Week of November 17

Notes on Speaker

Triple Shock for US and World-

• energy, food and comodity prices
• housing prices, foreclosures

Energy and Commodities-

• oil at $145/ barrel, gas $4 + at pump
• food prices triple
• raw materials spike in price
• less production, conserves reserves
• less pollution, waste and CO2
• reward and profit for new technology

Boom and Bust in Energy Prices

• Now oil at $55 bbl, gas at $2 a gallon
• relief for consumers
• loq commodity prices make recession milder
• price floors, trade, carbon tax, use controls= other solutions (may conflict with economic recovery)

Housing Bust

• Homebuilding down by 2/3
• Housing prices drop 20%
• mortgages harder to get
• foreclosures double to 3 million annual rate
• mortgage "paper" the lean that is turned into security, is clogging world banking and portfolios with $11 trillion in bad paper
• why bad? paper usually not worth 100%, prepay mortgages, defaults, fraud, credit checks

Banking Crisis

• Will always be credit cycles. Busts preceded by Booms
• now banks won't lend to customers or each other
• sectors credit starved (non-freddie/fannie mortgages,) mergers and acquisitions, local government projects, auto and consumer lending
• New vs Old- old parts of cycle (optimism feeding itself, bad collateral, lax credit and hidden debts,) new problems (extreme leverage, deregulation, bad accounting or new complex credits no one understands AKA derivatives)

Big Investment Cycles Normal

• guess wrong on technology, not knowing competitors investments, misjudging pricing power, costs and profits, misjudging future market size, taking up easy credit and then the credit turns scarce= all mistakes investors can make

What are you worth?

• new complex products not traded -accountants don't know how to price them-neither do CEOs, regulators and rating agencies
• prepayments, bad collateral, fraud...unknown credit means fixed income isn't fixed

Accounting

• CSOS- collateralized debt
• if insolvent by more than 10-20% (if net worth is - by 10-20% liabilities) go bankrupcy

What to do

• spend like crazy (help poor, environment, tax cuts)
• invite foreign lenders in
• get comfortable with bankrupcy- its not liquidation its protection from creditors
• rethink cooperate leadership and governance
• get started on permanent fair value accounting

I thought the economics specialist was really interesting, although he was a little too advanced for me and it was difficult for me to understand all of the material he was trying to cover in such a short period of time (liabilities, insolvency?) I thought he was interesting though, and very intelligent, he knows his stuff. After retypeing and rereading my notes from his lecture for a second time I think I understand what he was trying to say better.

I also recently completed a project in my international affairs class on Brazil. I was Brazil's trade minister and I found their environmental situation very interesting. For example, Brazil is very into ethanol produced from sugar cane (no corn with would starve the worlds poor.) 92% of the new cars being made in Brazil are flex fuel and Brazil's citizens much prefer flex fuel and ethanol to gasoline because it is so much cheaper. These facts plus the fact that Brazil does have some oil in its territories have allowd Brazil to become independent of foreign oil. On top of that, Brazil has a comparative advantage in all agricultural products and is currently using only half of its available pasture land, meaning there is much room for the expansion of ethanol production. The only drawback is that Brazilian farmers are destroying the world's 'lungs' AKA the rainforest, although I am not sure if the two issues are related. Just thought you would like to know about a little cross curriculum learning :) I'm really interested in exploring the issue furthur, and possibly going into developmental studies where I can work to better the environment while also helping developing nations become independent of foreign energy sources, it seems in this instance international affairs and environmental studies are complementary.