Going Up?: Dollars and Yuan

In exploring the realm of information that is the Internet, I have discovered the fluid medium of the blogosphere to be an ever-morphing arena of common knowledge and technical expertise. During my adventures in this online arena, I discovered two blogs focusing on economics with interesting things to say about the status of the American dollar. Searching for a way to enter the online fray, I’ve loosed my initial informational volley in the form of two posts on different blogs. The first blog is written by CLS, a Blogspot user with a frank partiality for liberalism. The blog itself is called “Classically Liberal” and holds no illusions concerning bias. Though the author is not known to be of great repute, his stances, though partial, are based in solid groundwork for the most part and meets the criteria of a Webby Award winning website. His focus is the effect the Bush administration on the strength of the dollar, and how the incompetence of the administration has directly led to the devaluing of U.S. currency in comparison to the other major currencies. The second blog is titled Thomas Palley: Economics for Democratic and Open Societies. The author is Dr. Thomas Palley (see left), an economist with a degree from Oxford University and Yale University. He has written for several magazines including The Atlantic Monthly, American Prospect, and Nation. He was also the former Chief Economist with the US-China Economic and Security Review Commission. His post revolves around the issue of rampant inflation in China and the Chinese response to it.

Comment
First off, as a fellow detractor of President George W. Bush, I agree to an extent that the blame for much of the economic disaster ensuing today should be laid at the feet of the current administration. Their disregard for long-term economic stability and basic theory has earned them spots on my economic black list. However, I was wondering what the specifics of your disagreement concerning the Bush administration’s handling of economic policy revolve around. Links to evidence might be appreciated and formally strengthen your argument against the opposition and make it more persuasive for the layman. Also, in response to you comment about the charts, I realize that the downturn of the dollar happened soon after “King George’s… coronation,” but consider the lag between policy implementation and actual economic fluctuations as well as the introduction of a new strong currency. “It wasn’t long ago a Euro was worth about 90 cents.” Well, this is true, but it is also true that it wasn’t long ago that the Euro just did not exist. The consolidation of European currency was bound to have effects in the U.S. concerning the strength of the dollar. On top of that, the emergence of China as a growing economic power can be seen in the increase in the value of the yuan. This might be indicative of a decrease in the value of the dollar, not as a function of American incompetence (which it still is in part), but of Chinese growth. In addition, I was under the impression that a low strength dollar would increase the amount of exports from the United States and increase demand for the dollar in the international market, which in turn, would increase the strength of the dollar in general.

Comment
I think this post has an interesting point. The exploration of the Chinese problem with inflation reflects the United States own problem with its currency. I see how many of the Chinese solutions to inflation mirror actions taken by the Fed with an emphasis on monetary tightening and altering interest rates. I think if you compared how each of the economies has handled the problem, you could draw a convincing parallel. I realize that this is probably your specialty and by no means my own, and I respect your credentials. However, I want to know more about how one economy affects the other specifically. You explain that the Chinese strategy is to “shift the onus of global trade adjustment on the U.S.” What exactly is the process by which the Chinese do this? How do the differences in situations effect the implications of the policies taken by each respective government? How do the problems surrounding the Chinese economy directly affect the U.S. economy?

Subprime Lending: The Problem Behind the Wall

The word “Sub-prime” has been tossed around a lot in the past few months, especially in conjunction with the phrases “real estate” and “recession.” When talking about the housing and stock markets, the sub prime is generally blamed for the recent dip in the economy. The emphasis is placed on the inability of the lenders to collect on their high-risk loans. Sub prime loans are loans targeted at people with low credit scores and bad credit history. The boom in the housing market over the past few years (2001-2005) made lenders more willing to take on high-risk loans in the search for greater profits. “‘Clients started to get harder to come by and the brokers started shaking the trees a little harder,’ says Allen Hardester, director of business development for mortgage broker Guaranteed Rate.” However, the recent downturn in the housing market left many sub prime borrowers forced to default on their loans, and many sub prime lenders were unable to collect any of their investments. Companies such as the New Century Financial Corporation have been forced to shut down or file for bankruptcy because of the prodigious amount of mortgage foreclosures caused by the bursting of the housing bubble.

While most of the spotlight has been shone on the effects of the sub prime rippling throughout the housing markets and in turn the stock market, the sub prime itself is quite a controversial subject. Sub prime lending, by its very nature, targets those who have bad credit histories with credit risk characteristics such as two or more loan payments paid past ninety days due in the last 12 months, foreclosure or repossession. Compounded with the high rates and additional fees used to offset the risk for lenders, this can spell disaster for borrowers. Sub-prime lenders have also been accused of fraudulent and illegal practices. Mortgage fraud in some areas has increased 500% in some areas in just three years. Lenders often try to confuse borrowers with complicated loan terms and take advantage of their lack of knowledge and need to refinance their homes quickly. Sub-prime lenders will even offer sub-prime rates to borrowers that qualify for traditional loans.

Though sub-prime lenders have often taken the blame for unscrupulous activities, the sub-prime also offers an arena in which individuals can improve their credit scores. With the right facts and determination, an individual with bad credit history can use sub-prime loans and credit cards to reestablish their credit by meeting the terms of their contracts. In many cases, random events such as job loss or divorce can impact finances in a large way. The sub-prime gives these individuals a chance to regain their credit when nonsub-prime lenders would merely turn them down. The sub-prime provides an opportunity for an individual with bad credit history to even take out a loan at all.

Recently, the government stepped in and announced a plan to help borrowers in peril from foreclosing. The Federal Housing Administration provides mortgage insurance to borrowers in the private sector, and President George W. Bush has pushed to change policy to allow more homeowners to qualify. Bush also announced plans to reform housing policy in the federal tax code and provide assistance to non-profit groups that offer counseling for foreclosure and refinancing.

Though the situation has obviously gotten out of hand, the federal government’s stance towards the sub-prime borrowers seems lenient. The blame is partially on the borrowers. One of the tenants of a market society is “Let the buyer beware,” and sub-prime borrowers should do the necessary research or hire someone with the proper expertise to ensure what they get is what they want.