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  • Economics 411: Monetary and Financial Theory | Winter 2014
    poorer urban areas It added that the China Development Bank a lender for key government policy projects would set up a special arm to issue bonds to support new homes In my view this measure could be a complement to the railway construction because of its focus on ordinary people s well being It is a tradition that Chinese people care a lot about their housing and treat it as one of the most important measures of their living standard If the housing upgrade can be implemented effectively it could ease social instability and stimulate domestic consumption in the mid to long run Stimulus 3 Tax Relief for Small Businesses The government would extend existing tax breaks to small businesses until the end of 2016 and raise the threshold for taxing smaller businesses which have been struggling as economic growth slows I do believe that small businesses will benefit from decreasing tax burden but this measure might not address their problem radically which is largely due to the lack of financing State owned banks mainly offer loans to large state owned enterprises putting small and medium businesses in a significant disadvantage in market competition So in addition to regulating state owned banks the incorporation of private capital for lending and in depth financial reform is also indispensable In conclusion as the market force is set to play a fundamental role in the overall economy it is the quality rather than the quantity of growth that should be strengthened Therefore the new leadership should be committed to structural reform with emphasis on wealth increases of ordinary people so as to unleash domestic consumption and underpin growth stability This entry was posted in Writing Assignment and tagged China growth stimulus on April 25 2014 by viczhou The Essence of Wealth Management 1 Reply Wealth management is a lifelong task Either you are an individual investor or a professional asset manager the central goal is to steadily increase your wealth through proper management of capital Personally I think there are two keys to successful wealth management diversification and customization Diversification for Capital Growth Every single investor has to face a certain level of risk when investing in the capital markets ranging from bonds and equities to derivatives Diversification can be effective in optimizing the risk return payoff through well structured asset allocation Simply speaking investing in asset classes with alike market performance could lead to huge reward or huge loss as well Comparatively the exposure to diverse assets with different or even opposite performance is therefore a great hedging strategy leading to stable investment return in the mid to long run Customization for the Best Allocation After knowing the importance of diversification we still have to face a quantitative issue of what is the percentage of each asset class in a diversified portfolio which has to do with customization As said in the book A Random Walk Down Wall Street the risks you can afford to take depend on your total financial situation including the types and sources of your income exclusive of investment income Your earning ability outside your investments and thus your capacity for risk is usually related to your age Therefore there is not a best portfolio for everyone A responsible asset manager has to develop the investment decision for a particular client based on the well rounded mastery of his her financial situation and beyond Personally I interned at AIA Hong Kong office as a financial planner last summer One of the tasks I accomplished was financial health check interview The goal of the interview was to understand the financial status of clients and ensure their benefits from total protection In the fact finding stage of the interview I collected financial facts including income level family expenses aggregate debt and investment style as well as non financial facts including age family status diagnosed illnesses smoking drinking habits The integration of all these facts would offer a strong fundamental for the execution of a tailor made financial solution spanning insurance savings and investment In conclusion a truly diversified portfolio is not the result of a random selection from various asset classes in the market Instead it is derived from in depth analysis of their features and correlations as well as the client s earning power and risk appetite This entry was posted in Writing Assignment and tagged growth Management wealth on April 25 2014 by viczhou Need for a Minimum Standard 1 Reply In an earlier post I argued that sweatshop a shop or factory in which employees work for long hours at low wages and under unhealthy conditions is a better choice for folks in least develop and developing countries than no place to work at all This is why in general workers there do not request high standard of working condition as their counterparts in developed world do They adapt to some poor condition even though at the same time they are not well paid This situation attracts many major retailers in U S and other developed nations to massively relocate their productions abroad such as to China Vietnam Bangladesh Indonesia and other countries with low labor cost A figure said that more 97 percent of apparel and 98 percent of cloth sold in U S are imported while in 1960an that figure is only 5 percent Developing world home for the factories benefits from this shift Since in general the new industries are labor intensive they have been creating a huge number of jobs In 1980s the number of garment factories in Bangladesh is only hundreds while recently that number reaches nearly 6000 factories However the world was shocked by witnessing 1134 people dead and hundreds injured when the Rana Plaza building in Savar Bangladesh collapsed last year This is just a problem among many other issues involving multinational companies searching for low cost labor While I argue that sweatshop is one solution for the poor in least developed and developing countries but dangerous working condition is another issue What I mean by dangerous is a situation where it may threaten life safety of the workers a minimum standard has to be set up to avoid such tragedy or other accident in a smaller case Then the question is who should be in charge of such rules The industry itself is not a good choice for this responsibility since a player could not be a referee Leaving the task to the government to regulate is also not a guarantee since low labor cost is one of its comparative advantages Imposing too many restrictions might cause its industry less competitive and it means that investors could easily move their productions to other countries with less strict regulations Thus a collective action should be taken to overcome this issue In my opinion International Labour Organization ILO and World Trade Organization WTO are good candidates to take this responsibility given their credibility among parties involved This entry was posted in Writing Assignment and tagged rana plaza sweatshop on April 25 2014 by mrosidi First State to Enact GMO Food Labeling Law Leave a reply In the U S genetically modified food labeling is optional The Food and Drug Administration only makes sure that the food consumers consume is safe and wholesome it does not consider the fact that the sources of GM foods are genetically engineered Considering the FDA is responsible for protecting and promoting public health you would think that the labeling of GMO foods would be a requirement by now Altering crops genes can not only be harmful to the environment by causing a greater use of pesticides but it can also potentially be harmful to human health With this in mind it is no surprise that more and more states are proposing bills to require GMO labeling As of Wednesday Vermont could likely be the first state in the country to require labels on genetically modified foods The vast majority of corn and soybeans grown in the U S are GMOs and food companies estimate that about 80 of U S packaged food products contain GMO ingredients in some form With many people being aware that the use of genetically modified plants and animals has already become commonplace in today s society the lack of consumer consent in the choice to eat these foods creates an ethical dilemma With nearly 80 of all prepackaged food in a normal grocery store containing GMOs it is a bit concerning of whether or not these foods are safe Similar to the way that drugs have to be tested to be put on the market and need to have the ingredients and side effects clearly labeled on the package it should be the same case for food Consumers should have the right to know what exactly they are eating With very little testing having been done on genetically modified foods and long term results being unclear many other countries have already put much stricter regulations on GMOs In the European Union for example the introduction of labeling requirements led to the virtual extinction of GMOs in food Gov Peter Shumlin of Vermont says I am proud of Vermont for being the first state in the nation to ensure that Vermonters will know what is in their food However the labeling of foods containing genetically modified ingredients will come with a cost to Vermont Farmers food manufacturers distributors and grocers will have to spend more on record keeping and compliance Could this result in products being assigned a higher price than what a consumer would see them priced at in another part of the country Considering the bill s two year timetable it should give farmers and companies plenty of time to adjust There is no reason this would put a real burden on farmers food makers or consumers according to the Wall Street Journal This entry was posted in Writing Assignment and tagged consumers rights food labeling gmos on April 25 2014 by schultka Ukraine Crisis Hits Soccer 1 Reply Amid the political tensions between Ukraine and Russia which have also involved most Western countries on Ukraine s side there are many economic and social repercussions to consider As has been discussed on this blog the economic implications of the crisis are vast especially when looking within Ukraine However this period has been very tense business wise between Russian companies and Western countries A very unexpected implication of the crisis at least for me is that with the popular German soccer team Schalke According to an article from the Wall Street Journal Russian state owned gas giant OAO Gazprom pays around 20 million a year to sponsor Germany s Schalk e soccer club The problem here is not that Gazprom will halt its sponsorship it is in fact very content with the market results of the sponsorship However out of this Russian German connection Russian President Vladimir Putin extended an invitation for the team to visit the Kremlin The article notes that new complications for German business leaders who have been trying to maintain normal ties to Russia amid the mounting crisis in Ukraine German companies trying to take a business as usual stance with Russia increasingly find themselves under political pressure at home to avoid appearing to be part of Moscow s propaganda efforts Earlier this week the team seemed inclined to accept the invitation But today the backed down and declined it Apparently Schalke s chairman Clemens Tönnies has serious business ties with Russia besides the sponsorship of the team him and his partners are investing over 800 million in pork factories in Russia His initial response in an interview was that the team would love to see the Kremlin and is interested in Moscow and the Russian president is interested in Schalke and invited us But after political outrage on the behalf of German Chancellor Angela Merkel s allies today Mr Tönnies took back his comment there was never and there is no commitment to such a visit this would not be appropriate in light of the current political situation It s interesting to see the repercussions of the political tensions in Ukraine And it is unexpected to see it manifested in areas like soccer Luckily for German soccer lovers the team says its fans are widely unaffected by the situation With respect to the sponsor they say most people just see the sponsor as a source of capital and not a national flag Personally I think this is the right approach to the situation Though it is more complicated when considering the Putin himself invited the team to Russia it is important to remember that the Russian government s actions do not represent every Russian s views and wishes In general it is unfair and economically illogical to punish Russian businesses for the actions of its government This entry was posted in Writing Assignment and tagged Putin russia soccer ukraine on April 25 2014 by jhchamot Reflections on Economics at Michigan 2 Replies For my 40th blog post about an hour before the last post is due I wanted to reflect on a few details of my economics major at Michigan I hope that some of the other seniors in the class will agree with some of the points that I make here First off I would like to echo professor Kimball s words To paraphrase while we obviously learn a lot in each class that dwarfs what we can learn from a lifetime of following the news and reading articles related to Economics This is true not just of this course but the economics program as a whole I am sure that maybe someone going on to a PHD or Masters in Economics may disagree but since I am stopping my formal studies of economics at the undergraduate level I am hoping that I can continue learning a substantial amount using my economics studies at Michigan as a lens with which I can view the rest of the information that I consume throughout my career I would also like to mention one of the courses that I took at Michigan that has had a substantial impact on me The first elective that I took in the economics department was Econ 395 the Economics of Education with Adam Stevenson The course looked at economics models of why people choose a given amount of education and examined different ways to improve education in the United States among other things Not only did this class do an excellent job of preparing me for Econ 401 and other upper level courses it gave me an interest in education policy in the United States that has stuck with me for the past three years With the amount of resources spent per pupil it is amazing that our elementary and high school students are not performing better on international comparisons While this is all unrelated to the job I will be starting in a few months education policy is something that I follow on news sites such as politico not to mention it gave me a better understanding of the education reform bill that was discussed throughout the first several episodes of House of Cards I could write a similar paragraph about most of the economics courses that I took here My point is that as many of us get ready to move on to the next chapter of our lives we shouldn t forget the impact that each class has had on us and how truly valuable our economics degrees will be to us This entry was posted in Writing Assignment and tagged economics education reflection on April 25 2014 by umbrown Revised Can QE Be an Effective Long Term Policy Yes and Here s How Leave a reply The Fed s decision to implement quantitative easing and other unconventional monetary policy in December 2008 sparked a blaze of heated discussion amongst economists that has been burning to this day The questions of if and how these new measures affect economic growth have become the focus of countless blog posts and editorials and have become an integral part of many university Econ courses The beginning of QE tapering in December 2013 added even more fuel to the fire but it also gave many traditional economists a sense of relief It finally looked like there was an end in sight to these unfamiliar and controversial policies To the dismay of these traditionalists however recent research by the Brookings Institution paper 1 and paper 2 suggests that there are significant benefits of pursuing unconventional monetary policy in the long term A recent Economist article Staying Unconventional emphasizes some of the most important results of this research and raises a provocative question Can QE and forward guidance or some alternate forms of these policies be combined to create an effective long term policy Based on my reading of the research papers that the article cites I am inclined to say yes It may not be the QE policy currently being rolled back but I can see an alternate form of such a policy hence the in the title being effective in the long term Not only does unconventional monetary policy not cause riskier financial behavior but it also provides a substantial boost to economic growth In this blog post my goal is to defend the bolded argument by highlighting some of the key findings of the research papers I mentioned earlier 1 Unconventional Monetary Policy Does NOT Cause Financial Instability The argument commonly used to refute long term implementation of QE is that it encourages individuals and financial institutions to pursue riskier investments thereby reducing financial stability The prediction is that long periods of low interest rates incentivize investors to reach for yield and take on more credit risk duration risk and or leverage The research by Gabriel Chodorow Reich of Harvard University confirms this prediction but emphasizes that the story is not so cut and dry Although the Fed s low interest rate

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