Anatomy of a fraud (Small Case Study)

Have finacial markets lost faith in politicain ability to handle their economies

Sunday, 28 August 2011

Have finacial markets lost faith in politicain ability to handle their economies

Question no. 62

Have financial markets lost faith in politician’s ability to handle their economies.

 INTRODUCTION 

 Financial Market:-

Broad term describing any market place where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.

Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor’s geographical location, knowledge of the markets or the profession of the participant.

Discussion

The role of political environment in financial development is considered through several channels: how the political connectedness of managers affects firm valuation and ease of raising capital; the way politicians influence banks (and other companies) trying to attract electoral support; the ability of interest groups with political power to shape financial market institutions.

In the early stage of financial system development, the financial market is relatively small and the optimal configuration is for there to be a few banks in the economy. Politicians intervene to expand credit availability to borrowers by providing direct capital subsidies to banks in exchange for some state ownership of banks. In the intermediate stage, the financial market is larger and the optimal configuration involves more banks in the economy, with each being bigger. There is no political intervention in the financial system.

In the advanced stage, the financial market is at its largest and the optimal configuration has even more banks, with each being larger. Political intervention returns, this time in the form of direct-lending regulation that mandates that banks make loans to low-quality borrowers, even if doing so imposes losses on banks. Thus, the relationship between political intervention and financial system development is non-monotonic, and politicians intervene when financial markets are underdeveloped or highly developed.

Politicians cannot come to an agreement on the debt ceiling, what economic consequences should we expect?

If Politicians Do Not Reach Agreement

If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist).

If Politician Reach Agreement

It depends on the nature of the agreement. If the immediate budget cuts are large and poorly targeted, the resulting impact on the economy could threaten the recovery. Those who favor large and immediate cuts argue that the increase in the confidence of investors will more than compensate for the decline in demand.

The best outcome of the negotiations over the debt ceiling would be for both sides to agree upon a credible framework for reducing the debt level over time (which must include tax increases). That would give investors the confidence they need that politicians will be able to solve the debt problem without threatening the economic recovery or harming long-run economic growth.

The past behavior of politicians and the lack of credibility on budget issues, faith in politicians are so low that any agreement about the future will likely be discounted substantially. This means politicians need to show people that they are serious about the debt Problem by making large, immediate cuts -- promises are not enough -- and we could be headed for slower growth of output and employment, or even outright declines.

CONCLUSION

According to the discussion above the faith of financial market in politician ability is losing due to the slow performances and public response to the financial market. Politicians need to show people that they are serious about the debt Problem by making large, immediate cuts -- promises are not enough.

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Submitted to: Prof. Gurdeepak Singh
Submitted by: Nitika Lamba (MBA I-C)

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general agreement on trade in services (please check)

The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade

While the overall goal of the GATS is to remove barriers to trade, members are free to choose which sectors are to be progressively "liberalised", i.e. marketised and privatised, under which mode of supply a particular sector would be covered under, and to what extent to which liberalisation will occur over a given period of time. Members' commitments are governed by a "ratchet effect", meaning that commitments are one-way and should not be wound back once entered into. This reason for this is the creation of a stable trading climate. Article XXI allows Members to withdraw commitments and so far two members have used this option (USA and EU). In November 2008, Bolivia notified that it will withdraw its health services commitments.

purpose of the GATS

The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose results entered into force in January 1995. The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT): creating a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants (principle of non-discrimination); stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.

Services

The GATS applies in principle to all service sectors, with two exceptions.

Article I(3) of the GATS excludes “services supplied in the exercise of governmental authority”. These are services that are supplied neither on a commercial basis nor in competition with other suppliers. Cases in point are social security schemes and any other public service, such as health or education, that is provided at non-market conditions.

Further, the Annex on Air Transport Services exempts from coverage measures affecting air traffic rights and services directly related to the exercise of such rights

basic obligations under the GATS

Under Article II of the GATS, Members are held to extend immediately and unconditionally to services or services suppliers of all other Members “treatment no less favourable than that accorded to like services and services suppliers of any other country”. This amounts to a prohibition, in principle, of preferential arrangements among groups of Members in individual sectors or of reciprocity provisions which confine access benefits to trading partners granting similar treatment

Other generally applicable obligations include the establishment of administrative review and appeals procedures and disciplines on the operation of monopolies and exclusive suppliers

“built-in agenda” of the GATS

At the sectoral level, negotiations on basic telecommunications were successfully concluded in February 1997 and negotiations in the area of financial services in mid-December 1997. In these negotiations, Members achieved significantly improved commitments with a broader level of participation.

ACHIEVEMENTS

Under Article XIX, Members are (self-)committed to launch successive rounds of services negotiations with a view to achieving a progressively higher level of liberalization. The first such round was to begin no later than five years from the date of entry into force of the Agreement and, accordingly, started in January 2000. The initial focus was mainly on the built-in agenda with a view to creating a sound basis for the negotiations of new specific commitments. During a stock-taking session in March 2001, Members agreed on the Negotiating Guidelines and Procedures for the new round (document S/L/93) and discussed a first series of sector proposals which had been submitted by individual countries; the Guidelines and all proposals are available on the WTO Web Site

The Scale of Debt Crisis

INTRODUCTION

Nowadays, there are two things i.e. Debt settlement and debt help in demand. Both are reducing the financial burden of the consumers. One of the easy and convenient ways of getting out of the financial difficulty is online debt settlement. Many Debt Help are launching to reduce the debt. Debt Reduction Help may help you to find out solutions and get you out of debt trap, if you are drowning in debt and feeling helpless. By adopting this help, you can cleverly manipulate of your funds and also free of debts within the shortest time possible. Everyone knows that debt disturbs the mental stability of the humans. If anyone has debt, then its liability keeps one under huge pressure. Debt problem is increasing day by day and it becomes a global issue.

Loans are borrowed by people from the financial institutions and are not able to pay because of the overspending and variety of other reasons which has form a part of life. The unpaid amount is rising because the due amount is unpaid. The lenders in turn want immediate payment of their loan amount. Many debt settlement companies are established through which consumers can get debt help. During their financial crisis, these are the organizations which help the consumers. Various debts settlement programs are offered by such companies to overcome from this problem. These organizations advice their customers and even recommend them ways of conquering.
A huge interest of the unpaid loans is reduced by this process. The dues also get reduced up to 50 to 60%.Nowadays; everyone wants fast alternatives and solutions at finger tips

According to J W Smith

The size of the debt trap can be controlled to claim all surplus production of a society, but if allowed to continue to grow the magic of compound interest dictates it is unsustainable. One trillion dollars compounded at 10 percent per year become $117 trillion in fifty years and $13.78 quadrillion in one hundred years, about $3.5 million for every man, woman and child in the Third World. Their debt is 50 percent greater than this and has been compounding at twice that rate — over 20 percent per year between 1973 and 1993, from $100 billion to $1.5 trillion [only $400 billion of the $1.5 trillion was actually borrowed money. The rest was runaway compound interest]. If Third World debt continues to compound at 20 percent per year, the $117 trillion debt will be reached in eighteen years and the $13.78 quadrillion debts in thirty-four years.

Instead of developing the Third World, it is clear that the Third World dependency is a policy of the major powers, and the world leaders insist on restricting consumer buying power in the Third World as a price for what is an essentially maintenance loan. Meanwhile, these same leaders easily agreed that West Germany must put $1 trillion into the former East Germany to simultaneously build industry, social infrastructure, and markets. And when the relatively poorer countries of Greece, Portugal, and Spain wanted to join the Common Market, these leaders “implemented a 15-year plan which included massive transfers of direct aid, designed to accelerate development, raise wages, regularize safety and environmental standards, and improve living conditions in poorer nations.”... Emerging former colonies receive no such care for their economies to become viable

EFFECTS

The debt crisis of 1982 was the most serious of Latin America's history. Incomes dropped; economic growth stagnated; because of the need to reduce importations, unemployment rose to high levels; and inflation reduced the buying power of the middle classes.
In response to the crisis most nations abandoned their import substitution industrialization (ISI) models of economy and adopted an export-oriented industrialization strategy, usually the neoliberal strategy encouraged by the IMF, though there are exceptions such as Chile and Costa Rica who adopted reformist strategies. A massive process of capital outflow, particularly to the United States, served to depreciate the exchange rates, thereby raising the real interest rate. Real GDP growth rate for the region was only 2.3 percent between 1980 and 1985, but in per capita terms Latin America experienced negative growth of almost 9 percent. Between 1982 and 1985, Latin America paid back 108 billion dollars. The debt crisis is one of the elements which contributed to the collapse of some authoritarian dictatorships in the region, such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime.

CONCLUSION:-

It is concluded that In order to achieve such a partitioning, there has to be a consistent set of accounts linking the deficits (flows) with the debt (stocks). In calculating the real rates, the authors use the implicit price deflation for GDP at market prices. The interest rate on government debt is calculated by dividing interest payments during a financial year by the stock of liabilities outstanding at the beginning of the year.

REFERENCE:-

www.wikipedia.org
www.globalissues.com

recession? depression? difference? (please check)

A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration

Depression A depression is a time where business, employment, and stock-market values decline severely or remain at a low level of activity

THE DIFFRENCE

So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe

By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition. submitted to: Mr. gurdeepak singh submitted by: vidhi walia