MACRO Term Paper
• Our banks are oversold
Banks are oversold if their performance is soaring. This is to say they have the following characteristics: The banks have excess capital and reserves; the banking sector is a flush with liquidity, reserves and capital. This makes the banks the most capable of paying a high dividend yield. Another factor that contributes the overselling is that fact that the banks anticipate a high gain in the next quarters. The banks are operating at low prices to earnings multiples. They also take into account the possibilities of low expectations in terms of earnings. The banks are also experiencing improved fundamentals and earnings per share growth project. The banks are attracting value investors due to their oversold natures, the banks are better posed in the markets. This is based on the fact that the banks have a positive performance projection. This leads to the reversion of the general mean. This is based on the premise that prices will finally appreciate towards the mean (Ragan &Lipsey, 2011).
• Old rules versus new rules with respect to bank leveraging.
There are a number of rules intended to govern bank leveraging, however, these rules vary depending on the prevailing market conditions. Lahart, (2007), states that the old rules were developed to create an economic boom in major world economies; however, the new rules are geared at maintaining a stable banking system to cushion banks from the risks that are increasingly building up in the finical market. The leveraging ratios for major banks in the US are as shown in the graphs bellow:
Figure SEQ Figure * ARABIC 1: Biggest banks in North America by capitalization
• Given the Euro crisis and European bank leveraging, does this inspire confidence in the Euro?
In the short run; yes, in the long run; no
• Does this inspire confidence in the marginal European economies: Greece, Italy, Spain, Portugal, Ireland and now France?
This does inspire confidence in the marginal European economies in the short run, however, this is not sustainable and in the long run, the marginal European economies would have difficulties as the euro crisis ease. The banks leveraging would involve certain measures to ensure that the gearing is stable.
• The housing market in the US is leveraged. Explain the part that tax deductibility and recourse loans play.
According to Manny, (2007), when the interest rates rise and the housing prices fall, everyone would easily get access to a good home. However, the property owners would have problems paying back their mortgage loans, leading to overselling as the property owners start to panic
• What are the results of the US not requiring any down payments with respect to housing purchases?
This is one way of subprime lending, as it involves the provision of loan to those with limited capacity to payback with the intention of having an economic bubble. The effect of this will be an economic crisis as refinancing then mortgages will not be easy. As housing is also on of the leading industries, it will lead to trade deficit and cause panic in the financial system (Levenson, 2006). The major shift in the housing prices is shown in the graph below:
• Explain subprime lending.
Subprime lending is the concept that involve advancing loan to borrowers who are likely to experience difficulties paying back the loan, these people do not meet the requirement set by banks, so the loans advanced to them attract high interest rates due to the risk factors involved. This concept was widespread in the early 90s as there was a general belief that subprime borrowers could be managed.
• Compare the affordability of home ownership with subsequent delinquencies and foreclosures between Canada and the US.
There is likely to be a remarkable increase in the level of delinquencies and foreclosures in the US than in Canada due to the expiry of the easy initial terms. There also likely to be an increase in the economic crisis in Canada as the wealth of the consumers in the market would be drained, with less protection of the banks by the government (Laperriere, 2006).
As the prices of product houses increase relative to US houses, the level of uptake of houses lowers down leading to home sharing and delinquencies as the home owners would not be able to payback their mortgage loans. These forces the government to bail them out in terms of tax decreases. The general increases in the value of Canadian dollar in a further increase in the prices of Canadian houses relative to foreign prices.
• Comment on Osama’s plan to reduce mortgage interest and property taxes. Does it appear viable?
While president Obama is interested in ensuring that the citizens of America have access to affordable housing there are a number of factors that should be considered. For example, Ragan &Lipsey, (2011), argues that when the mortgage interest’s rates are reduced, the home owners are in a position to save lots of money per year by only refinancing at lower interest rates. On the other hand, many of the home owners may not be qualified t for the refinancing scheme organized by Mr. Obama. However, it is important to note that while most of the owners may not be eligible for the reduced mortgage taxes. This may be attributed to the recent fall in property prices leaving them with very little in terms of equity. On the other hand, the lenders are not likely to approve refinancing for those home owners who have very low equity. These cuts out the home have poor credit rating. This is also true for those who have been paying back their loans. The plans are not viable as many people would not be able to meet the requirements for eligibility into these programs (Ragan & Lipsey, 2011).
If the budget balance the level of revenue minus expenditure is represented by the expression, the budget balance is denoted by T-G. However, if revenue is greater than expenditures, there arises a surplus which can be saved in terms of federal reserve’s, however, if the level of expenditure is higher than the revenue, there arises deficit which must be filled by the government. However as the level of income level of the population increase, the governments increase the amount of expenditure. On the other hand, the transfer payment that the government gives to the elderly falls. If the fiscal policy set by the government does not hold, there is likelihood of a general increase in the prices of products.
Generally, any increases in the general level of household income increase the prices of other things, however, then general increase in the prices of products. This marks inflation. During inflation, the governments increases reduces the prices of products key amongst them is the housing units, then government bails out the property owners to enable them pay back their loans. At times the government may bails out those property owners who are below the standards industry level of credit rating.
Ragan and Lipsey, (2011). Economics, 13th Canadian Edition. Pearson Canada Inc.
Lahart J. (2007). “Egg Cracks Differ In Housing, Finance Shells”. WSJ.com (Wall Street Journal).
Krugman, P. (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited
Manny F. (2007). “Study Finds Disparities in Mortgages by Race”. New York Time
Levenson, E. (2006). “Lowering the Boom? Speculators Gone Mild”. NY Sage.
Laperriere, A. (2006). “Housing Bubble Trouble: Have we been living beyond our means?”. The Weekly Standard