomings in the global system, according to IMF chair Camdessus . The question was whether the repairs would be performed quickly enough to enable the IMF and its backers to cope with the next financial implosion.

According to the Fundamentals of Corporate Finance

As early as 1000 B. C. , we can see an early sign of options. According to the Fundamentals of Corporate Finance, Thales the Philosopher knew from the stars that there would be a great olive harvest. Thales did not have much money, but was able to purchase options for the use of olive presses. When the harvest arrived he was able to rent the presses at a substantial profit. Thales speculation on the harvest allowed for him to purchase rights to the presses. He could then exercise his rights if his speculations on the harvest were correct.

An option is a contract giving the buyer the right to buy or sell an asset at a specific price for a limited time. An option is a contract between the buyer and seller with defined parameters. The asset that is bought or sold is called the underlying. This underlying asset could be a commodity, a futures contract, or stock. The seller gives the buyer the rights for a sum of money called a premium. The price that the underlying right is bought or sold at is called the exercise price. The two types of Options are Calls and Puts.

When an option gives the buyer the right to purchase underlying assets from a writer is called a call option. The call option is the most straightforward strategy for capitalizing on an anticipated increase in the price of the underlying asset. The investor that buys a call option is said to be in a long call position. An investor that believes the price of an underlying asset will decline or remain the same, can if his speculations are correct, realize income by selling a call option. The seller is said to be in a short call position.

When the purchaser of an option has the right to sell the underlying asset the option is called a put option. With a put option you can insure an asset by locking in a selling price. If the price of the underlying falls you can exercise your option and sell it at the locked in price. If the price of the underlying asset increases then you would not exercise your right and the only cost incurred is the premium paid for the option. The investor that purchases a put option is said to long put position.

The investor that can earn income buy selling a put is said to be in a short put position. The people that buy options are called holders where those that sell options are called writers. The holder of a call has purchased the right to exercise a call. Put holders have purchased the right to sell the underlying asset at the locked price. However, neither the call holders nor put holders have an obligation to exercise their rights on the option. On the sellers side, call writers are required to sell the underlying asset when a holder exercises his right to buy.

Put writers are also obligated to buy the underlying asset at the locked in price. Options are traded on several different exchanges. The first of these is the Chicago Board Options Exchange founded in 1973. Other exchanges that options are traded on are the American Stock Exchange, The Philadelphia Stock Exchange, The Midwest Stock Exchange, and The Pacific Coast Stock Exchange. The key to the success of the options market is in the structure, which puts together two different types of transactions in one process.

These two types are: The creation of an option by writer and purchaser, and the secondary market where the investor has the opportunity to sell his position by canceling transactions through the exchange. The Buyer and seller are not the only entities in options trading. The Options Clearing Corporation is an intermediary between writer and purchaser as well as serves as an accounting office between them. The Options Clearing Corporation is the issuer of individual options. It takes the position of the writer for the purchaser, and takes the place of the buyer for the writer.

The OCC is responsible for making certain that the writer of a call always fulfill its obligation to the buyer if he exercises his option. This is how the OCC guarantees the financial stability of options transactions. The members of the OCC are made up of the brokerage houses and are accountable to the OCC for making sure that options transactions process smoothly. If an investor wants to exercise an option he calls his broker, who then notifies the OCC. The OCC then chooses a broker at random with which the corresponding option that has been sold.

When looking at the investor side of options trading it is important to look at how options are priced and valued. There are several aspect that have to be considered. The first is the fluctuation of the price because of the laws of supply and demand. The underlying asset in the option will fluctuate in price during the life of the option and this will cause the price of the option to fluctuate as well. Another aspect of the value/price is the time premium. A better measure of the time premium is the percent of time premium.

The time period per month of the time that is left makes up the percent of time premium. Speculation and trading amounts increase as the time period shortens and the open interest increases. This means that an options with a longer life, even though higher priced, will not have a greater percentage of time premium per month of life left than an option with a shorter life. The third aspect of price/value is the intrinsic value of an option. The intrinsic value of an option only exists when the underlying asset is worth more than the locked price on a call.

For example if an investor has the right to purchase a shares of xyz stock at seventy dollars and the price of the stock is seventy four dollars a share than the intrinsic value of the option is four dollars. So if the option is selling for seven dollars than the time premium is three dollars and the intrinsic value is four dollars. These are the three main aspects of pricing and valuation. One main reason for buying options, other than making a profit, is to reduce risk.

Portfolio Managers often buy options in order to reduce the down side risk of the portfolio. Options also could be bought to help limit potential market risk. For example, if a company made jet planes and they are concerned about the price of metals rising, they could purchase a call option and lock in a price. If the price of the metal goes above the lock in price they can exercise there right to purchase at the agreed upon price. If the price goes below the locked price they can just not exercise their right on the option.

All they lose is the premium. The same idea can be used for stocks. If an investor speculates that the price of a stock is going to rise then he could buy an option to lock in a price with the hope that the price will rise as speculated. If the price rises he could exercise his right to purchase the stock at a lower price. The investor could then sell the stock as a profit. Buying this option very much limited the amount that he could lose on the investment, and at the same time the amount of possible gain seams almost infinite.

The same idea can work on the sell side as well. If a company that sells oil speculates that the price of the oil will fall they can purchase a put option. This gives them the right to sell the oil at an agreed upon price so if the price of oil falls lower than the exercise price they will be able to sell oil at the locked price and realize a gain. Interest-Rate Agreements are another way that investors can control their risk. There are two types of these agreements a ceiling rate agreement and a ceiling/floor rate agreement.

In a ceiling rate agreement a financial institution providing the agreement will compensate the buyer for the difference of the actual rate and the agreed upon ceiling rate. So if the ceiling was 10% and the interest rate rises to 13% the financial intermediary will compensate the buyer the extra 3%. In a ceiling/floor agreement it is a little different. Usually the financial intermediary is trying to protect its earnings on lending. If the rate goes above the ceiling then the entity compensates the buyer, but if rates go below the floor then the buyer compensates the bank for rates under the agreed percentage.

Options appear to be extremely complicated so many investors dont like to use them. However, if understood they can be very useful. They are excellent tools for hedging and lowering risk as well as investments for profit. The option market allows for two types of transactions to be exercised at the same time; buying and selling the options and being able to sell the underlying asset holdings. The Option Clearing Corporation makes sure that these day to day option trading runs smoothly. These reason are why options are a good alternative to other security trading.

Instability In Financial Markets

The soaring volume of international finance and increased interdependence in recent decades has increased concerns about volatility and threats of a financial crisis. This has led many to investigate and analyze the origins, transmission, effects and policies aimed to impede financial instability. This paper argues that financial liberalization and speculation are the most reflective explanations for instability in financial markets and that financial instability is likely to be transmitted globally with far reaching implications on real sector performance.

I conclude the paper with the rgument that a global transaction tax would be the most effective policy to curb financial instability and that other proposed policies, such as target zones and the creation of a supranational institution, are either unfeasible or unattainable. In this section I examine four interpretations of how financial instability arises. The first interpretation deals with speculation and the subsequent bandwagoning in financial markets. The second is a political interpretation dealing with the declining status of a hegemonic anchor of the financial system.

The question of whether regulation causes or mitigates inancial instability is raised by the third interpretation; while the fourth view deals with the trigger point phenomena. To fully comprehend these interpretations we must first understand and differentiate between a currency and contagion crisis. A currency crisis refers to a situation is which a loss of confidence in a country’s currency provokes capital flight. Conversely, a contagion crisis refers to a loss of confidence in the assets denominated in a particular currency and the subsequent global transmission of this shock.

One of the more paramount readings of financial instability pertains to peculation. Speculation is exhibited in a situation where a government monetary or fiscal policy (or action) leads investors to believe that the currency of that particular nation will either appreciate or depreciate in terms relative to those of other countries. Closely associated with these speculative attacks is what is coined the bandwagon effect. Say for example, that a country’s central bank decides to undertake an expansionary monetary policy.

A neoclassical interpretation tells us that this will lower the domestic interest rates, thus lowering the rate of return in the foreign exchange market and ringing about a currency depreciation. As investors foresee this happening they will likely pull out before the perceived depreciation. Efforts to get out would accelerate the loss of reserves, provoking an earlier collapse, speculators would therefore try to get out still earlier, and so on (Krugman, 1991:93). This herding or bandwagon effect naturally cause wild swings in exchange rates and volatility in markets.

Another argument for the evolution of financial market instability is closely related to hegemonic stability theory. This political explanation predicts a circumstance (i. e. decline of a hegemon’s status) in which a loss of confidence in a particular countries currency may lead to capital flight away from that currency. This flight in turn not only depreciates the currency of the former hegemon but more importantly undermines its role as the international financial anchor and is said to ultimately lead to instability. The trigger point phenomena may also be used as an instrument to explain financial instability.

Similar to the speculative cycles described above, this refers to a situation where a group of investors commits to buy or sell a currency when that currency reaches a certain price level. If that particular currency were to rise or fall to that specified level, whether by real or speculative reasons, the precommited investors buy or sell that currency or assets. This results in a cascade effect that, like speculative cycles, increases or decreases the value of the currency to remarkably higher or lower levels. Country after country has deregulated its financial markets and institutions.

The neoclassical interpretation asserts that regulation is thought to create incentives for risk taking and hence instability. It is said to bring about what are called moral hazards. Proponents of deregulation argue that when people are insured, they are more apt to take greater risks with their investments in financial markets. The riskier the investment activity, the more volatile the markets tend to be. A closer look suggests that perhaps only two of these explanations are valid when thinking about the origins of financial instability. The trigger point explanation seems to be a misreading of the origins of instability.

It is unlikely that a large number of investors would have the incentive or operational ability in order to simultaneously coordinate the buying or selling f a currency or assets denominated in that currency. If even there is such unlikely coordination, the existence of even a very large group of investors with trigger points need not create a crisis if other investors know they are there (Krugman, 1991:96). The theory of hegemonic stability also overlooks a number of factors that can provide useful insights in explaining the emergence of financial instability.

Historical precedence supports this assertion. For instance, Britains role as international economic manager was very minor in the stability experienced under the gold standard. The success of the standard can be attributed to endogenous factors such as the self adjusting market mechanism and the informal discipline maintained by its rules. The destabilization of the gold standard can be attributed to the extreme domestic economic and financial pressures brought on nation states by World War I, and not solely on the industrial and economic demise of Britain.

A valid explanation for the origins of financial instability are the speculative attacks brought on by investors. Although similar in function to trigger points, these speculative cycles cannot be mitigated simply by pure ecognition. Rather than acting on the value of the currency itself, speculators act on occurrences or policies that will alter the value of the currency. Instability arises from the fact that these speculative cycles induce capital flight and therefore a change in the value of that particular currency, whether or not the decisions of these investors are based on market fundamentals.

Futures, options, swaps and other financial instruments have given investors and speculators an unheard of capacity to leverage financial markets. The greater the leverage, the greater the instability (McCallum, 1995:12). If we examine the deregulatory process closely, it becomes clear that there is a perverse relationship between deregulation and financial stability. Say for example, investors suffer from a profit squeeze. This causes the investors to lobby politicians for deregulation. The resulting wave of deregulation fosters instability and wide swings in exchange rates which in turn cause loan defaults and subsequent banking crisis.

The resulting financial instability thus begs calls regulation, likely placing the investors in the original position with an unsolved problem. We can see that the dialectic of he regulatory process undermines anticipated stability and will eventually lead to financial instability and collapse. In this environment, there arises calls for new forms of financial regulation. These policies and proposals are of critical importance and will therefore be discussed later in the paper. There are three contending albeit interrelated views on how financial instability may be transmitted globally.

These include equity markets, multiplier effects and monetary reverberations. Say for example, a movement of stock prices generates a recession in one ountry. This is turn leads to a reduce in imports from abroad. The lower aggregate demand for foreign imports will generate a contraction in other country’s output markets. The resulting contraction in the foreign countries will then induce a contraction in the originating country. As seen, the multiplier effect begins to take place that in turn leads to a global recession. If an asset crash leads to a monetary crises, the money crisis could be transmitted worldwide.

The Mundell-Flemming model assumes that under a fixed exchange rate system, such as that under the gold standard, a worldwide monetary ontraction will result from a contraction in any one particular country because a monetary contraction in one country, which raises interest rates in that country, must be matched by an equal rise in rates elsewhere (Krugman, 1991:103). However, under a flexible exchange rate system, such as the one in operation today, the model predicts that monetary shocks will be transmitted perversely, that is, a monetary contraction in one country will produce expansion elsewhere.

Herring and Litan (1995) advance this argument by concluding that the transmission of crisis creates a systemic risk. This iew states that continuous losses in financial markets has adverse effects on the real economy because significant losses can occur if there is a significant disruption in the payments system or the mechanism through which transactions for goods, services, and assets are cleared (Herring and Litan, 1995:51) . While it may be accepted that financial crises can be transmitted globally, there is debate on its ramifications on the real sector of the economy.

Krugman (1991:97) states that a currency depreciation will produce an improvement in competitiveness that will increase net exports and thus have an xpansionary effect on the domestic economy. He also asserts that policy responses may help to curb real sectors effects. When currencies depreciate, government officials and central bankers raise interest rates to discourage capital flight. The recessionary effects of tight monetary and fiscal policies, it is argued, dilute the inflationary repercussions of the currency crisis.

Citing historical evidence of the US stock market crash, Kapstein (1996:6) goes so far as to say that the real economy is shockproof from transmission of financial instability and even in the face of financial crisis continues to function normally. The assumption that swings in financial markets do not influence real sector performance is inattentive to many factors. Advocates of this view use what is percieved as relatively small repercussions felt worldwide after the US stock market crash in 1929 where in general the slump was mild (Krugman 1991:91).

The empirical data of the slump underscores this argument. Between December 1929 and December 1932, for example, Germany experienced a 30. % percent stock market decline, France 38. 5 percent and Canada 37. 5% (Kindleberger, 1973). If we keep in mind that the percentage swing in the US stock during that same period was 37. percent, we see that the slump was only slightly milder but by no means mild. The real sector ramifications were just as remarkable.

Germany saw a 58 percent decline in industrial production, France 74 percent and Canada 68 percent, all comparably higher declines than in the United States (Yeager, 1976). It is obvious that financial crises do have global spillover effects and consequences on real sector performance. However, recognition of these adverse effects does not solve the problem. In the next section I present contending policies and proposals designed to curb international financial instability and its repugnant ramifications.

History Of The Stock Market

Once there was a time when shares in business corporations were rarely bought and sold because few companies were considered promising financial profits (Blume 21). That is hard to believe considering almost everybody has invested in some stock today. The stock market went through some distinct changes since its inception, and has evolved into a shaping force in the world today. There is one idea that sparked the fire which produced the stock market: capitalism. Everything the stock market is, and was, rooted in the basic idea of capitalism.

Without that idea, stocks and bonds would never have come to be. Capitalism is an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market (Peterson). When a person buys a stock, that means they own a part of the company in which they invested. The average person can thereby invest in a public company and receive a piece of that company’s success, or failure. This process helps not only the smart investors, but the companies as well.

The investors’ money must go somewhere, and that place is the treasury of the company they endorsed (Simonson). The company then uses that money for its financial needs, providing the company an income in addition to simple sales profits. Then, the investors make or lose money based on how much that company makes. Basically, people invest in an idea, and make money based on how that idea performs in the real world (Blume 35-39). While the stock market is based upon capitalism, this type of enterprise was shunned by the community in 1792 because of financial panic (Blume 23).

However, these practices were not shunned by all America in 1792. People wanted a way to trade stocks without the public stock auctions (which were banned because of lack of profits), so they tried something different than stock auctions. The institution we know today as the New York Sock Exchange began in 1792 as an effort to circumvent government regulation (Blume 21). Twenty-four… stock brokers, with no building or even a formal title, met under a buttonwood tree on the north side of Wall Street… (Blume 23) there they made a deal that went on to be known as the Buttonwood Agreement.

In it were these words: We the Subscribers, Brokers for the Purchase and Sale of Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever any kind of Public Stock, at a less rate than one quarter percent Commission on the Specie value of, and that we will give a preference to each other in our Negotiations (Blume 23). To these brokers’ great delight, their idea became very popular amongst investors and brokers alike.

They bought office space on Wall Street, where the Buttonwood Agreement was made. That office space later went on to be called the New York Stock Exchange. They grew and expanded the Exchange so that it became the only place to buy stocks if a profit was to be made. This system was a good one, but there were ways to beat it. Some of the outstanding financial powers of the United States often used their wealth to corner the stock market. All of these powers had monopolies in large business areas such as oil, steel, railroads and banking.

The government tried to stop monopolies from forming by passing the Sherman Anti-Trust Act of 1890 (Blume 270). This did not stop these giants, however. They often engaged in financial battles for control of the market. In one of these instances, J. P. Morgan and Harrimen both wanted control of the Northern Pacific Railroad Company in 1901 (Sharp 165). Harrimen decided to buy his way to majority share holder of the company, thereby allowing him to run the business. Morgan then bought all the outstanding stock available.

This activity raised the stock price from $112 to $149 (Sharp 166). This increase caused people to sell the stock short (to sell it hoping it will go down before you buy it), but J. P. Morgan had unexpectedly created a corner in the market and within hours the stock price had soared from $149 a share to $1,000. Since Harriman had sold short, he was now in debt $800 for every share he owned (Sharp 166). There were big rivalries between other giants as well, showing how the market could be swayed so severely simply to fit ones needs.

There were many similar struggles between men like Morgan and Carnegie for control of the steel business (Sharp 168). There have been too many battles over small railroads to count. All this led to one thing. In the late 1800’s and early 1900’s, the stock market was easily swayed, and cut-throat business was a way of life. Today we have laws against monopolies, market cornering, and other violations which greatly influenced the market. However, it was not truly recognized that stricter laws were needed until the crash of 1929 (Blume 29).

The free public market had become too free and out of control. Investing geniuses saw the evident crash coming, but they were powerless to stop it. The brokerage business ended up being more of a free market where the good brokers could charge a higher commission and the less successful brokers would be paid a lower one (Blume 24). A few brokerage firms had an idea that would change the market, but not for the better. They decided to allow their investors to pay for only ten percent of the actual amount of stock they bought.

Since many people could not afford to buy stock at its face value, the firm would put up ninety percent of the money, leaving the investors to pay a mere ten percent (Simonson). This set investors up for huge gains, because if the stock went up ten percent, the money the investor had put into the company doubled. There is a flip side to this money making wonder though. What happens if the stock goes down even ten percent? A complete failure resulting in the investor being in debt to the firm with whom they conducted business (Simonson). That problem is exactly what caused the major market failure of 1929.

The initial panic in 1929 carried the market some fifty percent lower and back to preboom levels. The slow grinding misery of the longest depression in the nation’s history worked the market ninety percent below its 1929 highs by 1932 (Sharp 210). The market only fully recovered after the start of Word War II. This was not a good time in America, but there were a few good things that came out of it. One is that we have learned from our mistakes, and will hopefully not make the same mistake twice. The other prosperous idea was invented just before the crash.

The smart investors knew that one must spread his holdings amongst a pool of stocks, just like the old phrase about never keeping all your eggs in one basket. They also knew that the riskier stocks gave far greater returns than the safer ones (Blume 95). These ideas paved the way for the invention of the first mutual fund, created in 1924. This allowed people to invest in one fund, but still spread their money over a wide variety of stocks, thereby creating a net to fall back on. This was one idea that has survived until today and shows no sign of stopping.

This notion helped lead the way for the prosperity that was to come. The next twenty years was a time of great prosperity due to low inflation rates and inheritance taxes (Simonson). However, the 70’s brought about a whole new era. The economy had grown too fast, causing ten percent inflation. This caused stocks to tumble. Real estate and fixed income became the prominent assets. From the 80’s on, the market has enjoyed many years of prosperity, with the 90’s being the decade of largest market growth. However, none of it would have been possible if it weren’t for the lessons learned in the 1920’s (Brown 90-107).

Learning from the past is very important, and a great example to learn from is the crash of 1929. We caught the monopolies before they became too out of control, but failed to stop the small investor from driving the market down (Sharp 210). We must learn from history to make sure we never make the same mistakes that Wall Street made at the turn of the century. However, nobody can predict the future; with the rise of new types of stocks, online trading, and faster riskier trading, are we setting ourselves up for yet another fall?

Deficit Spending: The Deficit Good or Bad

“Spending financed not by current tax receipts, but by borrowing or drawing upon past tax reserves. ” , Is it a good idea? Why does the U. S. run a deficit? Since 1980 the deficit has grown enormously. Some say its a bad thing, and predict impending doom, others say it is a safe and stable necessity to maintain a healthy economy. When the U. S. government came into existence and for about a 150 years thereafter the government managed to keep a balanced budget. The only times a budget deficit existed during these first 150 years were in times of war or ther catastrophic events.

The Government, for instance, generated deficits during the War of 1812, the recession of 1837, the Civil War, the depression of the 1890s, and World War I. However, as soon as the war ended the deficit would be eliminated and the economy which was much larger than the amounted debt would quickly absorb it. The last time the budget ran a surplus was in 1969 during Nixon’s presidency. Budget deficits have grown larger and more frequent in the last half-century. In the 1980s they soared to record levels.

The Government cut income tax rates, greatly increased defense spending, and didn’t cut domestic spending enough to make up the difference. Also, the deep recession of the early 1980s reduced revenues, raising the deficit and forcing the Government to spend much more on paying interest for the national debt at a time when interest rates were high. As a result, the national debt grew in size after 1980. It grew from $709 billion to $3. 6 trillion in 1990, only one decade later.

Federal spending has grown over the years, especially starting in the 1930s in actual dollars and in proportion to the economy (Gross Domestic Product, or GDP). Beginning with the “New Deal” in the 1930s, the Federal Government came to play a much larger role in American life. President Franklin D. Roosevelt sought to use the full powers of his office to end the Great Depression. He and Congress greatly expanded Federal programs. Federal spending, which totaled less than $4 billion in 1931, went up to nearly $7 billion in 1934 and to over $8 billion in 1936.

Then, U. S. entry into World War II sent annual Federal spending oaring to over $91 billion by 1944. Thus began the ever increasing debt of the United States. What if the debt is not increasing as fast as we think it is? The dollar amount of the debt may increase but often times so does the amount of money or GDP to pay for the debt. This brings up the idea that the deficit could be run without cost. How could a deficit increase productivity without any cost? The idea of having a balanced budget is challenged by the ideas of Keynesian Economics.

Keynesian economics is an economic model that predicts in times of low demand and high unemployment a deficit will not cost anything. Instead a deficit would allow more people to work, increasing productivity. A deficit does this because it is invested into the economy by government. For example if the government spends deficit money on new highways, trucking will benefit and more jobs will be produced. When an economic system is in recession all of its resources are not being used.

For example if the government did not build highways we could not ship goods and there would be less demand for them. The supply remains low even though we have the ability to produce more because we cannot ship them. This non-productivity comes at a cost to the whole economic ystem. If deficit spending eliminates non-productivity then its direct monetary cost will be offset if not surpassed by increased productivity. For example in the 1980’s when the huge deficits were adding up the actual additions to the public capital or increased productivity were often as big, or bigger than the deficit.

This means as long as the government spends the money it gains from a deficit on assets that increase its wealth and productivity, the debt actually benefits the economy. But, what if the government spends money on programs that do not increase its assets or productivity. For instance consider small businesses. If the company invests money to higher a new salesman then he will probably increase sales and the company will regain what it spent hiring him. If the company spends money on a paper clips when they have staplers they will just lose the money spent on the paper clips. This frivolous spending is what makes a deficit dangerous.

Then the governments net worth decreases putting it into serious debt. Debt should not be a problem because we can just borrow more, right? This statement would be correct if our ability to borrow was unlimited, but it is not. At first the government borrowed internally from private sectors. The government did this by selling bonds to the private sectors essentially reallocating its own countries funds to spend on its country. This works fine in a recession, but when the country is at or near its full capability for production it cannot increase supply through investment of deficit dollars.

Deficit dollars then translate into demand for goods that aren’t being produced. Referring back to the small business example, if a company is selling all the products it can produce they can still higher another salesman. But since there re no more goods to be sold the salesman only increases the number of consumers demanding the product. Without actually increasing sales. The problems of deficit spending out of a recession even out through two negative possibilities, inflation and crowding out.

Inflation means there is more demand or money than there are goods this causes an increase in prices and drives down the worth of the dollar. This depreciation of the dollar counters the cost of the deficit but destroys the purchasing power of the dollar. A five dollar debt is still a five dollar debt even if the five dollars are only worth hat used to be a five cent piece of bubblegum. Despite its dangers inflation is used to some extent to curb the debt. Crowding out is when the government is looking for the same capital that the business sector wants to invest.

This causes fierce competition for funds to invest. The fierce competition causes an increase in interest rates and often business will decide against further investment and growth. The government may have the money to build new highways but the truckers cannot afford trucks to use on them. The governments needs will crowd out business needs. This turns potential assets into waste. However, there is a third option which would allow the government to run a deficit and avoid the negative aspects of inflation and crowding out. Borrowing from foreign sources is a tangible and recently very common practice.

Attracted by high interest rates and stability, foreigners now buy huge amounts of U. S. national debt. Of course this cannot be the perfect solution otherwise no one would be concerned about the debt. The problem with borrowing from external sources is the lack of control the government has over foreign currency and debts. Internal debts can be paid with increased taxes, inflation, and other onetary controls the government has but external debts can extremely damaging to a country if it cannot buy enough of the foreign currency to pay the interest.

Running a deficit is apparently good for an economy that is operating inside its production possibilities curve but it can be damaging to an economy operating on the curve. A deficit managed properly has the effect of increasing demands. An economy inside its curve can increase supplies in reaction. An economy on the curve can increase demand but its supplies cannot increase causing prices to rise, or inflation. If there is no deficit and the curve hifts to the right then supplies will not increase and the country will no longer be operating on the curve.

A deficit must be maintained to insure that the economy grows with its resources. Is the U. S. ‘s current debt bad or good? The trick is finding out how large the deficit should be in order to allow for growth without waste. The U. S. ‘s deficit is bad at this point because the U. S. is close to its maximum production capabilities, and deficit money is being wasted. For example two of the largest portions of the budget: defense and social security. Defense spending produces little or nothing except in times of war.

Judging by the current status of the United States as the only existing Nuclear Super Power war is not a tangible event in the near or distant future. The way social security is managed creates a huge waste. As managed, social security is money spent to immobilize a large and fairly capable part of the work force. It encourages elderly people not to work by spending deficit money on them. Reducing productivity and increasing the debt at the same time. In its current state the U. S. should attempt to reduce its deficit but eliminating it is not necessary and could do more damage than good.

Financial Instability Report

The soaring volume of international finance and increased interdependence in recent decades has increased concerns about volatility and threats of a financial crisis. This has led many to investigate and analyze the origins, transmission, effects and policies aimed to impede financial instability.

This paper argues that financial liberalization and speculation are the most reflective explanations for instability in financial markets and hat financial instability is likely to be transmitted globally with far reaching implications on real sector performance. I conclude the paper with the argument that a global transaction tax would be the most effective policy to curb financial instability and that other proposed policies, such as target zones and the creation of a supranational institution, are either unfeasible or unattainable.

In this section I examine four interpretations of how financial instability arises. The first interpretation deals with speculation and the subsequent “bandwagoning” in financial markets. The second is a political interpretation dealing with the declining status of a hegemonic anchor of the financial system. The question of whether regulation causes or mitigates financial instability is raised by the third interpretation; while the fourth view deals with the “trigger point” phenomena.

To fully comprehend these interpretations we must first understand and differentiate between a “currency” and “contagion” crisis. A currency crisis refers to a situation is which a loss of confidence in a country’s currency provokes capital flight. Conversely, a contagion crisis refers to a loss of confidence in the assets denominated in a particular currency and the subsequent global transmission of this shock. One of the more paramount readings of financial instability pertains to speculation.

Speculation is exhibited in a situation where a government monetary or fiscal policy (or action) leads investors to believe that the currency of that particular nation will either appreciate or depreciate in terms elative to those of other countries. Closely associated with these speculative attacks is what is coined the “bandwagon” effect. Say for example, that a country’s central bank decides to undertake an expansionary monetary policy. A neoclassical interpretation tells us that this will lower the domestic interest rates, thus lowering the rate of return in the foreign exchange market and bringing about a currency depreciation.

As investors foresee this happening they will likely pull out before the perceived depreciation. “Efforts to get out would accelerate the loss of reserves, provoking an earlier collapse, peculators would therefore try to get out still earlier, and so on” (Krugman, 1991:93). This “herding” or “bandwagon” effect naturally cause wild swings in exchange rates and volatility in markets. Another argument for the evolution of financial market instability is closely related to hegemonic stability theory. This political explanation predicts a circumstance (i. e. decline of a hegemon’s status) in which a loss of confidence in a particular countries currency may lead to capital flight away from that currency.

This flight in turn not only depreciates the currency f the former hegemon but more importantly undermines its role as the international financial anchor and is said to ultimately lead to instability. The trigger point phenomena may also be used as an instrument to explain financial instability. Similar to the speculative cycles described above, this refers to a situation where a group of investors commits to buy or sell a currency when that currency reaches a certain price level.

If that particular currency were to rise or fall to that specified level, whether by real or speculative reasons, the precommited investors buy or sell that currency or ssets. This results in a cascade effect that, like speculative cycles, increases or decreases the value of the currency to remarkably higher or lower levels. Country after country has deregulated its financial markets and institutions. The neoclassical interpretation asserts that regulation is thought to create incentives for risk taking and hence instability.

It is said to bring about what are called “moral hazards. ” Proponents of deregulation argue that when people are insured, they are more apt to take greater risks with their investments in financial markets. The riskier the investment activity, the more volatile the markets tend to be. A closer look suggests that perhaps only two of these explanations are valid when thinking about the origins of financial instability. The trigger point explanation seems to be a misreading of the origins of instability.

It is unlikely that a large number of investors would have the incentive or operational ability in order to simultaneously coordinate the buying or selling of a currency or assets denominated in that currency. If even there is such unlikely coordination, the “existence of even a very large group of investors ith trigger points need not create a crisis if other investors know they are there” (Krugman, 1991:96). The theory of hegemonic stability also overlooks a number of factors that can provide useful insights in explaining the emergence of financial instability.

Historical precedence supports this assertion. For instance, Britains role as international economic manager was very minor in the stability experienced under the gold standard. The success of the standard can be attributed to endogenous factors such as the self adjusting market mechanism and the informal discipline maintained by its rules. The destabilization of the gold standard can be attributed to the extreme domestic economic and financial pressures brought on nation states by World War I, and not solely on the industrial and economic demise of Britain.

A valid explanation for the origins of financial instability are the speculative attacks brought on by investors. Although similar in function to trigger points, these speculative cycles cannot be mitigated simply by pure recognition. Rather than acting on the value of the currency itself, speculators act on occurrences or policies that will alter the value of the currency. Instability arises from the fact that these speculative cycles induce capital flight and therefore a change in the value of that particular currency, whether or not the decisions of these investors are based on market ” fundamentals.

Futures, options, swaps and other financial instruments “have given investors and speculators an unheard of capacity to leverage financial markets. The greater the leverage, the greater the instability” (McCallum, 1995:12). If we examine the deregulatory process closely, it becomes clear that there is a perverse relationship between deregulation and financial stability. Say for example, investors suffer from a profit squeeze. This causes the investors to lobby politicians for deregulation. The resulting wave of deregulation fosters instability and wide swings in exchange rates which in turn cause loan defaults and subsequent banking crisis.

The resulting financial instability thus begs calls regulation, likely placing the investors in the original position with an unsolved problem. We can see that the dialectic of the regulatory process undermines anticipated stability and will eventually lead to financial instability and collapse. In this environment, there arises calls or new forms of financial regulation. These policies and proposals are of critical importance and will therefore be discussed later in the paper. There are three contending albeit interrelated views on how financial instability may be transmitted globally.

These include equity markets, multiplier effects and monetary reverberations. Say for example, a movement of stock prices generates a recession in one country. This is turn leads to a reduce in imports from abroad. The lower aggregate demand for foreign imports will generate a contraction in other ountry’s output markets. The resulting contraction in the foreign countries will then induce a contraction in the originating country. As seen, the multiplier effect begins to take place that in turn leads to a global recession. If an asset crash leads to a monetary crises, the money crisis could be transmitted worldwide.

The Mundell-Flemming model assumes that under a fixed exchange rate system, such as that under the gold standard, a worldwide monetary contraction will result from a contraction in any one particular country because “a monetary contraction in one country, which raises interest rates in that ountry, must be matched by an equal rise in rates elsewhere” (Krugman, 1991:103). However, under a flexible exchange rate system, such as the one in operation today, the model predicts that monetary shocks will be transmitted perversely, that is, a monetary contraction in one country will produce expansion elsewhere.

Herring and Litan (1995) advance this argument by concluding that the transmission of crisis creates a “systemic risk. ” This view states that continuous losses in financial markets has adverse effects on the real economy because “significant losses can occur if there is a significant isruption in the payments system or the mechanism through which transactions for goods, services, and assets are cleared” (Herring and Litan, 1995:51) . While it may be accepted that financial crises can be transmitted globally, there is debate on its ramifications on the real sector of the economy.

Krugman (1991:97) states that a currency depreciation “will produce an improvement in competitiveness that will increase net exports and thus have an expansionary effect on the domestic economy. ” He also asserts that policy responses may help to curb real sectors effects. When currencies depreciate, overnment officials and central bankers raise interest rates to discourage capital flight. The recessionary effects of tight monetary and fiscal policies, it is argued, dilute the inflationary repercussions of the currency crisis.

Citing historical evidence of the US stock market crash, Kapstein (1996:6) goes so far as to say that the real economy is “shockproof” from transmission of financial instability and even in the face of financial crisis “continues to function normally. ” The assumption that swings in financial markets do not influence real sector performance is inattentive to many factors. Advocates of this view use hat is percieved as relatively small repercussions felt worldwide after the US stock market crash in 1929 where “in general the slump was mild” (Krugman 1991:91).

The empirical data of the slump underscores this argument. Between December 1929 and December 1932, for example, Germany experienced a 30. % percent stock market decline, France 38. 5 percent and Canada 37. 5% (Kindleberger, 1973). If we keep in mind that the percentage swing in the US stock during that same period was 37. 3 percent, we see that the slump was only slightly “milder” but by no means “mild. ” The real sector ramifications were just as remarkable.

Germany saw a 58 percent decline in industrial production, France 74 percent and Canada 68 percent, all comparably higher declines than in the United States (Yeager, 1976). It is obvious that financial crises do have global spillover effects and consequences on real sector performance. However, recognition of these adverse effects does not solve the problem. In the next section I present contending policies and proposals designed to curb international financial instability and its repugnant ramifications.

Three main policies have been introduced to curb international inancial instability. A global transaction tax, which is a tax on short term financial investments, a target zone approach, where nations exchange rates would be allowed to fluctuate within a specific band and a supranational or regional institution aimed at coordinating global financial reform. Proposed by economists and Nobel Laureate James Tobin in 1978, a global transaction tax (STT) would act to “throw some sand in the well greased wheels of the global financial markets.

The STT is predicted to slow the short term financial excursions into other currencies, yet at the same time it would have a ighter impact on trade and long-term investments with higher percentage yields. Speculators, now carrying the burden of a tax woul therefore have less ” leverage” with which to exploit exchange volatility while long-term investment would be encouraged. Another benefit of the tax is that it would reduce wasted financial resources and increase government revenues.

While proponents of the STT say the policy will reduce wasted financial resources, others argue that there would be an adjustment problem because of the fact that “goods and the price of labor moved in response to international price ignals much more sluggishly than fluid funds, and prices in goods and labor markets moved more sluggishly than prices of financial assets. “(McCallum, 1995:16) Others attack the view that excess volatility would be eliminated because “deciding whether volatility is excessive is complicated by difficulty of determining the fundamental value of a security” (Hakkio, 1994:22).

Opponents of the tax argue that it could be avoided by product substitution and regulatory arbitrage and that the government revenue created would be overestimated because “the tax base would decline as security prices and the olume of trading decline” (Hakkio 1994: 26). Advocates of the “efficient market hypothesis” argue that if financial markets are allowed to freely operate, there will be a revaluation of asset values that will produce the most accurate price signals on which to base long- term resource allocations. They say that a STT would be detrimental to less developed countries so reliant on short term investment.

Another highly noted policy aimed at curbing international financial instability is the adoption of a targeted exchange rate system. A sort of ” hybrid” regime, target zones allows currencies to fluctuate within predetermined nd set bands, thus allowing a “float” but at the same time keeping a “fix. ” Since “the main sources of conflict have been the unpredictability of exchange rates” (Frenkel, 1990:318) a target zone approach would in theory alleviate this unpredictability, while keeping the appealing attributes of a floating system.

Seen to be the optimal answer for coordinated exchange rate stabilization, ” target zones would involve the determination of an international consensus regarding an appropriate and globally feasible range around which currency values could fluctuate” (Grabel, 1993:77). The adoption of a target zone system would not be universally beneficial. Naturally, the size, status and sector of the economy play an important role in its desirability.

Government officials and central bankers will likely oppose the adoption of a targeted exchange rate due to the fact that it would hurt their ability to change the value of their currency in the face of high capital mobility. With a targeted exchange rate, it is argued that there is limited room for fluctuation which infringes on the effectiveness of domestic policies. On the other hand, the fixity of the target zone would in theory tabilize purchasing power of wage earners in both developed and less developed.

The overriding problem of the adoption of a target zone regime is that there is no clear way in which target zones could be calculated. If they were to be calculated what would be the ramifications if a country was to fluctuate out of the specific bands? Would the target zones be global or regional? If global, how could the less developed countries be able to stay in the same bands as the developed countries? If a target zone was adopted, what is to say the maldistribution of wealth would not remain idle?

There seems to be little, if ny, evidence that a fixed, stabilized exchange rate leads to higher or lower interest rates. If the value of a currency is not able to adapt to high tendencies of capital mobility, then it is only rational to say that the developed countries would continue to sap the wealth of less developed countries. The last major policy aimed at quelling financial instability is the creation of a supranational institution aimed at coordinating financial reform and adopting a system of “regulatory supervision.

Processing along the lines of a Bretton Woods architecture, this would in a sense institutionalize the role of hegemon with “a creation of a common currency for all of the industrial democracies” and “a joint Bank of Issue to determine monetary [and financial] policies” (Cooper, 1984:166). This policy proposal endorses the adoption of an global financial institution managing the operation of coordinated supervision. Experience shows us that coordinated supervision is not possible in international financial markets.

For instance, the Basel Concordant was never able to reach organizational level to properly respond to a crisis. Additionally, “the BCCI affair demonstrated the limitations of international ank supervision when confronted by unscrupulous operators intent on exploiting the gaps in national bank supervisory systems” (Herring and Litan, 1995:105). Proponents of re-creating a Bretton Woods-type system are unaware of the lessons to be learned from that period.

The theoretical brethren of hegemonic stability advocates, proponents of this policy seek too place “the direction of world monetary policy in the hands of a single country” or institution that would have “great influence over the economic destiny of others” (Williamson, 1977:37). As seen under the Bretton Woods system the “destiny” of others was in he hands of a country that was unable to maintain stability. It is yet to be demonstrated how an institutional framework would sidestep the same faultlines and management problems experienced by the United States under the Bretton Woods regime.

The organizational barriers to creating such cooperation and coordination would be insurmountable. Secondly, whose view would most likely be presented in the supranational forum? Experience in international organizations shows us that it will probably be the powerful, industrialized nations. The voice and needs of the less developed countries is likely to be marginalized and ituations such as the Latin American debt crisis would continue to occur. When looking at the progress of the European Monetary Union we see that the completion of a single market is far too radical for today’s international financial climate.

Just as “the costs of qualifying for the EMU has become too high” it becomes “unrealistic to hope that the major industrial countries can make comparable strides toward political [much less financial] unification in our lifetime” (Eichengreen and Tobin, 1995:170). Ideally, the best policy for stemming financial instability and spillover effects would be one that extinguishes the problem at its roots. If deregulation in itself causes instability in financial markets, then regulation would be appealing.

Even when the benefits of financial deregulation are apparent, there is a role for regulatory policy” that would “leave the world economy less vulnerable to financial collapse” (Eichengreen and Portes, 1987:51). . If we also hold true the conclusion that the best explanation for financial instability is speculation, then a global securities transaction tax such as the one proposed by Tobin would be optimal. The discouragement of short term speculative excursions and the endorsement of long-term investment will liminate the problem of volatility based on speculative attacks that so often stray from market “fundamentals.

Critics are quite correct when they argue that the tax could induce financial arbitrage and substitution. However this problem would be solved as long as the tax was globally adopted. Secondly, the tax would be applied to goods, services, and financial instruments that had few or no substitutes. The view that the creation of new government revenues is overestimated and that Third World countries would carry the financial burden is nullified when we see that “a . percent tax on exchange transaction would ugment government revenues globally by as much as $300 to $400 billion per anum” and “devoting merely 10-20 percent of that revenue to a revolving fund for long-term lending to Third World countries would be a healthy substitute for the hot money on which some have become disastrously overdependent” (McCallum, 1995:16).

The recognition and ceasing of financial instability and its global transmission is becoming more and more universally endorsed. To decide on a prudent and practical policy will prove to be a major hurdle of international financial leaders around the world.

However, if we look closely, we will find the locus of instability in financial markets to be deregulation and speculative attacks. Government and central bankers can no longer adopt an attitude of ” benign neglect” toward international financial instability as it becomes increasingly apparent that there are far reaching consequences on real sectors. We can see that there is one policy that supersedes the rest. If the world financial system hopes to curb these real sector ramifications of speculative attacks and financial liberalization, then it becomes indisputable that the STT is an idea whose time has come.

The Integrity Of Financial Reporting In The U. S. Marketplace

On September 28, 1998, Chairman of the U. S. Securities and Exchange Commission Arthur Levitt sounded the call to arms in the financial community. Levitt asked for, “immediate and coordinated action to assure credibility and transparency” of financial reporting. Levitts speech emphasized the importance of clear financial reporting to those gathered at New York University. Reporting which has bowed to the pressures and tricks of earnings management. Levitt specifically addresses five of the most popular tricks used by firms to smooth earnings.

Secondly, Levitt outlines an eight part action plan to recover the integrity of financial reporting in the U. S. market place. What are the basic objectives of financial reporting? Generally accepted accounting principles provide information that identifies, measures, and communicates financial information about economic entities to reasonably knowledgeable users. Information that is a source of decision making for a wide array of users, most importantly, by investors and creditors. Investors and creditors who are responsible for effective allocation of capital in our economy.

If financial reporting becomes obscure and indecipherable, society loses the benefits of effective capital allocation. Nothing illustrates the importance of transparent information better than the pre-1930s era of anything goes accounting. An era that left a chasm of misinformation in the market. A chasm that was a contributing factor to the market collapse of 1929 and the years of economic depression. An entire society suffered the repercussions of misinformation. Families, and retirees depend on the credibility of financial reporting for their futures and livelihoods.

Levitt describes financial reporting as, a bond between the company and the investor which if damaged can have disastrous, long-lasting consequences. Once again, the bond is being tested. Tested by a financial community fixated on consensus earnings estimates. The pressure to achieve consensus estimates has never been so intense. The market demands consistency and punishes those who come up short. Eric Benhamou, former CEO of 3COM Corporation, learned this hard lesson over a few short weeks in 1996. Benhamou and shareholders lost $7 billion in market value when 3COM failed to achieve expectations.

The pressures are a tangled web of expectations, and conflicts of interest which Levitt describes as “almost self-perpetuating. ” With pressures mounting, the answer from U. S. managers has been earnings management with a mix of managed expectations. March of 1997 Fortune magazine reported that for an unprecedented sixteen consecutive quarters, more S&P 500 companies have beat the consensus earnings estimate than missed them. The sign of a quickly growing economy and a measure of the importance the market has placed on consensus earnings estimates.

The singular emphasis on earnings growth by investors has opened the door to earnings management solutions. Solutions that are further being reinforced to managers by market forces and compensation plans. Primarily, managers jobs depend on their ability to build stockholder equity, and ever more importantly their own compensation. A growing number of CEOs are recieving greater percentages of their compensation as stock options. A very personal incentive for executive achievement of consensus earnings estimates. Companies are not the only ones to feel the squeeze.

Analysts are being pressured by large institutional investors and companies seeking to manage expectations. Everyone is seeking the win. Auditors are being accused of being out to lunch, with the clients. Many accounting firms are coming under scrutiny as some of their clients are being investigated by the SEC for irregularities in their practice of accounting. Cendant and Sunbeam both left accounting giant Arthur Anderson holding a big olbag full of unreported accounting irregularities. Auditors from BDO Seidman addressed issues of GAAP with Thing New Ideas company.

The Changes were made and BDO was replace for no specific reason. Herb Greenberg calls the episode, “A reminder that the company being audited also pays the auditors bill. ” The Kind of conflict of interests that leads us to question the idea of how independent the auditors are. All of these pressures allow questionable accounting practices to obfuscate the reporting process. Generally accepted accounting principles are intended to be a guide, not a procedure. They have been developed with intended flexibility so as not to hinder the advancement of new and innovative business practice.

Flexibility that has left plenty of room for companies to stretch the boundaries of GAAP. Levitt focuss on five of the most widespread techniques used to deliver added flexibility. “Big Bath” restructuring charges, creative acquisition accounting, “Cookie Jar” reserves, “Immaterial” misapplications of accounting principles and the premature recognition of revenues. These practices do not specifically violate the “letter of the law,” but are gimmicks that ignore the spirit and intentions of GAAP. Gimmicks, according to Levitt, that are “an erosion in the quality of earnings and therefore the quality of financial reporting.

No longer is this just a problem perceived in small corporations struggling for recognition. Throughout the financial community, companies big and small are using these tools to smooth earnings and maximize market capitalization. The “Big Bath” restructuring charge is the wiping away of years of future expenses and charging them in the current period. A practice that paves the way to easy future earnings growth by allowing future expenses to be absorbed by restructuring liabilities. Large one time charges that will be ignored by analysts and the financial community through a little convincing and notation.

In note fifteen of the Coca-Cola companys 1998 annual report shows seven nonrecurring items from the past three years. Fours of these charges are restructuring charges, most significantly in 1996 in this note. In 1996, we recorded provisions of approximately $276 million in selling, administrative and general expenses related to our plans for strengthening our world wide system. Of this $276 million, approximately $130 million related to streamlining our operations, primarily in Greater Europe and Latin America. These one time write-offs become virtually insignificant footnotes to the financial reporting process.

Extraordinary charges that are becoming unusually common. Kodak has taken six extraordinary charges since 1991 and Coca-Cola has taken four in two years. The financial community has to wonder how “unusual” these charges are. Creative acquisition accounting is what Levitt calls “Merger Magic. ” With the increasing number of mergers in the 90s, companies have created another one time charge to avoid future earnings drags. The “in-process” research and development charge allows companies to minimize the premium paid on the acquisition of a company.

A premium that would otherwise be capitalized as “goodwill: and depreciated over a number of years. Depreciation expenses that have an impact on future earnings. This one time charge allowed WorldCom to minimize the capitalization of “goodwill” and avoid $100 million a year in depreciation expenses for many years. A charge hiding in this complex note on WorldComs 1996 annual financial statement. (1) Results for 1996 include a $2. 14 billion charge for in-process research and development related to the MFS merger.

The charge is based upon a valuation analysis of the technologies of MFS worldwide information system, the internet network expansion system of UUNET, and certain other identified research and development projects purchased in the MFS merger. The expense includes $1. 6 billion associated with UUNET and $0. 54 billion related to MFS. (2) Additionally, 1996 results include other after-tax charges of $121 million for employee severance, employee compensation charges, alignment charges, and costs to exit unfavorable telecommunications contracts and $343. 5 million after-tax write-down of operating assets within the companys non-core businesses.

On a pre-tax basis, these charges totaled $600. 1 million. The dollar amounts are staggering and the future implications far reaching. Since this approach was introduced by IBM in 1995 these charges have become commonplace for acquisition accounting. A popularity, largely due to the level of room allowed in research and development estimations. The Third earnings manipulation tool discussed by Levitt is what he calls “Miscellaneous Cookie Jar Reserves. ” The technique involves liability and other accrual accounts specifically sensitive to accounting assumptions and estimates.

These accounts can include sales returns, loan losses, warranty costs, allowance for doubtful accounts, expectations of goods to be returned and a host of others. Under the auspices of conservatism, these accounts can be used to store accruals of future income. Restructuring liabilities created by “Big Bath charges also provides these “Cookie jar reserve” effect. Jack Ciesielski, who manages money and writes the Analysts Accounting Observer, calls these accounts the “accounting equivalent of turning lead into gold a virtual honeypot for making rainy-day adjustments.

Various adjustments and entries that can produce almost any desired results in the pursuit of consistency. The statement of financial accounting concepts No. 2 (FASB, May 1980), defines “materiality” as: The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reaonable person relying on the information would have been changed or influenced by the omission or misstatement. Todays management has started to ignore this fundamental principle.

Materiality is being defined as a range of a few percentage points. Companies defend immaterial omissions by referring to percentage ceilings that draw a line on materiality. “The amount falls under our ceiling and is therefore immaterial. ” The materiality gimmick is one more method companies are using to stretch a nickel into a dime. Simply put, “In markets where missing an earnings projection by a penny can result in a loss of millions of dollars in market capitalization, I have a hard time accepting that some of these so-called non-events simply dont matter,” says Levitt.

Finally, Levitt briefly touches on the complex issue of the manipulation occuring in revenue recognition. Modern contracts, refunding, delaying of sales, up front and initiation fees all add to the complications in some industries to follow specific rules of revenue recognition. With plenty of holes in revenue recognition the door is open for tweaking. Microsoft is a good example of the problems facing todays companies. Concerned with proper revenue recognition, Microsoft started a practice in the software industry that allows companies to recognize revenue over a period of time.

This recognition allows for better matching of revenues to future expenses generated by the sale of the software. Expenses such as upgrades and technical support are related to the revenue generated by the sale of the software but are incurred at a later date. The complexities of modern business transactions have left modern standards of accountancy years behind. Gimmicks, that all must be addressed by the financial community. The task of returning integrity to U. S. financial reporting is of paramount importance. The interests of our financial system are at stake.

Arthur Levitt and the SEC “stand ready to take appropriate action if that interest is not protected. But, a private sector response that obviates the need for public sector dictates seems the wisest choice. ” A nine part plan that involves the entire financial community is proposed by Levitt. Levitt has made it very clear that the SEC is prepared to start forcing change. A line Levitt hopes will not be necessary to cross. The SEC will begin to issue guidance on a wide array of issues concerning the credibility and transparency of financial reporting.

Guidance that must be acted on to “Obviate” the need for large scale SEC involvement. The SEC will also act more proactively in two of its traditional roles of information regulation and enforcement. First, the SEC will begin requiring companies to provide additional disclosure details on changes in accounting assumptions. Supplemental beginning and ending balances and adjustments of sensitive restructuring liabilities and other loss accruals will also be required. Secondly, the SEC is unleashing the dogs on companies using any practices that appear to be managing earnings.

The gauntlet has been thrown, and it is up to the financial community to accept the challenge. FASB and other standard setting bodies have fallen behind a rapidly changing and evolving economic environment. FASB and the AICPA are being coercively encouraged to clean up auditing and disclosure practices. The pressure is on and standard setting bodies are scrambling to close the holes in GAAP. FASB has established committees to investigate a number of concerns and is diligently working toward solutions that “obviate.

Auditors and the public accounting industry received a good scolding from Levitt. Glaring failures in the auditing process at Sunbeam, Waste Management Inc. , and Cendant have put the whole industry at risk of public solutions. The auditors have failed to be the “watch dog” of investors. It is time to clean up your industry. Criticism by the entire financial community has questioned the auditors, qualifications, methods and their ability to police themselves. Finally Levitt challenges corporate management, and investors to begin a cultural change.

Change that resists the pressures to follow the leader in accounting chicanery. Investors are encouraged to set financial standards of integrity and transparency and punish those who depend on illusion and deception. “American markets enjoy the confidence of the world. How many half-truths, and how much sleight-of-hand, will it take to tarnish that faith? ” With the shift away form company run pension plans everyone has become their own personal financial planners. What hangs in the balance is the future of us all.

The Debut Of The Euro

In Europe, the debut of the euro is widely hailed as the most important event affecting the international monetary landscape since the breakup of the Bretton Woods System in 1971 to 1973, or since the Bretton Woods Agreement in 1944, or maybe even since the founding of the Federal Reserve System in 1913. It has become a contest for European officials and commentators to see who can push the analogy back furthest in time. Eminences elsewhere in the world have similarly greeted the euro with high hopes and great expectations.

Even Fidel Castro has praised Europe for creating a currency which finally confronts the dollar with a “prospective adversary” and promises to bring to a close the long postwar period of U. S. monetary hegemony. Only in the United States has the euro been greeted with a yawn. It is not hard to see why. So far, its advent has not weakened the international financial position of the dollar; if anything the opposite has been true.

The dollar has been strong against the euro rather than weak; for much of last autumn the fear was that the euro, which had started out being worth well more than a dollar, might plunge through the dreaded psychological barrier of one to one. There has been no sign of Asian and Latin American central banks replacing their dollars with euros en masse, as prominent commentators had predicted. The United States has not had to change the way it does business at Group of Seven summits, the OECD, or the IMF. Many Americans thus cannot help but feel that the euro is a tempest in a teapot.

Electronic Banking Report

A new study reveals that consumers are a lot more bullish about online banking services than previously thought, and that banks need to rethink how they go about segmenting customers and defining their value propositions. Online banking could grow by as much as 50% during the next year, according to the study, Competing on Supply, Winning on Demand. Recapturing Share of Consumer Financial Services, conducted by Bank Administration Institute (BAI) and The Cambridge Group. Twenty-four percent of survey participants conducted online financial transactions in the last 12 months.

Fifty-two percent are online but are not conducting financial transactions, and 24% are offline. However, over the next 12 months, 18% of respondents from these latter segments intend to transact financial services online. Other key findings are: 59% of consumers surveyed are interested in some form of online account aggregation. Aggregation solutions facilitated by screen scraping drew interest from 23%, while OFX (Open Financial Exchange) solutions were of interest to 34%. The most sought after aggregation deliverable was a single electronic statement (53%). % of consumers surveyed are interested in receiving financial education, advice and planning.

Thirty-eight percent are willing to pay for it on a one-time basis, while 34% are willing to pay for it on an ongoing basis. 990% of survey respondents are interested in the idea of one-stop shopping for financial services, and banks are viewed as the most capable providers of such a service. The most common online financial transactions for survey respondents are transferring money between accounts, paying bills, and buying securities. Sixty-three percent of study participants have life insurance.

Insurance companies are perceived as the most capable providers (65%), followed by large banks (14%), personal financial advisors (12%), credit unions (12%), full-service brokerage firms (11 %), and community banks (10%). “The research calls for financial services companies to look at their businesses in a new waythrough the eyes of their customers-to gain an understanding of the demand in the marketplace,” said Thomas P. Johnson, Jr. president and CEO at BAI. For example, the research shows that banks’ efforts to gain wallet share from wealthier consumers may be misdirected.

Many of these customers have a lower affinity for banks and have numerous financial companies competing for their business. However, by satisfying the needs of other customer segments who have a greater affinity for banks, are less demanding, and have fewer institutions vying for their attention, banking organizations can grow revenue from new sources. The study concludes that banks must focus more intensively on understanding the attitudes and motivations that drive customer behavior, said Navtej S. Nandra, principal at The Cambridge Group. “This approach allows you to predict behavior. ”

Qualitative Criteria and Evaluations

Alternative one offers the highest profitability. The net income after taxes for alternative two is $104,996,299 compared to $160,658,065 for alternative one. Alternative two also offers a high profitability, but not as much as the first alternative. The risk for alternative one is very high. The risk for the second alternative two is average. Purchasing Nestea is risky because the alternative beverage industry is declining. Coca-Colas dissolution of their alliance with Nestea also raises some concerns of risk and profitability.

The additional profits received from alternative one are not a large enough amount to consider taking this high of a risk. Competitors Reaction Competitors reactions were thought to be more prevalent in alternative two. The repackaging and offering the non-tea products in cans would cause an immediate reaction. The expected increase in sales would cut into the competitors share of the market. When Snapple refocuses itself in the international market, the other alternative beverage companies will also enter the market. Competitors reactions for alternative one are expected to be low.

The main competitor left after the purchase of the alternative beverage division of Nestea from Nestle would be Pepsis Lipton product. There are no clear strategic actions to counteract this movement from Pepsi Lipton. Societys Reaction Societys reactions for both alternatives would be high. Buying Nestea, alternative one, would give Snapple the profits they would receive from loyal Nestea customers. This brand loyalty might also help the image of Snapples drinks. The convenience of having Snapple in a can, included in alternative two, should have a positive reaction.

The slightly lower price of Snapple, for both alternatives, should create increased sales because consumers always appreciate being able to purchase goods at a lower price. Timing The timing of both alternatives is crucial because of Snapples declining market share and the slowing growth of the industry. It may also be a good idea to wait a while to purchase Nestea because of its declining sales, which could lower the purchase price. This is the right time for Snapple to enter the international market due to the industrys growth decline in the alternative beverage market in the United States.

Entering the international market should increase Snapples sales in a market that is not yet overcrowded. Feasibility Purchasing the Nestea division of Nestle could be difficult to accomplish. It is unknown if Nestle is willing to sell Nestea. Also, acquiring the amount of capital needed to purchase Nestea would be complex. Alternative two is more feasible. There are some promising prospects for international trade markets. It should be easy to offer Snapple in cans because the costs are lower and the company does not produce its own bottles.

However, Snapple would be forced to find companies that produce cans and will be willing to bottle the product in cans. Effectiveness Both of the alternatives address the problem that Snapple is facing. Alternative one solves the problem of Snapples declining market share by purchasing the Nestea division of Nestle. Alternative two solves this problem by entering the international market. The key success factor of maintaining and improving the image of the company is included in alternative two.

Both suggested methods of cutting costs, that would lower the price to the consumer, would also help to improve Snapples image Lowering the amount of flavors offered would make it easier to obtain shelf space for Snapples products. Choice Alternative two is the chosen solution. This decision was based on its strong numerical rating as well as its strengths. Alternative two was rated at 3. 9 compared to 3. 05 for alternative one. Entering the international market will increase the sales at less of a risk than alternative one. Alternative two also requires a considerably lessor amount to invest than the other alternative.

Alternative One Description As the sales in the alternative beverage industry have slowed, Snapple has to figure out new ways to survive. Snapple needs to look at cutting prices, varieties, and acquiring other investments. These suggestions lead to an alternative which will help Snapple survive and grow in the industry. Snapple needs to cut their prices to some extent, since they have a profit margin of 42. 11% according to 1993 standings. They can cut this to 30 percent and still make a great return without starting a big price war.

By doing this, Snapple will gain an increase in sales and possibly hurt other firms in the industry. This drastic reduction of consumer costs would threaten weaker firms to seriously consider leaving the alternative beverage industry. Since Nestle and Coke have separated, Nestea ( a division of Nestle) could be in serious financial trouble. The price cuts could hurt or eliminate Nestea and other small firms in the industry. In an industry with sales that are slowing, Snapple needs to try to acquire as much of the industrys sales as possible in order to survive.

Along with the cutting of prices, Snapple needs to acquire other investments. One way of doing this would be to buy out Nestles alternative beverage division (Nestea). Snapple has a great amount of assets and leverage for financing to buy Nestea. If Snapple can acquire Nestea, it would increase its market share substantially. At this point , Snapple would only have Pepsi Lipton as a major rival in which to contend. When acquiring Nestea, Snapple will take the name, product, and other patents and copyrights. Snapple will not buy the production or distribution buildings.

Snapple will also have Nesteas products subbed out to other distributors and bottlers in the same fashion as Snapples current plan. If Snapple and Nestea become one they could combine their products together for better sales and cheaper production. Since costs of supporting brands are on the rise and shelf space is limited, combing products packaging would be wise. Snapple will continue to not advertise its products as individual flavors but as the entire product line of Snapple. Also, they could use plastic bottles instead of glass, with the exception of ice teas.

The use of plastic could also save money and possibly increase sales because of the convenience. Alternative Two Description Despite the fact that Snapple was doing well within the alternative beverage industry in 1992-1993, sales began to fall while inventories rose in 1994. In order to combat the loss of sales and shelf space in convenience stores and supermarkets this alternative consists of three key components. The first component is to cut back on the number of flavors produced. Currently Snapple is distributed in 16 ounce bottles that tend to be bulky and more expensive than the competitors canned and bottled products.

To compete with our competitors one option is to change the packaging to cans for the non tea beverages, like Mango Madness and Kiwi Strawberry. These cans will be more convenient for the consumer in cost and the ability to recycle. The cans will also be more convenient to the supermarkets because they will be able to stock them more easily. Snapple would keep its tea beverages in bottles because of the unique technique used in the brewing process. A second aspect of the change in packaging is to sell packs of the drink to consumers. The packs would consist of four bottles or six cans.

The bottles would be advertised mainly in supermarkets as buy three get one free. These bottle four packs would consist of the consumers own assortment pack, in that the customer can choose which of the eight flavors of tea will go in their pack. The cans will be sold in six packs that are prepackaged in the same flavor. The third component of alternative two is to expand Snapples focus to include international markets. In 1994 Snapple began to introduce itself to the European market. They began selling Snapple in Britain, Ireland and Norway and then moved into Denmark, France and Spain.

However, by the end of 1994, only one percent of total Snapple sales were from international sales. This alternative proposes that Snapple increase their marketing strategies and attempt to contract more international distributors in order to increase global sales by ten percent. This component would cause the marketing department to expand their resources in order to market the product accurately in foreign lands. However, the timing is good at the current time in Europe to introduce Snapple. Snapples Research and Development staff would also have to research the flavors to see which ones are appealing to European tastes.

Hopefully, Snapple will ultimately be able to expand to other markets like Sou! th America, Asia and Central America. Current Strategy At the current time Snapples primary focus has been to pique consumer interest consistently with the introduction of new flavors regularly. Snapple is also entering the international market. Although, a lack of focus has not made sales strong in the international market. Another aspect of Snapples strategy has been to introduce varieties of their product in the soda, sport drink and diet form. Unfortunately these techniques have not been as successful for Snapple as they had hoped.

Computers And Finance

Computers have made financial bookkeeping much easier, and people no longer have to spend hours tracking investments or pay someone else to do their taxes. Moreover, the advancement in technology has allowed governments to cut back on the number of big companies and employees hired to process tax returns, resulting in the saving of millions of dollars. Although these advancements are extraordinary, they are not without their shortcomings. The IRS has had increased trouble in tracking fraudulent tax returns, and has had to revamp its detection system.

The most surprising part of Microsoft’s urrent purchase of Intuit, the maker of the Quicken line of personal finance software was not the $1. 5 billion price, which was fifty percent over the market value (Schlender 14). It was not even the fact that Bill Gates, America’s richest entrepreneur, is in a position to become America’s richest banker (14). The most surprising thing was that it did not happen earlier (14). For years Gates has had a dream of putting “electronic commerce at the core of personal computing,” and now he finally has the software to accompany that dream (14).

His idea includes a “Wallet PC” that can be arried around with people at all times (14). Microsoft believes that it can provide what executive VP Mike Maples refers to as a “whole new value chain” that will allow customers to interact by modem with banks, insurance companies, pension funds, etc. (14). Quicken is already being used by six million people to pay bills, manage credit, write checks, and handle taxes (14). For those of you scoring at home, it has 5. 2 million more users than Microsoft’s Money software (14).

That is a prime reason that Gates basically wanted to give up the product and donate it to his competitor Novell (14). Programs such as Quicken are excellent for keeping track of what is spent at home, but can be a big hassle for keeping track of the money spent on business trips (Baig 20). One way to solve the problem would be to carry a notebook computer with Quicken on it, but as Edward Baig states “It’s just not practical to boot up a laptop each time I step out of a taxi” (20). Intuit has released Pocket Quicken, a “Quicken Lite” for those who carry around digital assistants to help alleviate that problem (20).

Pocket Quicken is built into the new Hewlett-Packard 00LX palmtop, the Tandy/Casio Zoomer PDA’s, and the AST Gridpad 2390, but is not sold as a separate product just yet (20). Eventually this will also be available on the Motorola Envoy (20). Pocket Quicken allows users to categorically follow expenditures such as food, gas, and rent by creating checking, credit card, and cash accounts (20). Pocket Quicken lets travelers sequester what is spent into areas such as trip, client, project, or class (20).

People can share data with regular Quicken with the HP 200LX’s $119 optional cable and software package, or with the $30 addition to the Zoomer 20). However, Pocket Quicken does have its shortcomings because it does not allow for the set up of budgets or the following of investments (20). It also does not compute net worth or tax summaries, and does not have all the graphs with which Quicken comes equipped (20). If Pocket Quicken is not of interest, another option would be to record expenditures at the end of each day (20). Yet, another possibility would be QuickXpense for Windows from Portable Software (20).

This program allows users to work with the exact expense form they would like to use because many of the orms from large corporations have been previously loaded into the program (20). Another of its qualities is that if a specific company’s form was not included, they will put it on a disk for customers if they send blank copy of the form to Portable Software (20). All entries are entered the same as Quicken, but this program will also figure mileage cost for driving, convert foreign currency, and catalog each type of expense included on hotel bills (20). QuickXpense will also let the user know when it is time to file an expense report (20).

Computer and technology outsource ompanies typically handle the dirty work behind tax collecting; however, with the recent advances in technology, the state of New York was able to hire a financial group to handle the responsibility (Halper 63). The New York State Department of Taxation gave Fleet Financial Group a $197 million contract to handle computerized tax collections and refunds for the next ten years (63). This contract does not totally ignore the traditional outsourcing company because Computer Science Corp. (CSC) of El Segundo California is responsible for developing the software (63).

Arthur Gross, deputy commissioner for revenue and management, said that because the process involved “so many banking procedures it simply made more sense to hire a bank” (63). The inefficiencies of the current system would not have been done away with if a traditional technology company had been hired (63). The state will receive more than ten million personal income tax returns accompanied by two million checks (63). Those checks are sent to one of nearly forty banks that will deposit the checks, capture data, and then return that information to the state (63).

Gross questioned hat since the bank will end up with much of the information then “Why shouldn’t they get it directly instead of it banging around all over the place? ” (63). Experts have given New York credit for a fresh idea, but say that it is too early to know if a bank can handle all the challenges presented by the technology (63). This contract will cut the cost of processing by an estimated $80 million during the next ten years (63). Gross is impressed with the new technology, but added that “the focal point was not necessarily the technology” (63).

Fleet Financial will carry out the same tasks for he state that banks already do for their customers (63). Because of this, the bank is able to do a better and more efficient job than the state ever could (63). In fact, the new imaging and scanning equipment will allow Fleet Financial to do the job forty percent faster (63). CSC will play a large part in the process of cutting cost because the department will still depend on its IBM and Unisys Corp. mainframes (63). The new equipment for improving the process comes from the new imaging and scanning technology being installed by CSC and Fleet Financial (63).

The first item installed ill be the AT&T Global Information Solutions 7780 scanning system (63). This will be used to read the data from the 2. 3 million different coupons sent by self-employers, who are required to file their estimated earnings, and all checks that might accompany them (63). New York state law states that residents of New York City or Yonkers must use special filing procedures, so the bank will check addresses to be sure that the filer claimed residence in the proper place (63). Currently the state must check ten million forms manually to sort out approximately two million alse forms (63).

The cost-savings will allow the state to redistribute about 300 employees to jobs that create revenue — i. e. , disproving taxpayer complaints of inaccuracies — from their processing jobs (63). The new technology will allow the state to cut back from 1400 tax season workers to about 300 (63). According to the IRS filing taxes from home with the use of a PC and modem may be possible within five years (Kantra 47). The IRS also expects to process roughly eighty million electronic tax returns (47). In 1993, almost ten percent of everyone that filed individually sed some form of electronic or computerized filing system (47).

Approximately twelve million people filed with a professional tax preparer for refunds or some kind of third party that uses personal tax preparation software — a process that must have a verification form (47). Furthermore, 1040PC forms, printouts from tax software packages, were sent by another 4. 8 million people (47). The most widely used software packages are Chipsofts TurboTax and Meca Software’s TaxCut; however, it is now possible to obtain a competitors package for the cost of shipping (47). Several of these programs can pull ata in automatically from other programs like Quicken (47).

With the invention of electronic filing, more fraudulent attempts have been made to cheat the IRS. The U. S. General Accounting Office (GAO) noted a major increase in the amount of fraud attempts in the IRS’ electronic filing program by saying that “The growth of [fraudulent] returns is very high, but it is unclear how much of the growth is due to an increase in fraudulent activity rather than improvement in fraud detection” said GAO special assistant James F. Hinchman (Anthes 28). The worse part of everything is the uncertainty about the umber of false returns that go undetected (28).

An experimental system was instituted in 1990 without having certain “edit-and-validation” rules (28). An illustration of this would be that taxpayers names and Social Security numbers on the returns were not checked with the internal IRS records (28). When that omission was corrected, 200,000 returns were rejected; however, Hincman says the system is still in need of “stronger validity checks” (28). Aggressive plans have been taken by the IRS in order to automate fraud detection (28).

They have, with the help of computer scientists at Los Alamos National Laboratory, developed artificial intelligence techniques to notice suspicious returns (28). A new “electronic fraud detection system” will be implemented next year (28). A system that will allow for greater taxpayer and tax-return data on-line (28). Finally, more documents will be compared with each other for the purpose of making it easier to find more fraud attempts before the IRS makes refunds (28). The world of computers is always expanding, and computers are apart of almost everything that people do. This is evidenced by the way in which companies such as Microsoft have xpanded into the world of finance.

Computer programs like Quicken have made financial bookkeeping much easier because of its great versatility, and new computer technology has allowed the state of New York to hire a bank to work the state tax system. Furthermore, the invention of electronic tax filing has allowed people to file more quickly and get returns more quickly, but it has also caused an increase in tax fraud. This has forced the IRS to go look at and totally redesign its process of detecting fraud. All this is evidence that the world is becoming more computer oriented.

International Monetary Fund

Institutions like IMF and World Bank are central to enforcing modern imperialism. Founded in 1946 at Bretton Woods in the USA, the IMF and World Bank initially focused on rebuilding Western Europe and Japan after World War 2. They were a key component of the USA’s attempts to create a dollar- centered international monetary system. Then, from around 1971, the focus of IMF and World Bank shifted to the Third World, and especially to Africa. Despite IMF and World Bank’s rosy views of themselves as neutral, purely echnical aid agencies their role in these regions has been objectively imperialistic.

This is clear in both political and economic spheres. Although most States in the world are members of the IMF and World Bank, and pay into the central coffers of these institutions, the imperialist countries of the First World dominate their decision-making processes. Rather than a “one country, one vote” system, as can be found in United Nations organizations, a percentage of votes is granted according to the conomic size and contribution of a given country, a system which favors the First World states: the USA has 19. % of the total vote; the United Kingdom 6. 9%; and the USA, Western Europe, and Canada combined have 53% of the vote.

Firstly, an anti-imperialist struggle cannot succeed if it is isolated in one country. There can be no “anti-imperialism in one country” as hostile imperialism will either (a) subvert the autonomy of that struggle through subjecting it to the logic of the international State/capitalist system, or b) intervene against and/or destroy regimes its considers too renegade (in the case of a socialist revolution, armed intervention is a certainty).

Thus a successful struggle against imperialism requires maximum international support and solidarity, both within the First World and across the Third World. The revolution needs to spread into nearby territories dominated by imperialism as well as into the imperialist countries themselves. In other words, it requires an assault on the whole edifice of world capitalism and the world State system.

Secondly, imperialism cannot be defeated without simultaneously defeating capitalism and the State. In other words, the struggle against imperialism can only succeed if it is simultaneously a struggle against capitalism and the State. Since capitalism and the State can only be defeated by class struggle, and since the Third World ruling classes are objectively pro-imperialist, imperialism can only be defeated by means of a class struggle against all rulers and bosses, local and imperial.

The Euro Paper

In Europe, the debut of the euro is widely hailed as the most important event affecting the international monetary landscape since the breakup of the Bretton Woods System in 1971 to 1973, or since the Bretton Woods Agreement in 1944, or maybe even since the founding of the Federal Reserve System in 1913. It has become a contest for European officials and commentators to see who can push the analogy back furthest in time. Eminences elsewhere in the world have similarly greeted the euro with high hopes and great expectations.

Only in the United States has the euro been greeted with a yawn. It is not hard to see why. So far, its advent has not weakened the international financial position of the dollar; if anything the opposite has been true. The dollar has been strong against the euro rather than weak; for much of last autumn the fear was that the euro, which had started out being worth well more than a dollar, might plunge through the dreaded psychological barrier of one to one.

There has been no sign of Asian and Latin American central banks replacing their dollars with euros en masse, as prominent commentators had predicted. The United States has not had to change the way it does business at Group of Seven summits, the OECD, or the IMF. Many Americans thus cannot help but feel that the euro is a tempest in a teapot. The Euro’s Slow Start Perhaps Asian and Latin American central banks have been waiting to dump their dollars until the euro stabilizes.

Through much of 1999 the euro was weak because the European economy was weak; governments and private investors were understandably reluctant to overweight a currency that seemed to be losing value by the day. Investors were slow to move into euros because they thought that Europe was less well prepared than the United States for Y2K. They worried about the stability of the European banking system because European banks had lent much more aggressively than their American counterparts to Indonesia, Korea, Malaysia and Thailand.

But now that European growth is finally accelerating, the euro could strengthen, and the anticipated shift into euros at last could get under way. Perhaps governments and investors have been reluctant to embrace the euro because of a series of missteps by the European Central Bank. In the early months of 1999, ECB officials issued a series of confusing and contradictory statements, and on several occasions the ECB board’s decision on whether or not to raise interest rates leaked to the press in advance of the official announcement.

In April the ECB cut interest rates faster than most market participants thought wise in response to signs of weakness in the European economy. Now that the ECB has apparently concluded that less is more (by issuing fewer public statements and moving interest rates less frequently) and has begun to demonstrate the priority it attaches to price stability, skepticism about its ability to act as the steward of a strong currency may be about to fade. Learning to Think European And perhaps it is simply taking time for Europe to learn to speak with one monetary voice.

It is understandable that an extended process of acculturation should be required in order for the national central bank governors on the ECB board to learn to think and talk as representatives of Europe and to frame policy with Europe-wide conditions in mind. Similarly, not until well into 1999 was real progress made on reorganizing European representation at G-7, G-10 and OECD meetings. Europe, unlike the United States, has not been able to effectively represent its views on how best to reform the international financial architecture because it is still creating mechanisms for conveying its views and, more importantly, forming those views.

Given time, however, this will change. With time, the euro will significantly alter the international monetary and financial landscape. Europe’s new money will develop into a serious rival to the dollar as a reserve currency for central banks, an invoicing currency for importers and exporters, and a financial asset for international investors. But this will take more time than suggested even by many euro-skeptics. Because changes in the international monetary and financial landscape tend to occur extremely slow, the exaggerated hopes of euro-enthusiasts like Fidel Castro are likely to be disappointed.

Similarly, Europe will eventually learn to speak with one monetary voice. But the political changes needed to make that level of financial solidarity possible will take many years to complete. Just as the dollar will continue to dominate the international financial arena for the foreseeable future, the United States will retain the loudest single voice in international monetary debate. A Rival to the Dollar? n A world where the euro rivaled or even surpassed the dollar would represent a major change from the status quo.

At the moment, the dollar is far and away the leading currency. Aproximily sixty-seven percent of the foreign exchange reserves of central banks around the world are in dollars, compared to less than a quarter of the total for all Euroland– of the 11 E. U. Forty percent of the minor currencies that are pegged to one of their major counterparts are pegged to the U. S. dollar, a far larger percentage than any of its rivals. In one of the articles I also read that the dollar is used to denominate more than half of all private financial transactions.

There was an interesting articles which said that Less is known about whose cash is held outside the home country, since much of it is used for purposes like drug smuggling, tax evasion and money laundering. But the best guess of the Federal Reserve and the German Bundesbank is that perhaps 80 percent of the total is dollars. Those who hope or fear that the euro will quickly rival or overtake the dollar as an international currency point to the size of the European market, which are still growing. The population of Euroland approaches 300 million.

The euro area is the single largest importer and exporter in the world, accounting for 19 per cent of world exports, followed by 15 percent for the U. S. and 9 percent for Japan. Its share of world GDP is 16 per cent, far higher than Japan’s and not very far behind the United States. And as Euroland expands its E. U. member states like Greece, Denmark, Sweden and the UK that are now outside the monetary union decide to participate and the E. U. , and also the Eastern European countries if they every decide to join, its share of global GDP will quite possibly surpass that of the United States.

Moreover, the euro has created an immense European financial market. With so much economic activity taking place in Europe and so much of it denominated in euros, the euro should become increasingly convenient for use in international transactions by governments, banks and traders in other parts of the world. Increasingly, importers and exporters in Latin America and Asia will invoice their transactions in euros rather than dollars because so many European importers and exporters will be invoicing in euros.

I also believe that multinational corporations and governments will grow even more enthusiastic about denominating their international bond issues in euros, given the large and growing volume of euro-denominated transactions on European securities markets. Latin American and Asian central banks will in the future shift the currency composition of their international reserves from dollars to euros as they see other central banks moving in that direction. Also as the liquidity of European financial markets continues to improve, will begin to shift the eyes of investors around the world towards the shinning euro.

New Generation Housing & Finance Utopia

In the past few months, there was consistent negotiation for creation of a housing & financial Utopia. Last Friday, Oct 24, 2020, Michael Smith, the chairman of Style Construction Co, and John Abraham, the Cubat island owner, had given permission and their support to create the New Generation Housing & Finance Utopia. I was very fortunate to be the manager of this construction. It would my pleasure to present you the ideal of this goal and how it function. New Generation Housing & Finance Utopia will be a heaven residential area and a secure financial market, which is closely associated with the world markets.

We will have 500 elite world companies in this Exchange, such as AT&T, Microsoft, Intel and etc. As we have witnessed in this century, many investors were eager to increase their profits, they began to invest dangerously with undocumented speculations. Rumors such as the merger of MCI WorldCom and Charon Communication had stock prices increase dramatically in few weeks, up 150% from previous month. MCI WorldCom chairman, Bob Wilson disclaimed the false allegation. “We have never in any way discussed with Charon about the possibility of a merger.

We feel very confident with our position in the future. ” Wilson said. Undocumented speculation caused the unsubstantial rising of MCI and Charon stock prices. When the truth was being told, a major correction was inevitable for MCI and Charon, they dropped 200% from it’s high. The speculators sold their shares before the announcement was made, since they knew it was untrue. They were profited handsomely from this trade. However, the investors, who believed in the rumor, were the buffer of this deal, meaning the ones who helped the speculators made money, but lost wealth of their own.

A few investors, who lost all their money, found no way out but death. Dick Peterson, in debt of Margin loan, jumped from 30-story office building for an immediate solution to his problems. Others gathered in the streets outside the Stock Exchange to learn how much they lost. Margin loan was buying number of shares with partial of your own money, and borrow the rest from brokers. As you could see, danger investment led to tragedy. Our goal of New Generation Housing & Finance Utopia is to provide our investors a safer environment to invest in.

We will eliminate undocumented speculations. Any news you hear is base on credible and legal announcements. Whoever in any way or form, try to mislead a false speculations will be fine severely and will be forbidden from the Utopia. Some features in this new Exchange will be different from other markets. Margin loans will be bended to prevent risky investment. A new loan call Accommodate loan will be take place of the Margin loan. Accommodate loan will let you borrow up to 10% of your investment. The loan must be paid back in a month.

The interest rate will be 10% of the amount you borrow, and overdue funds will increase the rate to 15%. Funds not being return in 2 months will be obligated to take the risk of losing the whole investment to the bank. Ten percents tax charge on profits from market investment less than 10,000 dollars. Fifteen percents tax on profits less than 20,000 dollars, over 100,000 dollars will be twenty percents, and exceed 500,000 dollars will be thirty-five percents. The maximum capacity for the island is 100,000 people.

Anyone is welcome to live in this Utopia. However, the minimum requirement of acceptable residents must have $100,000 of investments in the new Exchange. The individuals, who had trouble with the law, must obtain recommendations from several credible foundations. Then, a Selection committee will decide the acceptance of the individual (Noted criminals who committed major crimes will be turn down from acceptance). Occupation is various in this island, but market investment would be the priority profession.

Anyone is welcome to set up his or her own business with the approval of the island chairman (To ensure the non-polluted environment wouldn’t be interfere, no factories will be permitted). A democratic government will be in charge of the island. Selection members and the chairman are chosen by free election. The chairman of the island acts as the president. He has to solve issues, manage investment funds, and provide quality living and peace for the island residents. A Selection committee will be set up of thirty members. They act as Congress. They have the rights to veto the chairman’s decision, and make laws of this island.

Understanding the personal needs and abilities of our residents make the difference between life and living, trained staffs are on hand 24 hours per day, 7 days per week to assist and care for residents if any conflicts or problems occur. If any disagreement should become an important concern, voting will take place by the residents to concur the matter. The government will provide high-quality health care and school education. The funds of this service will be supported by the 15 percents tax of resident’s income. School will be concentrated on financial, business, and technology education.

The educated students will be the followers of this community. Housing is one of the most essential belongings in our life. Not only we want a home, but also a fancy house with luxuries that satisfied our desires. To ensure that our resident personal lifestyle is not just maintained but enhanced, we took that ambition account to the construction of the island. Our mission is to provide our residents a home the way they wanted. When the resident’s application has been accepted, we would give them freedoms of constructing their dream house. They tell us what they want, and we will build it for them.

However, because of time consuming are limited, the area and the outer structure of the house will be constructed in advance. We will follow our customer’s wishes to assemble the bedrooms, living rooms, gardens, and etc. Thanks to the arrangement of the island, which surrounded by water, our residents could see beautiful water views, and spectacular sunsets. There is always abundance of activities to occupy in this gorgeous island. Beaches are conveniently access for our residents. Amusement park could be found in the center of the island. Shopping malls are located closely to residential areas.

The Usage of IT in The Banking Industry

Information technology has dramatically changed the way banking is done over the last 15 years or so. The era of change banking in Canada began from the establishment of Interac’s national Automated Teller Machine (ATM) network in 1986. National Debit Card network was introduced in 1994. First full service virtual bank came into being in 1997. Most recently voice recognition banking has begun to emerge in the Canadian business scene. One of the enabler of this Information technology revolution in Canadian financial service industry is Automated Teller Machine, which is essentially a date terminal with two input and four output devices.

The two input devices are Keypad and card reader. The four output devices are speakers, display screen, receipt printer, and cash dispenser. The user inserts the card in the card reader and key in the PIN number via the keypad. The receipt printer prints the receipt and the cash dispenser ejects the cash out. All the operations are displayed on the screen along with the instructions to carry out the necessary steps. Like any other data terminal ATM has to connect and communicate through a host processor, which acts as a gateway.

ATMs are connected to the host processor via leased telephone lines or dial up connections. Leased telephone lines have higher date rate transfer and are preferred at high transaction volume places. Banks themselves or independent service providers may be the owners of the host processors. Security is the biggest issue of the transactions done electronically. According to the TIMES magazine issue dated March 7, 2005 there were 10 million people were affected by identity theft in US in 2005 with a total loss of US$ 5 Billion.

ATM technology is turning to Biometrics to reduce the probability of the identity theft. The word ‘biometric’ means to measure life and to recognize an individual biometrics employs a biological trait unique to that person. The traits can be finger prints, iris patterns, retinal scans. For a biometric system to work first of all the individuals have to provide the samples of the unique trait such as finger prints to the organization planning to run the system.

This voluntary deposit of the samples can be a hurdle in the setting up of the system because some individuals may not like the idea of handing over their finger prints to some organization. Once the samples of the unique character are collected, they are arranged in a data base. When a customer intends to utilize the ATM then instead of entering the PIN he/she will present a finger to the machine and the finger will be scanned to get the finger print. The finger print will be processed in a manner similar to the verification of the PIN.

False Acceptance’ and “False Rejection’ are the major limiting problems of biometric systems. In systems using finger prints the incidence of such problems is practically zero but in the system based on face recognition the rate of true recognition is only 47%. So the systems based on finger prints are gaining acceptance while the use of face recognition system awaits the improvement in information technology. Bancafe Bank of Colombia has installed finger prints recognition system on three-quarter of its 484 ATMs.

Progress and convergence in the fields of Information Technology, Genomics, Nanotechnolgy, Robotics may disrupt every industry and may indeed redefine the humanity in the long run. In the next 20 years or so we are looking at peta bytes/sq. cm storage devices, microprocessors with 5 billion transistors, real time genome sequencing, and universal networks. In such environment the network of powerful hand held devices will mean that there may not be any need of carrying debit cards or credit cards and money may change ownership on the networks without any ATMs.

The Electronic Banking Association

The Electronic Banking Association (EBA) is a non-profit organization established to do one simple thing-help more people get started with electronic banking. Here’s why. Who taught you how to write paper checks? Probably your parent’s right? Well, who’s going to teach you how to write electronic checks? Probably NOT your parents. That’s where they come in. E-banking is so much more convenient and so much quicker that everyone should know about it. The EBA was established as an independent source of helpful information about electronic banking for consumers and businesses.

Financial institutions, merchants, and other financial service firms actually provide financial e-commerce services, but the Electronic Banking Association (EBA) monitors progress in the financial e-commerce industry and provides information that will enable users of those services to become better informed and to locate providers of the services they seek. Everyone hates paying bills. It’s time-consuming, frustrating, and you have to lick that awful envelope glue. But not with e-banking. You’ll spend less time paying bills, and more time doing fun stuff.

Here are some advantages to e-banking: – No more paper checks. Your computer remembers who you write checks to. You simply enter an amount then point-and-click. You’ll never run out of checks again. – No more hassles. You can schedule your payments in advance, so they’ll get paid while you’re on vacation or away on business. Electronic payments are processed quickly, in as little as 24 hours to 5 days (unlike a paper check sent in the mail, which takes an average of 10 days to post). – No more envelopes to lick. No envelope glue. No paper cuts on your tongue.

And you an stop writing your return address again, and again, and again. – No more writer’s cramp. It takes forever to write checks and addresses every month. E-banking cuts that time to practically nothing. – No more stamps. With e-banking, there’s no postage and your bills are processed quickly – whenever you want them paid. You can pay your bills online, so it only makes sense to receive them that way, too. This is called “Electronic Bill Presentment,” and more and more businesses are going to offer it. – No more lost bills. Your dog can’t eat electronic bills.

Your kids can’t misplace them. And you can’t lose them under a stack of catalogs. – Pay bills when you want to. Not when the post office decides to deliver them. Click to see it. Click to pay it. Your bills appear right on your computer screen and look much like the printed bills you are used to getting. But the difference is you can pay them with just the click of a mouse. – Better record keeping. All your billing and payment information is kept in one convenient location, not in messy cardboard boxes or goodness only knows where else.

You can pay your bills online, so it only makes sense to receive them that way, too. This is called “Electronic Bill Presentment,” and more and more businesses are going to offer it. In addition to paying bills online, you can get current information any time you want it. So you can get up-to-date account balances, transfer funds, obtain information about check clearing; all sorts of things. You can import this information directly into today’s popular financial management programs such as Quicken without having to re-enter it. You buy things all the time with credit cards, right?

Well then, those are electronic transactions just like these. Today’s latest Web browsers have sophisticated encryption that’s very secure. What’s more, electronic checks are safer than having paper checks lying around where anyone can obtain and misuse your account information. Experts predict it would take a hacker over 2,000 years to crack 56-bit encryption. Yet many financial institutions today require a browser that supports 128-bit encryption, which would take about 12,710,204,652,610,000,000,000,000 years to crack. Now that’s secure.

When you’re ready to open an e-banking ccount, you can receive more information on security, as well as a recent browser that supports 128-bit encryption, through your financial institution or at the Netscape and Microsoft Web sites. In the time it takes you to pay your bills the old-fashioned way, you can be up and running with e-banking. Best of all, once you enter who you pay bills to, you’ll never have to re-enter that information. Your financial institution may offer e-banking via the Web or a personal financial manager or both. Web-based e-banking is generally easier and quicker to set up.

Budget Deficit & National Debt

The purpose of this paper is to discuss the short- and long-term effects of current budget deficits and the nation debt. In order to do this; I first had to find out exactly what they were. I will also discuss whether I think the government should operate with a balanced budget. Budget deficit is the amount by which total government spending is more than government income during a specified period; the amount of money which the government has to raise by borrowing or currency emission in order to make up for the shortfall in tax revenues.

National debt denotes the total sum of the outstanding debt obligations of a country’s central government. I discovered that many people use the term somewhat more broadly to refer to the total indebtedness of all levels of government, including regional and local governments and sometimes also the indebtedness of government owned business entities such as local transit and communications systems or nationalized industries as well. The national debt represents the accumulated total of all the government budget deficits of past years, less the accumulated total of all the government budget surpluses of past years.

In the United States, the national debt consists almost entirely of interest-bearing “IOU” instruments that are usually re-sellable on organized financial markets such as, for example, U. S. bonds, U. S. treasury notes, and U. S. treasury bills. These IOUs are originally purchased from the Treasury by private individuals, private corporations, insurance companies, pension funds and banks (both inside the United States and outside its borders), and the Treasury then uses the money it raised to bridge its spending gap when its budget is in deficit.

The Treasury also sells IOUs to other Federal agencies that operate so-called trust funds — primarily the Social Security Administration and other Federal retirement programs. The complication here is that since this is money that the government “owes to itself,” it is not counted as part of the national debt in any realistic system of accounting. I find this to be really strange. Money to pay the annual interest owed to the owners of the government’s debt instruments has to be provided through appropriations in every year’s Federal budget.

These interest payments on the national debt constitute as one of the largest spending categories in the budget. Gross Domestic Product (GDP) is an estimate of the total money value of the entire final goods and services produced in a given one-year period using the factors of production located within a particular country’s borders. Running budget deficits has been a primary method for stimulating economies that have high unemployment rates.

Many articles that I read indicate that the budget should return to balance or surplus during boom times. “The Reagan administration discredited this notion, cutting taxes to such a degree that the United States would face perpetually high deficits, regardless of how hot the economy was,” according to economist John Maynard Keynes. The answer does not appear to be a balanced-budget amendment, unless you want to prevent the federal government from fighting recessions.

This would just make things worse, because then the federal government would be forced to make recessions worse. When the economy slows down, income and Social Security tax revenues drop, due to falling wages and profits. Meanwhile, costs for some programs, such as unemployment compensation, rise. These changes automatically put the federal budget into deficit, even if a balanced budget had been planned at the beginning of the fiscal year.

If a constitutional amendment requires the government to balance spending and revenues at the end of the year (not just in the original plan), then the White House would be forced to cut spending or raise tax rates. This would then slow the economy down, just at the time when it is most in need of stimulus. The Balanced Budget Constitutional Amendment, Center on Budget and Policy Priorities, January 9, 1995 states that in 1962 the federal budget was $100 billion and it doubled by 1971. It doubled again by 1977 and again by 1983. It then doubled again in 1997.

It also states that this year the federal government will spend $240 billion just to pay the interest on the federal debt. Another interesting statistic found is that a child born this year will have to pay $187,000 in taxes to pay his share of the debt. Because of the federal deficit’s effect on families, they’ll only make an average of $35,000 a year instead of the $50,500 they’d make without it. According to the “U. S. NATIONAL DEBT CLOCK” the outstanding public debt as of 17 Aug 1999 at 09:12:14 PM PDT was $5,635,435,597,521. . With the estimated population of the United States at 273,277,316 each citizen’s share of this debt is $20,621. 67.

The National Debt has continued to increase an average of $202 million per day since August 31, 1998. It is currently $3. 6 Trillion. I personally do not think that we should even entertain the notion of operating with a balanced budget. Why, you may say – because my limited knowledge of this subject indicates to me that the government has always overspent and in incapable of pulling in the purse strings.