week 6

The first article I did this week was called "Fed's Stern, critic of bank bailouts,set to retire" and was on Gary Stern's imminent retirement. Stern is the Federal Reserve's longest serving regional president, and is a very vocal critic of big bank bailouts. He has served the Minneapolis Fed since 1985, and is most likely to be replaced by Christine Cumming, who will become the third current female regional president. Strategists predict that the switch probably wouldn't have any major market consequences. Stern co-wrote a book called "Teoo Big to Fail: The Hazard of Bank Bailouts" in 2004, which criticized government intervention in saving financial institutions. The book argues that "protecting uninsured creditors of system institutions leads to underpricing of risk and, therefor, excessive risk-taking, which in turn sets the stage for turmoil in financial markets and disruption in the economy". Stern still believes if the government had followed his thesis, the country would have at least been better prepared to deal with the current problems, and also has proposed a program of "systematic focused supervision" which is designed to minimize potential spillover effect of large institutional failures.

This article was pretty interesting to me, because the phrase "too big to fail" was not a term too familiar to me before this economic crisis occurred, and yet it seems that it has been an issue in the American political system for some time before this. I have understood why the government has decided to act to save these huge institutions as a way of saving hundreds of thousands of jobs, but never really thought of why not to do it other than it was "un-american". Stern brings up a good point about the economic consequences of saving huge companies, and it worries me that maybe all the things the government is doing right now maybe be beneficial in the short term, but might have some pretty terrifying consequences in the future.

My second article of the week was called "Emerging recovery may give legs to market rally" and was about growing signs that the global economy might have hit a trough and is rallying in stocks and other risky assets. World equitis have risen more than 6 percent in the past 2 days, the biggest monthly gains in March since december 1999. Investors are also happy with the actions of the world governments, such as G20's pledge to give a trillion dollars to the IMF and other institutions. Some risky assets, which were hit very hard recently, have also shown some signs of recent investor confidence. Convertible bonds, which are a risky asset, have doubled in sals in the first quarter

This article gave me hope that this recession won't turn into the decade long debacle of the 1930's, which has been scaring me for some time now. I think the news needs to cover these types of stories more often, in order to help do their part in bolstering consumer confidence and hopefully improve overall spending. hopefully enough people will get this information and the market continues to show signs of improvement so we can all get on with our lives and focus on more important things than money.

My third article was called "After Obama ultimatum, GM standoff now a footrace?" and was about Obama's message to GM that pretty much said: make a deal now... or talk to the judge in bankruptcy court. The government has told GM that they have 60 days to present officials with a credible overhaul and survival plan, which must include major concessions from debtholders and United Auto Workers union. However there is one plan that GM is working out to use bankruptcy protection to shed all its toxic businesses and emerge reorganized around its solid ones, which would be terrible for GM's active and retired workers, which might get wiped out by such an action. This puts the union in a terrible position, meaning they have to agree to concessions that satisfy the government, GM, and their own members, before the bondholders of GM find reasonable concessions, because if they don't and the company goes under, it will look like it was the Unions fault.

I have heard before that some people have blamed the UAW for GM's economic woes. It seems from what I have heard that autoworkers who used to be underpaid and such, have for so long now fought for what they want, that they are actually overpaid with too many benefits and have limited companies abilities from sending some manufacturing overseas, a problem some foreign car makers have not had, thus disadvantaging U.S. automakers. It seems now is the time that a reasonable balance is to be found for GM's survival, and giving concessions up is better than having the whole union lose their jobs and benefits in bankruptcy, so it seems to me they should act as fast as possible in accommodating whatever the company needs.