Monday, November 14, 2011

Europe's Debt Crisis

By Jessica Chen, CE '14

The European crisis only seems to become increasingly complicated as the situation continues. The political climate is extremely hostile with multiple power transfers and government reforms. Georgios Papandreou, former Prime Minister of Greece, stepped down after popular demand for a unity government to tackle the debt crisis and was shortly followed by Silvio Berlusconi, former Italian Prime Minister, who also resigned this past Saturday after a seventeen year regime due to a loss of support even from within his own party for similar reasons.

The situation in Italy is proving itself to be of greater concern than that of Greece. Italy, the third biggest economic country in Europe, has a public debt of 120 percent of its gross domestic product, causing investors to lose trust in the Italian financial market and borrowing costs to increase to record highs. The European Financial Stability Facility was created as a special bailout fund set aside to help nations with financial crises, however the funds are too minute to bail out a large country like Italy.  Suggestions on using the European Central Bank as the euro zone’s lender has been strongly resisted by Germany as it would destabilize the Bank that ties the euro zone together and increase inflation of the euro. Unlike Greece, Italy poses actual global economic risks. With an economy too large for Europe to bail out or to allow defaulting, many economists wonder if the euro crisis has moved on to a whole new level.

The economic troubles have also caused an increase in tensions within the euro zone with more stable nations such as Germany and France becoming reluctant to risk their own country’s economy and financial markets to save those of the nations that are in danger. Currently, there has been talk of a reevaluation of the idea of a centralized currency within Europe and whether or not more stringent rules and qualifications should be necessary for countries to be included in the euro zone. Germany, France, and other more stable nations have become wary of supporting their fellow Europeans and are concerned for their own national economy. However this proposition was quickly dissolved as much opposition has been made against this idea, as it would create a “two-speed Europe”. The nations that were in danger of getting dropped from the currency would face a much more difficult path of reviving their country’s economic stability, creating a drastic difference in the economic health among European nations.

The world is far from seeing an end to the euro crisis. Greece marked the global awareness of the seriousness of the economic situation and need for immediate attention. Italy then followed with a larger public debt and last Thursday, Standard and Poor’s mistakenly downgraded France from its AAA rating, which caused a sell-off in French government bonds. Although a mistake, the incident reflected how France, considered one of the more stable nations, is also being affected by the crisis and is at the margin of its credit ratings.  

Sunday, November 6, 2011

Durbin Amendement and Debit Fees

By Katie Chan BC '13

In a time when consumers are met with countless charges on top of more charges, the proposed debit card fees caused uproar from the American populace.  The nation’s largest bank announced last month their plan for a $5 monthly fee to customers who make debit purchases. While Bank of America’s $5 charge is getting the most attention because of it’s steep price, Wells Fargo and Chase are charging $3, while Regions Financial based in the south is charging $4. Bank of America  announced at the beginning of November their decision to hold off on the debit card fee. 

As the government steadily pinches away bank profits through regulatory overhaul, banks struggle to keep up.  The Durbin amendment, part of the Dodd-Frank law, lowers the average 44 cent transaction fee to a maximum of 24 cents. With over 30 billion debit card transactions annually, two dimes to a transaction adds up to billions lost—an estimated $6.6 billion per year.

Some criticism of the banks’ decision comes from their historical overcharging of debit transaction as opposed to credit transaction.  For decades, banks charged shopkeepers the same amount for both debit and credit transactions despite a significant cost discount for debit swipes.  Banks absorbed this extra profit until a 1996 anti-trust law was passed; but even then, prices were too high, as evidenced by the new number being enforced by Dodd-Frank.  [Even this number is high—The Fed had initially proposed the new transaction fee to be between 7 and 12 cents.] 

However, to play devil’s advocate (also as a credit-only consumer trying to find a job in the financial sector), consider the fact that banks are a huge entity with more than just a commercial banking aspect.  Bank of America has a negative bottom line net income of $3.6 M for their year ending December 31, 2010.  As a company, it only makes sense to find profit wherever possible. The recovery of the financial sector is a sensitive point of contention to the larger economic recovery, so why are we rallying for their failure?

The government’s imposition of the Durbin amendment almost halving debit card transaction fee logically leads to banks needing to regain that lost revenue elsewhere.  Now the money comes directly from the consumer’s wallet, rather than being hidden in a business’ cost of operation.  In an ideal world, though, businesses could pass on the lower costs to their consumer, but will they really?  Maybe it’s time to think again when you save West Side Market 20 cents as you obligingly kindly choose debit when possible.

Occupy Wall Street

Protesters will march tomorrow, Monday, November 7th from 181st street to Zuccotti Park in an effort to connect more people to the Occupy Wall Street movement. The march will end in Zuccotti Park, where protesters have been camping since mid-September, with a solidarity demonstration.

Further Reading:
Where Are the Women at Occupy Wall Street? Everywhere and They're Not Going Away
Occupy My Wallet: Moving Money off Wall Street

Do you support Occupy Wall Street? Tell us what you think! Leave comments on the post with your opinions.

Female Leader Profile: Christine Lagarde

Christine Lagarde
Director of the International Monetary Fund (IMF)
  • First woman to become minister of Economic Affairs of a G8 economy and lead the IMF
  • Replaced Dominique Strauss-Kahn at IMF in June 2011 
  • French lawyer
  • In the News: Lagarde has played a crucial role in containing the European Debt Crisis as Greece, Ireland, and Portugal have sought out bailouts to pay for their large sovereign debts
  • Lagarde considers herself a follower of Adam Smith economics and supports steep spending cuts
Christine Lagarde is an excellent example of a strong female business leader. Known by her colleagues to be a very independent Director of the IMF, Lagarde has taken strong stands against austerity measures formerly practiced that she believes furthered the debt crisis. She requests that banks do more to stimulate growth and that central banks continue loose-money policies (lowering short term interest rates and making money less expensive to borrow) until recovery. She is a fearless leader who holds everyone to high standards; she pushed for the firing of incompetent managers at a French-Belgian bank who she considered incompetent. While on "The Daily Show" with Jon Stewart in 2009, she remarked, "I, for one, said, 'Management is out. They did a crappy job. They have to go.'" She is blunt and direct, which is often considered an aggressive attitude for a woman to have, but she is clearly taking the IMF in the right direction.

Further Reader
IMF Chief Urges Bold Action to Steady Global Economy
Investors Ask Whether Anything can Save Greece from Default
Lagarde, New IMF Chief, Rocks the Boat