Lauren Wilhelm

November 8, 2013

GVPT 200

Prof Shirk

Risky Business: Manipulation of CDOs and the Housing Market Crash

            In his book The Signal and the Noise, Nate Silver looks into and analyzes the contributing factors for the housing market crash which led to the U.S.’s most recent recession. In studying the inner workings of banks, loan sharks, debt raters, NRSROs and so on, it can be discovered that their greed for money and overall ignorance led to them overlooking many warning signs on the housing crash, contributing to the crash in the housing market and recession. The corporate workers in these industries wanted so badly for the system to work because of the revenue it would bring in that they used confirmation bias, and built their statistical data and proof around their ideas so it would support them. This system of buying and selling debt may have seemed like a profit maximizing one in the beginning, but eventually the false premise it was built on was bound to catch up with it and take it all tumbling down.

The selling of default rates and securities is wrong for more reasons than the simple fact that the system failed. It was made more wrong by the fact that it was essentially gambling. Gambling with debts and the possibility of risk may seem exciting to those who can afford to lose money and take that risk, but when it affects the livelihoods of others who need these loans and depend on them, it is not okay. The system involved rating agencies predicting the probability that someone would default on a loan and they predicted the nations 5-year rate at .12%. This rate was considerably low so they saw only small risk and with that sold and allowed for the trade of debt backed securities and CDOs as if they were stocks. They tried to create a market for them because they saw the possibility to bring more investors in on something they didn’t think existed to sell in the first place. This prospect was propelled by greed and the hopes of Wall Street’s new and young associates. The only problem with gambling is it is almost always taken too far because no one knows when to quit, and eventually, you lose it all.

The statistical model these ratings were based on ended up being faulty in the end, and causing the whole idea to fail because it was based on assumptions and not historical data. In fact it caused the prediction rate to be wrong by more than 200%. Those in charge were unapologetic and did not take responsibility for their actions. Instead they claimed they were just unlucky and never could have foreseen the housing bubble. They continued to blame external forces never truly taking accountability for what they had caused. In essence they just passed the debt around and spread it out more so that they could continue to reap the benefits of being a big corporate laborer. They made assumptions using faulty world models and instead blamed the fallout on a faulty world.

This goes to show that Wall Street workers may not necessarily commit what is defined as white-collar crime, but they do take actions that have larger repercussions on the public and so they must be held accountable. There will always be greed in the world just like there will always be those who believe business should be left to itself and unregulated. However, something needs to change or else the rich will continue to get richer by manipulating the system by creating these entities that don’t really exist, and in the long run have huge fallout. 

Why did Lehman Brothers not get bailed out?

Jason ye

11/11/2013

GVPT200

     The financial crisis of 2008, which is also known as the Global Financial Crisis is considered by many people the worst financial crisis since the 1930s Great Depression. It resulted in bankruptcy of financial institutions, high rate of unemployment, collapse of the stock market and bailed out from the U.S government to some of the biggest financial institutions in the U.S. So why did the U.S government bailed out American International Group, Bear Stearns and nationalized Fannie Mae and Freddie Mac but did not help out Lehman Brothers and let it fail.

Frist reason, in my opinion, the U.S government bailed out American International Group instead of Lehman Brother is all about the impact on financial markets. American International Group is the largest insurance company in the world, it insures not just millions of people but also corporations around the world as well. It also insures millions of dollars issued by the financial institutions’ lenders and borrowers. If American International Group collapse, it will have a tremendous effect on those financial institutions that are insured by the American International Group, which may result in collapse of those financial institutions too. The American International Group is like an ignorant kid playing with matches, he could harm not only himself, he could have burn down the entire block, the Fed stepped in not just to save him but also save the entire block, on the other hand, Lehman Brother is more like a kid who pulls the tail of a dog and got attacked by the dog, himself is harmed by the dog but nobody is harmed because of that, so nobody really care about it that much.

Second reason I think why Lehman Brothers did not get bailed out by the U.S government is because its lacked collateral for a loan. During the 2008 financial crisis, before the Troubled Asset Relief Program (TARP) was established, it was illegal for the government to inject capital into Lehman Brothers. Unlike the American International Group, which had insurance addendum that can be evaluative, the Lehman Brothers lacks of ancillary resulted in the Federal Reserve deiced not to bail out Lehman Brothers. Lacked collateral is also a reason why the two potential buyers – Bank of America and Barclays decided to back out at the last moment. Also, there were concerns of “lending into a run”, some top government officers feared giving Lehman Brothers loan can cause its customers to flee away which will ensuring its bankruptcy.

The last reason why the U.S government did not bail out Lehman Brothers is that the risk to taxpayers is high, like Bernanke said, “Lehman's status as a going concern was "melting away" as trading partners pulled back from the firm amid questions about its capital position and access to cash. The Fed couldn't have lent to Lehman without risking a large loss.”

Overall, the reasons why the U.S government didn’t bail out Lehman Brother are reasonable, but it might be better for the economic if the U.S government had bailed out Lehman Brother.

Shiran Zecharya

GVPT200

Blog #4: Trade/Globalization

            Globalization is undeniably changing the nature of the global economy; markets have expanded across political borders, international trade has flourished, and manufacturing has become more efficient and productive. For these reasons, many analysts have come to applaud these processes of economic change and conclude that the phenomena holds a great deal of promise for the future of the international political economy.  There is, however, a dark side to globalization that liberal economists have observed: the rapidly growing inequality between the global rich and poor. As a result of expanded markets, firms are drawn to conduct business in low-income nations in order to reduce costs and maximize their profits. By doing so, these companies not only exploit workers who often lack the protection of basic worker rights but also foster a proliferating global wealth gap.

This year, many began to question the benefits of globalization following a building collapse in Bangladesh that killed over 1,000 garment factory employees. The incident gave new fuel to the debates about how increased trade and expanded markets may impact worker safety and contribute to global inequality. Corporations often follow the lowest wages abroad in seek of greater profits in response to the economic changes brought on by globalization. In countries where wages are exceedingly low, such as Bangladesh, worker safety is almost never a priority, and the human cost can be tremendous. Furthermore, when corporations accept low wages and neglect worker safety to increase their profits, the divergence between less developed countries who manufacture goods and wealthier nations who consume the goods grows while the hope of increased global equality recedes.

            The overall impact of globalization hard to calculate, given that, in addition to its destructive elements, global trade has led to astonishing growth, interdependence, increased creativity and other immeasurable benefits. What can be taken as a mixed result of the debate of the costs and benefits is a formula for improvement. World leaders must understand the limitations of globalization to regulate the expansion of trade and ensure that it is mutually benefitting all parties. Additionally, corporations cannot continue to disregard labor rights in order to generate more revenue. Consumers must also demand fair labor practices from companies and apply pressure on ones that fail to do so. Inequality is not only a local issue, but also a global issue, therefore, all individuals in the international economy must work together to mitigate the global wealth disparity and questionable labor practices brought on by globalization; the result: a newly interconnected world driven by technological innovation and newfound interconnectedness but grounded in principles of morality and equality.

Power Within the United Nations

Estefania Velez

November 11, 2013

GVPT200 – FC

           

            In the past decade, there has been some skepticism about whether or not the United Nations has served to help protect the world by promoting peace or if it is just a group of the five most powerful countries making decisions based on their own needs. It is said that the United Nations was formed to promote peace and collective security throughout the world. Although this is true, I believe that in this past decade it has worked more for social and economic expansion than for peace itself because the five permanent countries on the Security Council have more opportunity than the non-permanent countries to do as they please. The power that the five permanent countries in the United Nations hold does not allow the organization to remain fair for the ten non-permanent countries because as time has passed, the organization has worked less on promoting peace and more on the interests of the five permanent countries.  When the United States invaded Iraq in 2003, it did not ask for permission from the Security Council as to whether or not it could or should invade, it went ahead and did it anyway.  It is certain that if any other nation tried to invade another country without getting UN approval, things would go differently for them.

            It is evident that the United Nations has done a lot for the world but as Hurd said in his article “Legitimacy, Power, and the Symbolic Life of the UN Security

Council”, it can also be claimed that they succeed because of the powerful symbols they have. For example, there are peacekeeping symbols that the UN is known for such as the Agenda, which allows any state to propose their issues to the council. These states want the five permanent members to care about their issues because of the immense power that they hold and if their proposals are in fact considered, they then get to brag that their issue is on the Security Council. The permanent members of the Security Council are the most powerful nations in the world today; therefore, other countries pay a grand amount of money to be a part of this “exclusive” group of nations because it is extremely desirable to be a part of the ten non-permanent members. In some instances, the small non-permanent countries are required to give their troops to the United Nations while countries like the United States do not because they want to be in control of their troops and not let the UN use them. These are all symbols of the power that the non-permanent members want to obtain throughout the Security Council and international relations.

            International organizations such as the United Nations have helped the world grow and become more peaceful but it seems as though the rules that come with the Security Council’s permanent members are not fair to the other members who pay loads of money and risk their troops to get a small amount of power. The fact that the five official members get to veto any proposal that comes their way while the other ten really have no say in the matter shows how unjust the organization has become. It is understandable that the five nations are in charge because they are the countries with the strongest economies, militaries and because most are the winners of World War II but I believe that in order for the United Nations to strive as it did when it was first created the power among the members needs to be balanced in a more equal way for all of them. 

BLOG 4: The Legitimacy of the World Trade Organization

Yasemin Unal

Professor Mark Shirk

GVPT200FC

11 November 2013

 

               The efficiency of International Organizations fulfilling their objectives are often the subject for debate. Some realists would argue that International Organizations are not useful in accomplishing their objectives of creation. Yet, I would argue that if an organization has acquired global legitimacy, then it has become a significant source of prevention. Even though there is an abundance of International Organizations, I will be focusing on how the World Trade Organization (WTO) has gained legitimacy through regulating commerce between states.

            To begin, the purpose of the WTO, when it was created in 1995 after the Uruguay Rounds, was to provide international trade with some type of a regulatory policy. This would ensure that states could not discriminate against one another and global trade would be much easier to take part in. In the long run, this idea of "free trade" allowed many states to develop stronger economies through globalization and modernization. Since the WTO was successful in executing it's purpose of removing and preventing barriers of commerce, it has gained a sense of legitimacy among international society.

            Furthermore, the WTO has a specific department, the Dispute Settlement Body, to act as a council for trade disputes. If one state feels discriminated against by another's trade policy or quota, then that state can appeal to the Dispute Settlement Body. This council has the authority to uphold the trade policies ensuring a "free" global market. Through the Dispute Settlement Body, states recognize the legitimacy of the WTO because it has a method for implementing repercussions when policies are violated. Having consequences for violators is critical for the global legitimacy of International Organizations, because states want their interests that are guaranteed in policies to be upheld. Thus, by providing a council the WTO provides a method for states that are being restricted to seek justice.

            A fundamental trait of the council is that it does not hold prejudice against any state. Therefore, the overall strength or importance of a state has no effect in the outcome of the council's decisions. This further legitimizes the purpose and rulings of the Dispute Settlement Body and the WTO. A prime example of the unbiased council can be referenced through the Costa Rican Underwear dispute between the USA and Costa Rica. Even though the economy of the USA is what arguably influences the global economy, this did not influence the ruling that the USA did have a discriminatory trading policy against Costa Rican underwear. When states feel that an organization is just and not based on favoritism or influence, then that institution's decisions are more readily implemented and followed.

            In the final analysis, some might disagree against the success of International Organizations. However, I argue that the key for success for these Organizations is to acquire a sense of authenticity among states and the global society. When this is achieved, then the rulings of International Organizations are implemented and obeyed. To support my argument, I explained how the WTO gained global legitimacy and why it's rulings are followed.