Embassy of the United States

Economics

Financial Affairs Archive

GLOBAL CRISIS: BANGLADESH BUCKS THE TRENDS.
YaleGlobal. Zafar Sobhan. October 14, 2009.
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A year ago as the world financial system teetered on the edge of collapse after many Wall Street giants failed, there was widespread concern about the impact of its tsunami effect on the world's developing countries so dependent on the U.S. market. But not only have China, India and other major developing countries survived and prospered, even poorer countries like Bangladesh have come out virtually unscathed. The author discusses the reasons behind it.

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THE FINANCIAL DEVELOPMENT REPORT 2009.
World Economic Forum. October 8, 2009.
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The world's largest economies took the biggest hit, according to the report. Global financial centers still lead in the report's Index, but the effects of financial instability have pulled down their scores compared to last year. The United Kingdom, buoyed by the relative strength of its banking and non-banking financial activities, claimed the Index's top spot from the U.S., which slipped to third position behind Australia largely due to poorer financial stability scores and a weakened banking sector. The report ranks 55 of the world's leading financial systems and capital markets.

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THE FEDERAL RESERVE’S BALANCE SHEET: AN UPDATE.
Board of Governors of Federal Reserve System. Ben S. Bernanke. October 8, 2009.
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Chairman Bernanke reviews important elements of the Federal Reserve’s balance sheet, as well as some aspects of their evolution over time. He provides a means of explaining the steps the Federal Reserve has taken, beyond conventional interest rate reductions, to mitigate the financial crisis and the recession, as well as how those actions will be reversed as the economy recovers.

ACCELERATED VEHICLE RETIREMENT FOR ECONOMY: “CASH FOR CLUNKERS”
Congressional Research Service, Library of Congress. Brent D. Yacobucci and Bill Canis. August 2009.
Full Text [PDF format, 12 pages]

In an attempt to boost sagging U.S. auto sales and to promote higher vehicle fuel economy, the President signed legislation on June 24, 2009–P.L. 111-32–establishing a program to provide rebates to prospective purchasers toward the purchase of new, fuel-efficient vehicles, provided the trade-in vehicles are scrapped. The report outlines the key provisions of the CARS program, discusses the initial impact of the program and some of the concerns raised by Senators. It also summarizes similar programs in other countries.

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Kim, J.S. THE COMING CONSEQUENCES OF BANKING FRAUD (Seeking Alpha, posted September 9, 2009)
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The author, an independent financial advisor and analyst, writes that the rally in Western stock markets in recent months has been the result of financial fraud, a “scheme executed by an elite global financial oligarchy ... to fool the world into believing that global economies are recovering.” Kim contends that the banking and financial establishment have engaged in transactions that have been kept secret from the public and “will have severe and negative consequences in the not-so-distant future,” and the blowback from these activities will exceed the downturn the world experienced in 2008. In view of the worsening economic data, the current stock market rally makes sense only when viewed through the prism of fraud, with the rise of computerized ultra-fast high-frequency proprietary trading programs, and the fact that much of the trading volume in recent weeks has been in only a handful of financial firms. He adds that all government-produced economic statistics “have been massively distorted towards the side of optimism and away from reality” during financial crisis, and this false front of optimism has been abetted by financial journalists.

THE LAFFER CURVE: UNDERSTANDING THE RELATIONSHIP BETWEEN TAX RATES, TAXABLE INCOME, AND TAX REVENUE.
Center for Freedom and Prosperity Foundation. Daniel J. Mitchell. August 2009.
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The author reviews the theory and evidence for "Laffer Curve" effects and discusses how the Joint Committee on Taxation's revenue-estimating process is based on the theory that changes in tax policy , even dramatic reforms such as a flat tax, do not affect economic growth. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts.

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GLOBAL TRENDS IN VENTURE CAPITAL: 2009 GLOBAL REPORT.
Deloitte. August 2009.
Full Text [PDF format, 38 pages]

The responses of venture capitalists around the world were illuminating. While the investment community is coming to grips with the hard realities of this global recession, they remain a resilient group and even an optimistic one. It’s been a tough season for investors and entrepreneurs alike but that may have strengthened the industry, according to the report.

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2009 CAPITAL SPENDING REPORT: U.S. CAPITAL SPENDING PATTERNS
U.S. Census Bureau. August 4, 2009
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Spending by all U.S. nonfarm businesses on new and used structures and equipment increased 17 percent, or nearly $201 billion, to a total of $1.362 trillion in 2007. This compares with an earlier cyclical peak of $1.161 trillion in 2000, according to the report from the U.S. Census Bureau.

WORLD INVESTMENT PROSPECTS SURVEY 2009-2011.
United Nations Conference on Trade and Development. July 22, 2009.
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The focus of this year´s World Investment Prospects Survey is the global economic and financial crisis and its impact on the FDI plans of TNCs. UNCTAD surveyed a sample of 240 company executives from the largest non-financial TNCs about the effect of the crisis on their International investment strategies during the next three years.

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WHY PRICES RISE FASTER THAN THEY FALL.
Antitrust Division, U.S. Department of Justice. Sheldon Kimmel. July 2009.
Full Text [PDF format, 15 pages]

For decades the fact that input price hikes are passed on faster than input price cuts was thought to be well explained by the assumption that competitive firms fully pass on all input price changes, so they can’t price asymmetrically, so asymmetric pricing behavior is limited to oligopolies, firms that do all sorts of bizarre things, says the report. The report strives to solve the issue.

CHINA TO THE RESCUE: GROWING OUT OF THE FINANCIAL CRISIS.
Yale Global. Joergen Oestroem Moeller. July 28, 2009.
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The global financial crisis is far from over even if the declines in the economic data have slowed. So the next question is how to pull the world out of its current malaise? For Professor Joergen Oerstroem Moeller the answer is clear: stimulate global demand. Unfortunately, the big drivers of demand growth in the past – primarily the US, but also Japan and Europe – each face major hurdles sufficiently large to suppose they won’t be the engines of growth in the immediate future. On this analysis, Moeller recommends looking primarily to China.

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Stix, Gary THE SCIENCE OF ECONOMIC BUBBLES AND BUSTS (Scientific American, July 2009)
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The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money. The worldwide financial meltdown has caused a new examination of why markets sometimes become overheated and then come crashing down. The dot-com blowup and the subsequent housing and credit crises highlight how psychological quirks sometimes trump rationality in investment decision making. Understanding these behaviors elucidates the genesis of booms and busts. New models of market dynamics try to protect against financial blowups by mirroring more accurately how markets work. Meanwhile, more intelligent regulation may gently steer the home buyer or the retirement saver away from bad decisions.

THE MULTILATERAL RESPONSE TO THE GLOBAL CRISIS: RATIONALE, MODALITIES, AND FEASIBILITY.
Inter-American Development Bank. Eduardo Fernandez-Arias et al. June 2009.
Full Text [PDF format, 27 pages]

The paper reviews the case for a strong multilateral response to the global crisis in emerging markets (EMs). It discusses modalities and feasibility of intervention and its associated risks, depending on country circumstances of fiscal space and liquidity needs. The specific role of Multilateral Development Banks (MDBs) in ensuring the development effectiveness of the fiscal response is also discussed. The paper concludes by highlighting the international financial architecture issues raised by the global crisis that cannot be addressed immediately but will need to be dealt with once the current crisis has been tamed.

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FINANCIAL REGULATORY REFORM: A NEW FOUNDATION.
U.S. Department of Treasury. June 2009.
Full Text [PDF format, 89 pages]

Over the past two years the country has faced the most severe financial crisis since the Great Depression. Americans across the nation are struggling with unemployment, failing businesses, falling home prices, and declining savings. These challenges have forced the government to take extraordinary measures to revive our financial system so that people can access loans to buy a car or home, pay for a child’s education, or finance a business says the report.

THE BEIGE BOOK.
Federal Reserve Board. June 10, 2009.
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Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year, according to the report.

THE US FINANCIAL AND ECONOMIC CRISIS; WHERE DOES IT STAND AND WHERE DO WE GO FROM HERE?
Business and Public Policy, Brookings Institution. Martin Neil Baily and Douglas J. Elliott. June 15, 2009.
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The economy is showing signs that it is likely bottoming out and heading toward a weak recovery, but the nation need to keep optimism and keep policy actions in check, argue Martin Baily and Douglas Elliott. Many risks remain for both the banking system and the larger economy, and they argue for increased focus on existing financial rescue plans and the banking sector.

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Cowen, Tyler LAST MAN STANDING (Wilson Quarterly, vol. 33, no. 2, Spring 2009, pp. 55-58)
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The author, a professor of economics at George Mason University, believes that although America's relative decline in global affairs has been foretold many times, it never quite seems to happen. Today, the rest of the world is looking to the U.S. to pull it out of a recession (or depression), even though many blame us for having started it. The truth is that the worse things get for the world as a whole, the more the U.S. gains in relative power and influence. The U.S. has more demographics than many countries; with its relatively unified system of governance, the U.S. Federal Reserve can simply print money to fund bailouts, and even if that is an ugly alternative, the government's ability to act underpins the credibility of the system as a whole. The European Central Bank (ECB) is explicitly banned from creating more euros for bank bailouts; the Swiss central bank could, but the prospect of the resulting inflation and rapid depreciation of the Swiss franc makes this an unappealing choice, especially for a country that has marketed itself as a financial haven. It's not widely recognized that Europe, because of its systemic weaknesses, already has required implicit bailouts by the U.S. European financial institutions are prominent on the list of creditors of the failed insurance company AIG. Few U.S. financial regulators would say it openly, but one reason why the Fed rescued AIG was that it knew that European regulators could not handle the fallout from an AIG collapse.

THE GLOBAL FINANCIAL SYSTEM.
eJournal USA, U.S. Dept. of State, May 2009
Description and link to PDF file

Experts describe the mechanics of the global financial system presenting their views concerning the cyclical nature of markets, the interdependence of global trade relationships, and the role of regulation.

TWO VIEWS ON THE CAUSE OF THE GLOBAL CRISIS: PARTS I AND II.
Yale Global. May 4, 2009.
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The first view contends that income inequality and speculative investment by the rich and poor in America led to financial meltdown. On the other hand, the second view contends that the twin excesses, financialization and globalization, caused the crash.

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LEVELING THE PLAYING FIELD: CURBING TAX HAVENS AND REMOVING TAX INCENTIVES FOR SHIFTING JOBS OVERSEAS.
The White House. May 4, 2009.
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President Obama and Secretary Geithner unveil two components of the Administration’s plan to reform U.S.’s international tax laws and improve their enforcement. First, there’s a call for reforms to ensure that its tax code does not stack the deck against job creation in the States. Second, they seek to reduce the amount of taxes lost to tax havens, either through unintended loopholes that allow companies to legally avoid paying billions in taxes, or through the illegal use of hidden accounts by well-off individuals.

GENERAL EXPLANATIONS OF THE ADMINISTRATION’S FISCAL YEAR 2010 REVENUE PROPOSALS.
U.S. Department of Treasury. May 11, 2009.
Full Text [PDF format, 130 pages]

The report (Greenbook) provides details of plans to cut taxes for small businesses and middle class families and close unfair corporate tax loopholes. The plan includes $736 billion in tax cuts for working families over the next ten years and provides almost $100 billion in tax cuts for businesses, providing support to the entrepreneurs who will help drive an economic recovery. The plan also promotes fairness and fiscal responsibility by closing hundreds of billions in loopholes, including $36 billion in tax breaks for oil companies and the $86.5 billion “check-the-box” loophole which allows U.S. companies that invest overseas to shift income to tax havens.

GLOBAL FINANCIAL STABILITY REPORT: RESPONDING TO THE FINANCIAL CRISIS AND MEASURING SYSTEMIC RISKS.
International Monetary Fund. April 2009.
Full Text [PDF format, 246 pages]

The report assesses key risks facing the global financial system with a view to identifying those that represent systemic vulnerabilities. In the current crisis, the report traces the sources and channels of financial distress, and provides policy advice on mitigating its effects on economic activity, stemming contagion, and mending the global financial system.

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IMPROVE TAX FAIRNESS AND HELP THE DEVELOPING WORLD.
Organisation for Economic Co-operation and Development. Angel Gria. April 24, 2009.
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Governments and financial centers around the world have come forward with pledges to open up bank records to foreign tax investigators. The message could not be clearer: aiding tax evasion is no longer acceptable. For scores of tax havens, it’s time to reform, says the report. With aid budgets under pressure and trade volumes weakening amid the global economic crisis, governments are looking to tax systems as a new frontier for development policies.

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BUILDING A SUSTAINABLE ENERGY FUTURE.
National Science Foundation. April 10, 2009.
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This is a draft report for public review and comments. The fundamental transformation of the current extractive U.S. fossil fuel energy economy to a sustainable energy economy is a critical grand challenge facing the U.S., says the report. The report makes a number of recommendations to the U.S. Government.

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Johnson, Simon THE QUIET COUP (Atlantic, May 2009)
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Johnson, former chief economist of the International Monetary Fund, writes that the Obama administration is unlikely to reform the U.S. financial system because his top economic advisers have been recruited from the leading investment banks, the very institutions in need of reform. “The finance industry has effectively captured our government,” Johnson writes; “recovery will fail unless we break the financial oligarchy that is blocking essential reform.” Johnson said that the U.S. financial troubles are similar to the crises that brought heavily indebted developing countries to the IMF for loans. The author, now a scholar at the Massachusetts Institute of Technology, asserts that the U.S. financial disaster was brought about by an “Oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.” He said that government bailouts of the banks that have become too big to fail are not incentives to reform. “The government’s velvet-glove approach with banks ... is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms,” Johnson asserts. In contrast to the administration’s bailout strategy, Johnson has another proposal: nationalize troubled banks and break them up as necessary. Without thorough banking reform, the author said that the world risks going into an economic slump worse than the Great Depression. “We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances,” Johnson writes.

THE HOUSING CRASH RECESSION AND THE CASE FOR A THIRD STIMULUS.
Center for Economic and Policy Research. Dean Baker. March 2009.
Full Text [PDF format, 21 pages]

The paper makes the case for a third stimulus package to in the face of economic indicators signaling that the economy is in a deeper downturn than was expected based on previous projections. Specifically, the report calls for an employer tax-credit for extending health care coverage and another per worker employer tax credit for increasing paid time off from work. The author also makes the case for a housing policy centered on the stabilization of prices in non-bubble and deflated markets rather than applying the same efforts on markets that remain at bubble inflated levels.

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SWIMMING AGAINST THE TIDE: HOW DEVELOPING COUNTRIES ARE COPING WITH THE GLOBAL CRISIS.
World Bank. March 8, 2009.
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Developing countries face a financing shortfall of $270-700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.

The international financial institutions cannot by themselves currently cover the shortfall, which includes public and private debt and trade deficits, for these 129 countries, even at the lower end of the range. A solution will require governments, multilateral institutions, and the private sector.

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Lewis, Michael WALL STREET ON THE TUNDRA (Vanity Fair, April 2009)
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What led the small country of Iceland to decide in 2003 to reinvent itself as a global financial power? Michael Lewis chronicles Iceland’s economic roller-coaster, as it rapidly expanded, then in October 2008 experienced economic meltdown when its new, large banks collapsed. An entire nation that had no experience with high finance gazed upon the example of Wall Street and said, "We can do that." But, he says, Icelanders should have asked themselves why Iceland should be "seemingly essential to global finance." At the beginning, when local interest rates were more than 15 percent, Icelanders chose not to borrow in the country's krona, but instead took out loans in Swiss francs and Japanese yen at much lower rates. Those bargains made people lots of money on currency trades. The krona and housing prices kept rising, creating false prosperity. Many who had made their living from fishing suddenly became wealthy bankers; borrowers had imported the future into the present. As the krona collapsed in 2008, loans made in yen and francs became much more expensive and mortgages ballooned. Large numbers of Icelanders are having to return to their earlier occupations.

MACROECONOMIC IMBALANCES IN THE UNITED STATES AND THEIR IMPACT ON THE INTERNATIONAL FINANCIAL SYSTEM.
Levy Economics Institute of Bard College. Julia S. Perelstein. Web posted February 2009.
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The paper presents that the financial crisis of 2007–08 was made global by the current account deficit in the United States and there is global dependence on the United States trade deficit as a means of maintaining liquidity in financial markets. The outflow of dollars from the United States was invested in U.S. capital markets, causing inflation in asset markets and leading to a bubble and bust in the subprime mortgage sector. Since the U.S. dollar is the international reserve currency, international debt is mostly denominated in dollars. Because there is a high degree of global financial integration, any reduction in the U.S. balance of trade will have negative effects on many countries throughout the world, according to the paper.

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BUDGET OF THE UNITED STATES GOVERNMENT FISCAL YEAR 2010.
U.S. Office of Management and Budget. February 2009.
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This is the full text of the Budget of the U.S. government, A New Era of Responsibility.

THE ECONOMIC CRISIS AND THE FISCAL CRISIS: 2009 AND BEYOND. Urban Institute. Alan J. Auerbach and William G. Gale. February 19, 2009.
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In 2009, the federal deficit will be larger as a share of the economy than at any time since the 1940s. After 2009, the Institute projects an average deficit of $1 trillion per year for the next 10 years. The longer-run picture is even bleaker, with a fiscal gap of 7-9 percent of GDP, between $1 trillion and $1.3 trillion annually in current dollars. Recent trends in credit default swap markets suggest that although fiscal policy problems are usually described as medium- and long-term issues, these problems may be upon us much sooner than previously expected.

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TROUBLED ASSET RELIEF PROGRAM AND FORECLOSURES.
Congressional Research Service, Library of Congress. N. Eric Weiss et al. February 17, 2009.
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Increasing foreclosure rates and problems in financial markets are some of the issues addressed in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343), which created the Troubled Asset Relief Plan (TARP). The law authorized $700 billion in spending. The report focuses on Title II of the bill, which would require the Treasury to spend a minimum of $40 billion of the second $350 billion on foreclosure mitigation. The bill, as passed by the House, would require the Secretary of the Treasury to develop a plan by March 15, 2009. Both H.R. 703 and H.R. 788 have the same safe-harbor provisions.

JAPAN: CHALLENGES AND OPPORTUNITIES IN THE GLOBAL ECONOMY.
Wilton Park. Web posted February 13, 2009.
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The current financial crisis has highlighted the interconnectivity of the global economy which many believe requires a shared international response, according to the conference report. There is a growing realization that the global financial crisis is increasingly impacting negatively on the Japanese economy. The rapid and concrete response by both the U.S .and European Union (EU) governments to the current credit (crunch) suggests they have already learned from Japan’s 1990s credit crunch experience. Japan, with its huge cash reserves, is in a strong position to take advantage of global business opportunities resulting from the current global economic turmoil.

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CAUSES OF THE FINANCIAL CRISIS.
Congressional Research Service, Library of Congress. Mark Jickling. Web posted February 11, 2009.
Full Text [PDF format, 10 pages]

The current financial crisis began in August 2007, when financial stability replaced inflation as the Federal Reserve’s chief concern. The roots of the crisis go back much further, and there are various views on the fundamental causes. It is generally accepted that credit standards in U.S. mortgage lending were relaxed in the early 2000s, and that rising rates of delinquency and foreclosures delivered a sharp shock to a range of U.S. financial institutions. While some may insist that there is a single cause, and thus a simple remedy, the sheer number of causal factors that have been identified tends to suggest that the current financial situation is not yet fully understood in its full complexity.

THE FUTURE OF THE GLOBAL FINANCIAL SYSTEM: A NEAR-TERM OUTLOOK AND LONG-TERM SCENARIOS.
World Economic Forum. January 2009.
Full Text [PDF format, 88 pages]

The report explores a near-term industry outlook characterized by an expanded scope for regulatory oversight, back to basics in the banking sector, some restructuring by alternative investment firms and the emergence of a new set of winners and losers.

Over the long-term, the report finds that a range of external forces and critical uncertainties have the power to significantly shape the industry.

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GLOBAL RISKS 2009: A GLOBAL RISK NETWORK REPORT.
World Economic Forum. January 2009.
Full Text [PDF format, 37 pages]

The report identifies deteriorating fiscal positions, a hard landing in China, a collapse in asset prices, gaps in global governance and issues relating to natural resources and climate as the pivotal risks facing the world this year. It bases on a qualitative assessment of global risks, workshops and input from business leaders and experts. The report predicts that massive government spending to support financial institutions is threatening the already precarious fiscal positions in countries such as the U.S., United Kingdom, France, Italy, Spain and Australia.

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FINANCIAL REGULATION: A FRAMEWORK FOR CRAFTING AND ASSESSING PROPOSALS TO MODERNIZE THE OUTDATED U.S. FINANCIAL REGULATORY SYSTEM.
U.S. Government Accountability Office. January 2009.
Full Text [PDF format, 107 pages]

The United States and other countries are in the midst of the worst financial crisis in more than 75 years. While much of the attention of policymakers understandably has been focused on taking short-term steps to address the immediate nature of the crisis, these events have served to demonstrate that the current U.S. financial regulatory system is in need of significant reform.

ROOTS OF THE FINANCIAL CRISIS: THE ROLE OF GOVERNMENT POLICY.
U.S. House of Representatives, Budget Committee, Republicans. Web posted January 10, 2009.
Full Text [PDF format, 13 pages]

Although failures among private-sector actors and institutions were significant, the roots of the financial crisis can be traced to flawed government policies. The housing sector, where most of the difficulties started, has substantial government components, including the financial and regulatory roles of large government agencies. In short, the current crisis reflects not a failure of the capitalist system, but the ways in which government distorted the functioning of private markets.

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Roubini, Nouriel WARNING: MORE DOOM AHEAD (Foreign Policy, January/February 2009)
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The author, professor of economics at New York University’s Stern School of Business, writes that “last year’s worst-case scenarios came true,” and that the global financial pandemic that he and others had warned about has arrived. This year portends the credit crunch getting worse, as the deleveraging continues and asset prices continue to fall. The U.S. will experience its worst recession in decades, and some developing economies will experience a full-blown financial crisis, and may need external financing to avoid a meltdown. Roubini notes that this crisis is not only the result of the collapse of the U.S. housing market or of abuses in subprime mortgage lending -– the credit excesses were global, amounting to “the biggest asset and credit bubble in human history.” He notes that drastic actions in the last year by the G-7 and others averted a total systemic meltdown, but that “the worst is not behind us ... only very aggressive, coordinated, and effective action by policymakers will ensure that 2010 will not be even worse than 2009 is likely to be.”

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RESURGENCE OF RISK: A PRIMER ON THE DEVELOP(ED) CREDIT CRUNCH (The Oil Drum, posted October 10, 2008)
Full Text [HTML format; print caution: only the first 10-12 pages are the article itself; the remainder are posted comments]

This article, an update of a version posted a year earlier by a respected financial blogger writing under a pseudonym, gives a prescient warning and detailed description of the disaster that has occurred in the financial markets. The writer notes that the credit hyperexpansion of the last decade has created the appearance of great wealth, but it is illusory; unlike inflation, which reduces the shares of existing wealth by an increased money supply, credit expansion “creates multiple and mutually exclusive claims to the same shares of the existing wealth pie.” Every dollar of subprime mortgage debt created during the last few years has been leveraged into a hundred or more dollars of additional debt through derivative swaps. A credit expansion cannot continue indefinitely, and the gargantuan “inverted pyramid” of leveraged debt that Wall Street created is imploding in a sea of margin calls.

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Cassidy, John ANATOMY OF A MELTDOWN (New Yorker, December 1, 2008)
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The author chronicles the U.S. financial history of the last two years and the role of Ben Bernanke, chairman of the Federal Reserve Bank. In hindsight, it still isn't easy to judge the whether Bernanke, described by fellow economists as "the smartest guy in the room," should have done things differently or if he did it right. Cassidy says that Treasury Secretary Hank Paulson and Bernanke employed the "finger-in-the-dike" strategy, attempting to deep the financial sector operating so that it could repair itself. As more financial institutions failed and the government put more resources into bailing out the financial sector, the Federal Reserve Board has become engaged in the boldest exercise of its authority since its inception in 1913. Bernanke believes that the Fed's bold action has avoided a disaster. Cassidy describes the views of the Fed's proponents and critics and the reasoning behind each of the various financial bailouts.

HUD ISSUES NEW MORTGAGE RULES TO HELP CONSUMERS SHOP FOR LOWER COST HOME LOANS.
U.S. Department of Housing and Urban Development. Web posted November 12, 2008.
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Good Faith Estimate (GFE) [PDF format, 3 pages]
Settlement Statement (HUD-1) [PDF format, 3 pages]

For the first time in more than 30 years, the U.S. Department of Housing and Urban Development issued mortgage reforms that will help consumers to shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers. HUD will require, for the first time ever, that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. HUD estimates its new regulation will save consumers nearly $700 at the closing table.

THE GLOBAL FINANCIAL CRISIS: THE ROLE OF THE INTERNATIONAL MONETARY FUND (IMF).
Congressional Research Service, RS22976, Library of Congress. Martin A. Weiss. October 27, 2008.
Full Text [PDF format, 6 pages]

The report discusses two potential roles the International Monetary Fund (IMF) may have in helping to resolve the current global financial crisis: (1) immediate crisis control through balance of payments lending to emerging market and less-developed countries and (2) increased surveillance of the global economy through better coordination with the international financial regulatory agencies.

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Delong, J. Bradford REPUBLIC OF THE CENTRAL BANKER (American Prospect, vol. 19, no. 11, November 2008, pp. 14-17)
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The author, professor of economics at the University of California at Berkeley and former deputy assistant secretary of the treasury in the Clinton administration, writes that Ben Bernanke “is the closest thing to a central economic planner the United States has ever had”. He notes that the fate of the U.S. economy depends much more upon the Federal Reserve chairman than on the president. Delong believes that Bernanke may very well be the right person for his job at this juncture in U.S. economic history; a former chair of the economics department at Princeton University, Bernanke is a student of the Great Depression, and his highest priority is to avoid the mistakes that were made at the time. The evolution of central banks on either side of the Atlantic was not by design, notes Delong, but came about through a series of accidents and crises. The absence of a central bank in the U.S. was blamed for most of the financial panics between the 1860s and World War I; presidential administrations after World War II did not plan to turn over macroeconomic policy to the Federal Reserve, writes Delong -- “it just seemed like the least-bad idea at the time.”

INFLATION TARGETING IN BRAZIL.
Levy Economics Institute, Bard College. Philip Arestis et al. Web posted October 2, 2008.
Full Text [PDF format, 30 pages]

The paper is to examine inflation targeting (IT) in emerging countries by concentrating essentially on the case of Brazil. The IT monetary policy regime has been adopted by a significant number of countries. While the focus of the paper is on Brazil, which began inflation targeting in 1999, it also examines the experience of other countries, both for comparative purposes and for evidence of the extent of this “new” economic policy’s success.

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NEW FINANCING TRENDS IN LATIN AMERICA: AN OVERVIEW OF SELECTED ISSUES AND POLICY CHALLENGES.
Federal Reserve Bank of Atlanta. Camilo E. Tovar and Myriam Quispe-Agnoli. Web posted September 24, 2008.
Full Text [PDF format, 16 pages]

During the past fifteen years, financial markets in Latin America have experienced a major transformation. This process and its effects on the nature of risks and policy challenges in Latin America were the focus of a May 2007 conference in Mexico City sponsored by the Representative Office for the Americas of the Bank for International Settlements and the Americas Center of the Federal Reserve Bank of Atlanta.

This article summarizes the papers presented at the conference as well as the discussions among participants from central banks, finance ministries, multilateral institutions, academia, and the private sector.

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MARKET REACTION TO THE ADOPTION OF IFRS IN EUROPE.
Harvard Business School. Christopher S. Armstrong et al. Web posted September 16, 2008.
Full Text [PDF format, 51 pages]

This study examines the European stock market reaction to sixteen events associated with the adoption of International Financial Reporting Standards (IFRS) in Europe. European IFRS adoption represented a major milestone towards financial reporting convergence yet spurred controversy reaching the highest levels of government. Overall, the findings suggest that investors in European firms perceived net benefits associated with IFRS adoption, according to the authors.

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THE BUDGET AND ECONOMIC OUTLOOK: AN UPDATE.
Congressional Budget Office. Web posted September 10, 2008.
Full Text [PDF format, 92 pages]

According to undated CBO economic forecast, the economy is likely to experience at least several more months of weakness. Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.

AA08311
Fraser, Steve IS THE ‘GOOD LIFE’ AS AMERICA KNOWS IT OVER? (Tomdispatch, posted September 19, 2008)
Full Text [HTML format]

Fraser, author of WALL STREET: AMERICA’S DREAM PALACE and a student of the history of relations between Washington and Wall Street, writes that the undoing of Pres. Franklin Roosevelt’s New Deal program and its regulatory regime, with the “socialization of risk”, beginning with the massive bailout of the savings and loan associations in the 1980s, is what has resulted in the present-day collapse of the U.S. financial system. He notes that, despite the free-market, anti-government rhetoric, the bailing out of the financial industry by Washington is acknowledgment of how dependent the U.S. economy has become on the financial sector. The recent decisions of allowing some firms to survive and others to fail is more a symptom of confusion of how to deal with a spiraling crisis. Fraser notes that the financial system is out of control, and that it is “time for a reversal of course -– reregulation of [the financial system] is not enough anymore ... the government must figure out how to shift the flow of investment capital out of the mine-fields of speculative paper transactions and back into productive channels that will help meet the material needs of American society.”

BANK SURVEY SHOWS TIGHTENING LENDING STANDARDS.
Federal Reserve Bank of Atlanta. Web posted September 2, 2008.
Full Text [HTML format, various paging]

The credit crunch that has constricted the economy in 2008 continues, according to the survey. The survey, which covers 52 U.S. banks with combined assets of $6.1 trillion and 21 foreign financial institutions doing business in the United States, finds increasing caution in banks’ approaches to making loans. For example, about three-quarters of U.S. banks said they became stricter on prime mortgage loans, which is an increase from 60 percent who cited stricter standards in the April survey.

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RECENT TRENDS IN HOME PRICES: DIFFERENCE ACROSS MORTGAGE AND BORROWER CHARACTERISTICS.
Office of Federal Housing Enterprise Oversight. Andrew Leventis. Web posted August 27, 2008.
Full Text [pdf format, 15 pages]

The research paper analyzes differences in recent price trends for homes with different types of financing and borrower characteristics. The work follows preliminary research published in January that uncovered relative price weakness for homes not purchased with Office of Federal Housing Enterprise financed mortgages.

GET A GOOD NIGHT’S SLEEP.
Federal Deposit Insurance Corporation. Summer 2008.
Full Text [pdf format, 8 pages]

The report provides practical guidance on how to become a smarter, safer user of financial services. It includes: Get a Good Night’s Sleep: Rest Assured, Your Money is Safe in an FDIC-Insured Account; Tips for Trying to Fix a Clogged or “Frozen” Home Equity Line; Dialing for (Your) Dollars: Beware of Phone and Fax Fraud; Reminder: Beware of Mortgage Rescue Frauds; “Green” Banking: Saving the Environment as You Save and Borrow Money.

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ISLAMIC FINANCE: OVERVIEW AND POLICY CONCERNS.
Congressional Research Service, RS22931, Library of Congress. Shayerah Ilias. Web posted August 15, 2008.
Full Text [pdf format, 6 pages]

Islamic finance is based on principles of shariah, or “Islamic law.” Major principles of shariah are a ban on interest, a ban on uncertainty, adherence to risk sharing and profit-sharing, promotion of ethical investments that enhance society, and asset-backing. The international market for Islamic finance has grown 10% to 15% annually in recent years. Critics of Islamic finance express concerns about possible ties between Islamic finance and political agendas or terrorist financing and the use of Islamic finance to circumvent U.S. economic sanctions. Proponents argue that Islamic finance presents significant new business opportunities and provides alternate methods for capital formation and economic development.

NEW ESTIMATES OF FUNDAMENTAL EQUILIBRIUM EXCHANGE RATES.
Peterson Institute for International Economics. William R. Cline and John Williamson. Web posted August 7, 2008.
Full Text [pdf format, 20 pages]

The study concludes that the dollar is still significantly overvalued against a number of Asian currencies, most prominently the Chinese renminbi and the Japanese yen. The renminbi needs to rise by about 30 percent against the dollar and the yen should strengthen by about 20 percent. A number of other Asian currencies also need to appreciate substantially.  The study also concludes that the euro and the pound are now overvalued on average.

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CREDIT RISK TRANSFER: DEVELOPMENTS FROM 2006-2007.
Basel Committee on Banking Supervision. Web posted August 3, 2008.
Full Text [pdf format, 87 pages]

The paper explains the causes of the credit market turmoil. It focuses on two financial instruments that have been used widely to transfer credit risk: collateralized debt obligations referencing (CDOs) and collateralized loan obligations (CLOs).

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FACT SHEET: TREASURY RELEASES BEST PRACTICES FOR RESIDENTIAL COVERED BONDS.
Office of Public Affairs, U.S. Treasury Department. July 2008.
Full Text [pdf format, 4 pages]

The U.S. Treasury Department aims to encourage additional sources of mortgage finance and to strengthen financial institutions. A covered bond is secured debt instrument that provides funding to a depository institution, collateralized by high-quality mortgage loans that remain on the issuer’s balance sheet. Covered bonds have the potential to increase funding for mortgages and to strengthen financial institutions by offering them a new funding source that will diversify their overall funding portfolio.

FANNIE MAE’S AND FREDDIE MAC’S FINANCIAL PROBLEMS: FREQUENTLY ASKED QUESTIONS.
Congressional Research Service, RS22916, Library of Congress. N. Eric Weiss. Web posted July 21, 2008.
Full Text [pdf format, 6 pages]

Fannie Mae and Freddie Mac chartered by Congress as government sponsored enterprises (GSEs) and are widely believed to have an implicit guarantee from the federal government. Questions about their roles are covered by the report in light of today’s economic environment.

KID’S SHARE 2008: HOW CHILDREN FARE IN THE FEDERAL BUDGET.
Urban Institute. Adam Carasso et al. Web posted June 25, 2008.
Full Text [pdf format, 40 pages]

According to the study, children are a diminishing priority in the federal budget. If current spending and revenue policies continue, the children’s share of domestic federal spending, which excludes defense, non-defense homeland security, and international affairs, will be 13.8 percent in 2018, down from 16.2 percent in 2007 and 20.2 percent in 1960. While domestic spending is projected to grow by $771 billion, largely because of escalating health care costs, between now and 2018, children will reap only 7.1 percent, or $55 billion, of this increase under current law. The report defines “children” as those under age 19 who are not in postsecondary education.

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BANK STRUCTURE AND THE TERMS OF LENDING TO SMALL BUSINESSES.
Harvard Business School. Rodrigo Canales and Ramana Nanda.Web posted June 24, 2008.
Full Text [pdf format, 35 pages]

Using loan-level data from Mexico, the study examines the relationship between the organizational structure of banks and the terms of lending to small businesses. The banks with decentralized lending structures, where branch managers have autonomy over the terms of lending, give larger loans to small firms, particularly in states with weak legal enforcement of financial contracts. However, decentralized banks are also more responsive to the competitive environment when setting loan terms. They are more likely to restrict credit and to charge higher interests rates when they have market power, more so to smaller firms that have fewer outside options for external finance.

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REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICIES.
U.S. Department of the Treasury. May 2008.
Full Text [pdf format, 39 pages]

The report reviews developments in international economic and exchange rate policies, focusing on the second half of 2007. However, where pertinent and when available, data through mid-April 2008 are included and discussed. The report also includes an appendix updating issues related to Sovereign Wealth Funds. Exports and imports of goods and services to and from the countries whose economies and currencies are discussed accounted for about 85 percent of total U.S. trade in 2007.

RENEWABLE ENERGY CONSUMPTION AND ELECTRICITY: PRELIMINARY 2007 STATISTICS.
Energy Information Administration, U.S. Department of Energy. Fred Mayes et al. May 2008.
Full Text [pdf format, 16 pages]

Renewable energy consumption declined 1 percent between 2006 and 2007 to 6,830 trillion Btu, according to preliminary 2007 data. In contrast, both total and nonrenewable energy consumption increased 2 percent. Hydro electricity production dropped 14 percent in 2007 due to reduced precipitation in several regions of the country. On the plus side, biomass-based energy grew 7 percent and wind-generated electricity increased 21 percent. Major increases in consumption of biomass to produce and use biofuels, ethanol and biodiesel, were almost entirely responsible for the increase in biomass during 2007. Foreign trade and investment

CAPITAL BUDGETING.
Congressional Budget Office. May 2008.
Full Text [pdf format, 25 pages]

This paper analyzes the advantages and disadvantages of adopting a capital budget at the federal level. The federal budget presents the government’s expenditures and revenues for each fiscal year, enabling policymakers to allocate resources to serve national objectives. One approach would be to create a category for capital spending as part of a restoration of the statutory budget enforcement procedures. Such a category within overall discretionary spending limits could help highlight important policy goals. Another alternative, which would address concerns about the management of assets rather than their reporting in the budget, might be to attribute a portion of the cost of assets each year to the programs that use them. Requiring users to pay the costs might improve incentives for agencies to sell assets that are no longer appropriate to their needs.

WEALTH ENHANCEMENT AND STORAGE.
American Enterprise Institute for Public Policy Research. John H. Makin. May 2008.
Full Text [pdf format, 4 pages]

The desire to enhance and store wealth has been present ever since income rose above subsistence levels. The dangerous stage for many wealth managers arises when the prospects for wealth enhancement seem to become overwhelmingly attractive. Bubbles arise, be they tied to the price of tulips, tech stocks, or Miami condos. A bubble occurs when investors believe that purchasing a particular means of storing wealth will yield such strong returns that a substantial rise in living standards will be possible much sooner than previously imagined.

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THE SUBPRIME CRISIS: SIZE, DELEVERAGING AND SOME POLICY OPTIONS.
Organisation for Economic Co-Operation and Development. Adrian Blundell-Wignall. Web posted April 15, 2008.
Full Text [pdf format, 25 pages]

The study reviews where the crisis stands since the OECD’s September 2007 calculation of $300 billion loss. Further, it examines the effect of losses for the deleveraging in the economy and the options to deal with the economic consequences.

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INCOME INEQUALITY, INCOME MOBILITY, AND ECONOMIC POLICY: U.S. TRENDS IN THE 1980S AND 1990S.
Congressional Research Service, RL34434, Library of Congress. Thomas Hungerford. Web posted April 7, 2008.
Full Text [pdf format, 27 pages]

Income inequality has been increasing in the United States over the past 25 years. Several factors have been identified as possibly contributing to this phenomenon. Some researchers have suggested the decline in unionization; others have argued that rising returns to education and skill-biased technological change are the important factors. Most analysts agree that the likely explanation skill-biased technological change combined with a change in institutions and norms.

DEBUNKING THE 'TAX THEE BUT NOT ME' MYTH.
National Taxpayers Union, NTU Issue Brief #167. Kristina Rasmussen. March 19, 2008.
Full Text [pdf format, 8 pages]

Smokers are easy targets for elected officials looking to increase government revenue and score political points by punishing “unpopular” activities. Cigarettes taxes have been increased 72 separate times in 43 states since 2000. Broad-based tax increases (e.g., sales tax hikes) are often opposed by majorities of the population but non-smokers overwhelmingly approve of raising tobacco excise taxes because they believe they will be unaffected. However, this kind of approach doesn’t hold up to scrutiny. Analyses of state fiscal habits from 2000 and onward show that tobacco tax hikes have very real fiscal implications for nonsmoking taxpayers.

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AA08086
WHAT WENT WRONG (Economist, vol. 386, no. 8572, March 22, 2008, pp. 79-88)
Full text available from your nearest American Library

In this special report, the Economist examines how close Wall Street came to a systemic collapse, and how the financial system will change as a result. They note that the origins of this crisis are in the 1980s, when the financial services industry began a pattern of growth that may only now have come to an end. Financial services’ share of total corporate profits grew from ten percent in the early 1980s to forty percent last year — but account for only fifteen percent of corporate America’s gross value and only five percent of private-sector jobs. After the “dotcom” crash in 2001, America’s GDP growth has been the lowest in half a century; yet, even as the ground beneath it fell away, the financial services industry has “defied gravity” by using debt, securitization and proprietary trading to boost fees and profits, made possible by cheap money and low consumer-price inflation.

THE BUDGET OF THE UNITED STATES GOVERNMENT, FY09.
Office of Management and Budget (OMB). Web posted February 4, 2008.
Full Text [pdf format, 10.9 MB]

Issued by the Office of Management and Budget (OMB), the Budget of the United States Government is a collection of documents that contains the budget message of the President, information about the President's budget proposals for a given fiscal year, and other budgetary publications that have been issued throughout the fiscal year.

CANADA – THE 2008 FEDERAL BUDGET: THE END OF SURPLUS?
The Conference Board of Canada. Web posted February 27, 2008.
Full Text

A weaker economic outlook, coupled with the aggressive tax cuts contained in the government’s October 2007 Economic Statement, has constrained the ability of the federal government to introduce significant budget initiatives.

[Note: Contains copyrighted material.]

CHINA’S HOLDINGS OF U.S. SECURITIES: IMPLICATIONS FOR THE U.S. ECONOMY.
Wayne M. Morrison and Marc Labonte. Congressional Research Service (CRS), Library of Congress. January 9, 2008.
Full Text [pdf format, 16 pages]

Because of the slow savings rate in the U.S., the economy depends on foreign capital inflows from countries with high savings rates. China has become the world’s largest holder of foreign exchange reserves (FER); and as of June 2006, China was the 2nd largest foreign holder (after Japan) of U.S. securities.

The issue of China’s large holdings is part of a larger debate on how long the U.S. can rely on these foreign investments, can this reliance pose a risk to the U.S. economy, and what are the costs of this borrowing. This report discusses these issues.

DOLLAR CRISIS: PROSPECT AND IMPLICATIONS.
Craig K. Elwell. Congressional Research Service (CRS), Library of Congress. January 8, 2008.
Full Text [pdf format, 17 pages]

The value of the dollar in international exchange has fallen 29% since 2002. For most of that period, it dropped approximately 3% per year; but this past year, the value fell nearly 10%. The large U.S. current account deficits are sustained by foreign capital inflow.

A stimulative monetary policy could be implemented quickly; but the author states that the “most useful policy response by foreign economies would be complementary expansionary policies to offset the negative impact of their appreciating currencies on their net exports. Attempts to defend a currency against this crisis driven appreciation would be costly and likely fail.”

IF, WHEN, HOW: A PRIMER ON FISCAL STIMULUS.
Douglas W. Elmendorft and Jason Furman. The Hamilton Project, Brookings Institution. Web posted January 14, 2008
Full Text [pdf format, 30 pages]

Recent economic data show that problems in the housing and financial markets are affecting the whole economy. In December, employment growth fell and unemployment rose. On the other hand, there are some reassuring indicators—net exports are trending upward and consumer spending increased in October and November. Nonetheless, most forecaster and economists are predicting a slowdown in economic growth for several quarters; and over half of them believe there will be a recession.

This paper examines some of the monetary and fiscal policy alternatives that could stabilize and stimulate the economy. The Federal Reserve could adjust the interest rate, and Congress could pass tax cuts or spending increases. Both of these options would give the economy a quick boost. The paper concludes with a discussion of risk protection for families.

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DEBT CANCELLATION FOR HAITI: NO REASON FOR FURTHER DELAYS.
Mark Weisbrot and Luis Sandoval. Center for Economic and Policy Research (CEPR). Web posted December 12, 2007.
Full Text [pdf format, 14 pages]

Haiti is one of the poorest countries in the Western Hemisphere—76 percent of its population lives below the poverty line. Yet it was excluded, because of a technicality, from the International Monetary Fund (IMF) and World Bank’s Heavily Indebted Poor Countries (HIPC) initiative. Haiti was included in HIPC in 2006; but because of the initial delay, Haiti continues to struggle to meet its foreign public debt cancellation requirement. This paper argues for cancellation of this $1.54 billion debt so that Haiti can be in line with the other HIPC countries in the Western Hemisphere.

[Note: Contains copyrighted material.]

AA08029
Shoven, John B. NEW AGE THINKING (Foreign Policy, no. 164, January-February 2008, pp. 82-83)
Full Text (EbscoHost; password required)

Will the worldwide tidal wave of aging baby boomers create a fiscal burden that will devastate the global economy? No, says Shoven, director of the Institute for Economic Policy Research at Stanford University. Our conception of “old” has itself become old-fashioned, he writes. He recommends using modern mortality risk measurements -- or the chance a person has of dying within the next year -- to measure age. The higher the mortality risk, the “older” a person is. Today’s 65-year-old man can expect to live another 17 years and has the same mortality risk a 59-year-old man did in 1970 or a 56-year-old man did in 1940. (Women, on average, live longer than men.) So, if one looks at the fraction of the U.S. population with a mortality risk higher than 1.5 percent, the growth of the “elderly” population is not that dramatic. By 2050, Shoven says, only 62.5 million Americans, or about 1.5 percent of the population, will have a mortality risk greater than 1.5 percent. Nonetheless, the average length of retirement for today’s 65-year-old man has stretched to more than 19 years. To keep the costs of ever-lengthening retirements under control, Shoven recommends altering retirement ages and pensions to reflect current mortality risks.

THE GROWING ROLE OF THE EURO IN EMERGING MARKET FINANCE. Paul R. Masson. Policy Research Working Paper, World Bank. Web posted November 9, 2007.
Full Text [pdf format, 27 pages]

The impact of the Euro on developing countries has been modest. The Euro is much “more important in debt issuance than in the official foreign exchange reserve holdings.” Demand for Euro reserves has been held back by the dominance of the dollar, but further dollar declines may cause a shift out of dollars into Euros.

THE SUBPRIME LENDING CRISIS: THE ECONOMIC IMPACT ON WEALTH, PROPERTY VALUES AND TAX REVENUES, AND HOW WE GOT HERE: REPORT AND RECOMMENDATIONS. [Majority Staff, Joint Economic Committee, U.S. Congress]. Web posted October 25, 2007.
Full Text [pdf format, 34 pages]

Careless subprime lending practices during a period of rapid housing price appreciation placed some borrowers in a vulnerable position with risky adjustable rate mortgages. Policymakers are aware of the need to prevent more home foreclosures before the housing market affects the broader economy. This report highlights the underlying causes of the subprime crisis and offers policy options to reduce foreclosures and prevent this crisis from reoccurring.

THE UNITED STATES AS A NET DEBTOR NATION: OVERVIEW OF THE INTERNATIONAL INVESTMENT POSITION. James K. Jackson. Congressional Research Service (CRS), Library of Congress. Updated October 18, 2007.
Full Text [pdf format, 18 pages]

“The international investment position of the United States is an annual measure of the assets Americans own abroad and the assets foreigners own in the United States. The net position, or the difference between the two, sometimes is referred to as a measure of U.S. international indebtedness.” These assets generate “flow of capital into and out of the economy. . .” Some members of Congress have concerns about the U.S. net international investment position while others argue that the U.S. reliance on foreign capital leaves the economy vulnerable to a financial crisis. This report examines both arguments.

FOREIGN INVESTMENT AND SOVEREIGN WEALTH FUNDS. Douglas Rediker and Heidi Crebo-Rediker. Global Strategic Finance Initiative, Working Paper, New America Foundation. September 25, 2007.
Full Text [pdf format, 9 pages]

Money held by governments around the world in reserves and in sovereign wealth funds is the largest concentration of investment capital in the world. These funds come from two main factors: global imbalances between debtor nations (like the U.S.) and surplus nations (like China) and state-owned commodity funds. Policymakers need to assess how to influence the use of these funds.

AA07394
Ewing, Jack THE NEW FINANCIAL HEAVYWEIGHTS (Business Week, Nov. 12, 2007, pp. 52-55)
Full text [html format]

Developing nations in Asia and the Middle East are rapidly accumulating large pools of wealth. These governments are creating sovereign funds, whose purpose is to make investments, often in developed nations. The author notes that Russia, the Persian Gulf states, China, and others have “amassed fortunes from exports of gas, oil, or manufactured goods, and now they're looking to supercharge the returns.” Ewing voices a concern of many, that foreign governments could exert undue political or economic influence by purchasing shares in many U.S. businesses, particularly as these nations' sovereign funds become more sophisticated investors. Yet, Western financial institutions are greatly in favor of these funds, as they are potential sources of vast amounts of capital. For now, the U.S. and Europe are encouraging the sovereign funds to become more transparent. A potential drawback is that the funds may decide to pull out of the U.S. and invest in emerging markets, causing the dollar to weaken against other currencies.

AA07363
Greenberg, Maurice; Peterson, Peter A FISTFUL OF DOLLARS (National Interest, no. 90, July/August 2007, pp. 17-22)
Full text available from your nearest American Library

In this two-part series on the monetary challenges facing the U.S., Greenberg, in MONEY, MONEY EVERYWHERE, notes that the United States has benefited for a long time as the dollar has been the world's de facto currency; however, he says, this is changing. As policymakers in Washington wallow in complacency, Brazil, Russia and Western Europe are rising in the international pecking order, and their currencies can compete with the dollar as a global reserve. "As that happens," he writes, "the advantages we have gleaned from that [sole] status -- the ability to finance our twin fiscal and trade deficits while keeping our interest rates low -- will also be lost." In NO FREE LUNCH, Peterson identifies vulnerabilities in the American future -- an explosion of demands on Social Security and Medicare as the population ages; high levels of debt to foreign nations; exploding health-care costs, and an out-of-control dependence on foreign oil. Peterson writes that one serious national misstep shaking the world's trust in the American economy could make these weaknesses spiral into crisis.

FISCAL POLICY AND ECONOMIC GROWTH: LESSONS FOR EASTERN EUROPE AND CENTRAL ASIA. Cheryl Gray, Tracey Lane, and Aristomene Varoudakis, eds. International Bank for Reconstruction and Development, World Bank. Web posted July 2, 2007.
Full Text [pdf format, 356 pages]

Governments formulate and implement policies for taxation and public spending that can impact economic growth, income distribution, and poverty. This study explores public finance policies in transition countries in Europe and Central Asia (ECA) tackling broad questions such as fiscal deficits, government size, quality of public spending, and taxation structure. The study also “brings in experiences from rapidly growing economies in other regions of the world and tries to draw policy lessons from these experiences for ECA.”

TEN YEARS AFTER: THE LASTING IMPACT OF THE ASIAN FINANCIAL CRISIS. Mark Weisbrot. Center for Economic and Policy Research (CEPR). Web posted August 7, 2007.
Full Text [pdf format, 8 pages]

The Asian financial crisis of ten years ago brought to the forefront some problems of the international financial system. For example, “international capital flows tended to come in when economies were growing and even overheating, and exit during downturns, thus exacerbating the swings of business cycles.” The author asserts that the Asian financial crisis “changed some of the ways that economists and other observers think about the international financial system.” He further states that the International Monetary Fund (IMF) lost most of its power over middle-income countries and “permanently damaged the institution’s credibility and authority in much of the world.”

MEASUREMENT AND INFERENCE IN INTERNATIONAL RESERVE DIVERSIFICATION. Anna Wong. Working Paper Series, Peterson Institute for International Economics. Web posted August 8, 2007.
Full Text [pdf format, 63 pages]

The report analyzes “international reserve diversification by examining changes in quantity share of currencies held in foreign exchange reserves.” The analysis reached four conclusions: (1) the quantity shares of the U.S. dollar and the Euro are “consistent with net stabilizing interventions”; quantity shares rise when currencies decline and vice versa; (2) the principal driver of stabilizing diversification is Japan; (3) industrial countries (excluding Japan) do not indicate stabilizing diversification; and (4) non-industrial countries display stabilizing diversification over short periods.

SOVEREIGN WEALTH FUNDS: THE NEED FOR GREATER TRANSPARENCY AND ACCOUNTABILITY. Edwin M. Truman. Policy Brief, Peterson Institute for International Economics. Web posted August 8, 2007.
Full Text [pdf format, 9 pages]

Over the past several years, governments (primarily in emerging-market economies) have accumulated large amounts of international assets from reserves and other holdings. This paper examines this trend and outlines some of the issues for the international financial system. The author argues for increased transparency and accountability concerning the management of sovereign wealth funds and other forms of cross-border assets. He also proposes a plan for international standards to manage these activities.

AA07313
Modi, Vikram. WRITING THE RULES: THE NEED FOR STANDARDIZED REGULATION OF ISLAMIC FINANCE (Harvard International Review, vol. 29, no. 1, Spring 2007, pp. 38-42)
Full text [html format]

Islamic finance fueled by petrodollars has been growing fast over the last decade, says Modi, associate editor of the Review. As Islamic and some regular banks develop Shari’ah-compliant financial products, the customer base is growing despite suspicions from some Islamic scholars. Some predominantly Muslim countries such as Libya and Morocco refuse to recognize Islamic banks, which they see as linked to Islamic parties. Others, such as Egypt and Tunisia, allow such banks to exist but impose little regulation. But there also are countries such as Bahrain and Malaysia that not only offer substantial support to Islamic banking but also cooperate on regulatory issues. The author declares that consolidation, standardized regulation, greater transparency and innovation are needed to encourage growth of Islamic financial services. He suggests that Western countries with large Muslim populations follow the lead of the U.K Financial Service Authority, which holds Islamic banks to the same standards as conventional ones, but has modified laws to accommodate them, recognizing the unique nature of Islamic financial transactions.

AA07312
Bosco, David. THE DEBT FRENZY (Foreign Policy, Issue 161, July/August 2007, pp. 36-42)
View article on ProQuest (password required)

The author, a contributing editor at Foreign Policy, discusses various aspects of the system of international government debt, with particular emphasis on “vulture funds,” investment funds which purchase government bonds from lenders at a fraction of their face value, then sue, harass, and shame the debtor governments to pay what they owe. Activists who support debt forgiveness criticize these funds for reducing the money available for humanitarian expenditures such as education and health care by the debtor governments.

Where the activists see poor countries in need of relief, fund managers see the governments which refuse to pay their debts as corrupt deadbeats disregarding the rule of law. Argentina and Zambia are presented as extreme examples of a country which is shirking its obligations (Argentina) and one which is struggling to pay a debt incurred in 1979 while facing wrenching poverty and a runaway AIDS epidemic (Zambia). “What is sorely needed is ... a legal mechanism that can inject some equity into the process -- a system that will cry for Zambia but punish Argentina.”

AA07310
Baker, Gerard. THE WALL STREET SLIDE (International Economy, vol. 21, no. 2, Spring 2007, pp. 26-28)
Full text [pdf format, 3 pages]

“New York is losing its mojo!” scream the financial pundits. Over-regulation is driving business away from the Big Apple to other global financial centers such as London and Hong Kong, they charge. Or is it? Gerard Baker, the U.S. editor and an assistant editor of The Times of London, challenges the notion that U.S. financial markets are losing out to more nimble, less tightly regulated markets in Europe and Asia as a result of legislation in 2002 following the Enron and other financial scandals.

Nothing of the sort, he says. The rise of London and Hong Kong as financial centers is not because of regulatory differences but is simply a reflection of a more balanced global capital system, Baker writes. He says that London has emerged as the consolidated financial market for Europe, where in the first quarter of this year, the combined market capitalization of companies quoted on European exchanges exceeded that of American companies for the first time since World War One. He said the growth of Hong Kong’s equity market reflects the explosive expansion of the Chinese economy.

What unites London, Hong Kong and New York is far more important than what differentiates them, and that is the prevalence of Anglo-American common law. “This Anglo-American common-law approach differs fundamentally from the legal systems of Europe and most of Asia in its flexibility and reliability. It is no accident that, as capitalism has gone truly global in the last ten years, financial centers steeped in that tradition have moved to preeminence,” he writes.

A (LACK OF) PROGRESS REPORT ON CHINA’S EXCHANGE RATE POLICIES. Morris Goldstein. Working Paper, Peterson Institute of International Economics. Web posted June 12, 2007.
Full Text [pdf format, 24 pages]

This paper assesses the progress in improving China’s exchange rate policies using four indicators: (1) the change in China’s global current account positions; (2) movements in real effective exchange rate of the renminbi (RMB); (3) the role of market forces; and (4) China’s compliance with its exchange rate policy obligations to the International Monetary Fund (IMF). 

The author further discusses how the lack of progress in improving China’s exchange rate policies affects its economy, the U.S. economy, and the international monetary and trading systems. He then considers what should be done by China, the U.S., and the IMF to accelerate progress.

GLOBAL DEVELOPMENT FINANCE: THE GLOBALIZATION OF CORPORATE FINANCE IN DEVELOPING COUNTRIES I: REVIEW, ANALYSIS, AND OUTLOOK. International Bank for Reconstruction and Development, World Bank. May 2007.
Full Text [pdf format, 162 pages]

This is the Bank’s annual review of trends in and prospects for financial flows to developing countries. The report reflects that international private capital flows to developing countries reached record levels of $647 billion in 2006. This increase was due primarily to cross-border mergers and acquisitions that boosted foreign direct investment (FDI). In developing countries, improved domestic policies and favorable international economic conditions for corporations raised large sums of capital. However, some economists are concerned about financial markets volatility, slowing growth, and monetary tightening.

AA07254
Prasad, Eswar; Rajan, Raghuram; Subramanian, Arvind THE PARADOX OF CAPITAL (Finance and Development, vol. 44, no. 1, March 2007, pp. 16-19)
Full text [html format]

According to standard economic theory, financial capital should flow from richer, industrial to poorer, developing countries in search of new investment opportunities and higher rate of return. Foreign direct investment (FDI) does follow that pattern, but other capital flows tend to move in the opposite direction, a phenomenon that has long puzzled economists. The authors of the article point out that the paradox has intensified since 1990, when it was first described by Robert Lucas. By examining a sample of 51 nonindustrial countries, the authors also found out that countries that relied less on foreign finance have grown faster in the long run. In other words, higher growth in those countries is associated mainly with higher domestic savings. The authors suggest this may be a result of weak financial systems in many developing countries that hamper the absorption of foreign capital, slow down borrowing and force savings. In some countries with weak financial systems foreign capital may be neither needed nor helpful, the authors conclude, because the forces of globalization may be generating productivity gains and growth despite those financialweaknesses. “Any discussion of the merits of capital account openness is likely to be very specific to a country,” they say. 

AA07239
Claessens, Stijn; Feijen, Erik FROM CREDIT TO CROPS (Finance & Development, vol. 44, no. 1, March 2007)
full text [html format]

The authors argue that more development of financial services can directly reduce world hunger by providing farmers in developing countries with the credit they need to buy such tools as tractors, fertilizers and livestock to increase agricultural production. This, in turn, causes household incomes to rise and food prices to decrease, resulting in less undernourishment. They studied more than 50 developing countries between 1980 and 2003 to find relationships between financial development and investment in agricultural inputs, productivity and nutrition. They incorporated variables likely to affect those relationships, such as government expenditures as a percentage of gross national product, level of economic activity, inflation and the percentage of the population living in rural areas. They found that private credit and greater agricultural productivity are linked, as are credit and investment in the use of agricultural equipment. The authors say commercial banks are achieving success in some poor countries, including the development of sustainable microcredit institutions, mobile phone banking, smart cards and the use of scoring to extend credit. Claessens is a research director at the International Monetary Fund (IMF) and Feijen in an economist with the World Bank.

THE WORLD BANK’S INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA). Martin A. Weiss. Congressional Research Service (CRS), Library of Congress. April 18, 2007.
Full Text [pdf format, 21 pages]

The World Bank makes loans and grants to low and middle-income countries. One of its institutions lends directly to governments to finance projects and programs. This institution is the International Development Association (IDA. On March 5, 2007, donor nations discussed replenishing IDA funds. They selected the following three themes for IDA-15:

• IDA’s role in international foreign aid;
• The World Bank’s role in post-conflict reconstruction; and
• The need to improved IDA’s effectiveness.

This report provides background material on IDA and the U.S.’s role at this institution. It also examines IDA-15 negotiations and analyzes the three themes.

THE VALUE TO BANKS OF SMALL BUSINESS LENDING. Joe Peek. Small Business Research Summary, Office of Advocacy, U.S. Small Business Administration. Web posted May 4, 2007.
Full Text [pdf format, 38 pages]

“This study provides direct evidence on the value to banks arising from relationship lending by estimating the market premium placed on the small business loan portfolios of banks.” The study also finds that small commercial and industrials loans add value relative to large commercial loans. On the other hand, small commercial real estate loans do not add additional value relative to large commercial real estate loans.

REFORM OF THE INTERNATIONAL MONETARY FUND. Peter B. Kenen. Council Special Report, Maurice R. Greenberg Center for Geoeconomic Studies, Council on Foreign Relations. Web posted May 10, 2007.
Full Text [pdf format, 56 pages]

The original purpose and scope of the International Monetary Fund (IMF) was to maintain monetary and exchange-rate stability among its mostly industrialized membership. Today, however, most of its members are from developing countries. The expansion of IMF’s macroeconomic issues has led some to call for reform. The authors urge the U.S. to support reform, but they argue that “the United States should not try to achieve unilaterally what the Fund can and should achieve multilaterally.”

AA07216
Karger, Howard LIVING IN AMERICA’S FRINGE ECONOMY (AlterNet, posted December 29, 2006)
Full text

Businesses that engage in predatory financial transactions with low-income or heavily indebted consumers, by charging excessive interest rates and fees or exhorbitant prices for goods and services, are not new in the U.S. Karger, professor of social work at the University of Houston, and author of SHORTCHANGED: LIFE AND DEBT IN THE FRINGE ECONOMY, writes, however, that the “fringe economy” in the U.S. has grown explosively in recent years, taking advantage of the growing proportion of the U.S. population whose lives are economically insecure. Additionally, the expansion of nationwide chains of payday lenders, pawnshops and check-cashing stores are being fueled by a number of major banks. The profits raked in by these chains rivals the federal government assistance programs to low-income households.

Contrary to the predatory lending industry’s claims that they charge higher rates to make up for the increased risk of doing business with poor people, the author notes that studies have shown that the default rates on these transactions are quite low; the net result is that people already struggling to make ends meet are enmeshed in a web of debt. Karger notes that at least one major bank in this field has plans to export its operations to Poland, China, Mexico, Britain, France, India, and Brazil. He notes that it will take a variety of strategies, such as community-based lending institutions, higher minimum wages, stricter usury laws and more robust banking regulations “to restrain this growing and out-of-control economic beast.”

AA07175
Steil, Benn. THE END OF NATIONAL CURRENCY
(Foreign Affairs, Vol. 86, No. 3, May-June 2007, pp. 83-96)
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Steil, director of international economics at the Council on Foreign Relations, relates how President Nixon in 1971 effectively ended the link to gold not only for the U.S. dollar but also for all national currencies. Since then all currencies have become fiat money, with no intrinsic value. Most people in most countries seek to get rid of their own national currencies because they fear default by their own governments. Instead they hold U.S. dollars or euros, in which they maintain faith. Countries such as Ecuador that have abandoned their national currencies entirely and adopted the U.S. dollar instead have seen lower interest rates and thus stable economic expansion and low inflation. Countries such as Argentina that try to maintain a fixed dollar exchange rate without the dollars to do so have seen continued economic crisis and stagnation. Daily capital flows between two of the 12 largest economies in the world, California and New York State, take place with negligible cost, practically without thought, in a single currency. The developing economies of the world should take the lesson by abandoning their costly national currencies and instead adopting the U.S. dollar, the Euro, or some Pan-Asian currency.

GLOBAL IMBALANCES: TIME FOR ACTION.
Alan Ahearne, William R. Cline, Kyung Tae Lee, Yung Chul Park, Jean Pisani-Ferry, and John Williamson. Policy Brief, Peter G. Peterson Institute for International Economics. Web posted March 28, 2007.
Full Text [pdf format, 8 pages]

A joint workshop was held in February concerning “how to achieve an orderly reduction in global imbalances.” The discussions centered on two sets of contributing papers: the first set of papers provided a perspective on underlying factors behind surpluses and deficits; and the second set focused on estimates of the changes in policy variables and the corresponding exchange rate adjustments. This brief provides an overview of the discussions of the workshop, and it outlines proposals the participants made to address these global imbalances.

AA07153
MacLean, Aaron. ISLAMIC BANKING: IS IT REALLY KOSHER?
(The American, vol. 1, no. 3, March/April 2007, pp. 104-108)
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The author describes the mechanisms Islamic banks use to ensure compliance with Sharia laws against collecting interest on loans. Many of the largest financial institutions, including Deutsche Bank and JPMorgan Chase have subsidiaries that are compliant with Islamic banking practices. MacLean describes how Japan will be the first non-Muslim country to issue Sharia-compliant bonds. He notes that Islamic banking is big business and growing at a rate of 20 percent each year. MacLean asserts that Islamic banking experts follow the letter of the law to maximize profits for their institutions, "the real shared value that links Islamic and Western civilizations."

AA07152
Gangemi, Jeffrey. A BETTER WAY TO WIRE CASH HOME?
(Business Week Online, January 2, 2007)
Full text [html format]

The author describes how Washington-based Microfinance International (MFIC) wants to change the $268 billion worldwide remittance industry. Partnering with UAE Exchange, a company based in the United Arab Emirates, MFIC plans to offer real-time money transfer capabilities to a network of more than 70 countries using the Internet and a platform adopted from the leading Latin American banking software. The result is that senders and receivers of remittances will no longer be at the mercy of money transfer companies. The founder of MFIC is Tochisako Atsumasa, a former Japanese banker who wants to prove that a financial services company can both make money and serve the poor. Atsumasa says his company can achieve profitability by licensing his delivery platform to banks and making loans to poor immigrants, giving the new borrowers a chance to establish a credit history. He wants to expand his licensing in the United States as more remittances are being sent from the country.

RESPONDING TO FINANCIAL CRISES.
Jeffrey Fankel. Faculty Research Working Paper Series, John F. Kennedy School of Government, Harvard University. February 14, 2007.
Full Text [pdf format, 13 pages]

Most financial analysts agree there is a need for a Lender of Last Resort in the event of banking panics or disruptions, but crises should not be the basis for public policy. “The response must be appropriate and careful. It must be informed by the longer term perspective offered in the lessons of historical precedent. . .” This paper details lessons learned from past crises such as inflation, stock market crashes, housing crashes, and various international crises.

AA07104
BANKING SECTOR OPENING: POLICY QUESTIONS AND LESSONS FOR DEVELOPING COUNTRIES.
Leonardo Martinez-Diaz. Issue Brief, The Brookings Institution. February 2007.
Full Text [pdf format, 9 pages]

In the 1990s, many developing countries protected their banking markets, but today countries are opening their banking sectors to foreign capital and competition. This openness can bring real benefits to the economy such as fresh capital, more competition, new financial products, and improved corporate governance; but there can be risks and vulnerabilities. This survey draws from academic literature the lessons and insights learned from countries that have opened their banking sectors. The brief also makes recommendations on how to receive the most benefit with least risk when opening their banking markets.

MONETARY POLICY CHALLENGES IN EMERGING MARKETS: SUDDEN STOP, LIABILITY DOLLARIZATION, AND LENDER OF LAST RESORT. Guillermo A. Calvo. Research Department Working Paper 596, Inter-American Development Bank. December 2006.
Full Text [pdf format, 25 pages]

“This paper argues that Emerging Market economies (EMs) face financial vulnerability that weaken the effectiveness of a domestic Lender of Last Resort (LOLR).” Consequently, monetary policy is linked to the state of the credit market; e.g., the central bank should be ready to operate as an LOLR during Sudden Stop (of capital inflows). The author also believes that during these periods interest rate rules may cause an excessive volatility of exchange rates.

QUID PRO QUO: NATIONAL INSTITUTIONS AND SUDDEN STOPS IN INTERNATIONAL CAPITAL MOVEMENTS. Eduardo A. Cavallo and Andrés Velasco. Research Department Working Paper 587, Inter-American Development Bank. November 2006.
Full Text [pdf format, 40 pages]

This paper explores “sudden stops in capital flows on the incentives for building national institutions that secure property rights in a world where sovereign defaults are possible equilibrium outcomes.” The authors build on previous studies and models using two key features—lenders can trigger sudden stops and lenders can transfer resources at the beginning of sudden stops. The authors conclude “that under these conditions the advice “build institutions to secure repayment at all costs” may be very bad advice indeed.”

DEBT ENFORCEMENT AROUND THE WORLD.
Simeon Djankov, Oliver Hart, Caralee McLiesh, and Andrei Shleifer. The World Bank. Web posted December 2006.
Full Text [pdf format, 64 pages]

Some of the debt enforcement institutions, such as some foreclosure proceedings, do not require courts. However, in the case of firms with multiple creditors, many societies rely on courts to enforce debt contracts, usually through bankruptcy or insolvency procedures. Insolvency institutions are generally perceived to perform poorly especially in developing countries.

This paper addresses the functions of insolvency institutions and how to improve them. The authors presented a case study to practitioners in 88 countries to identify the characteristics and procedures of debt enforcement. “Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.”

INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION.
Committee on Capital Markets Regulation. November 30, 2006.
Full Text [pdf format, 152 pages]

Public capital markets offer the means for growing firms to finance investment as well as to enhance the value of investors’ assets and to lower the cost of capital for firms. “U.S. capital markets are losing their competitiveness in global markets, to the detriment of investors. Our report concludes that regulatory and legal costs play a leading role in this adverse shift.” The report findings support the need to balance costs and benefits of regulations in order to maintain the U.S. markets’ global position.

CHOOSING MONETARY ARRANGEMENTS FOR THE 21ST CENTURY: PROBLEMS OF A SMALL ECONOMY. John Williamson. Policy Briefs in International Economics. Peterson Institute for International Economics. November 2006.
Full Text [pdf format, 9 pages]

The generation that grew up in the 1950s was responsible for developing and creating central banks in many countries including Uganda. The world has several currency unions which are managed by a central bank. However, in recent years, the uniformity of a central bank system has been declining in popularity.

One of the unfortunate legacies of colonialism was the division of Africa into small states. This paper suggests that if an African Union could be created, economic development would be greatly enhanced. This argument is set out in three divisions:

• Analyzing the advantages and disadvantages of sharing monetary sovereignty;
• The considerations of abandoning monetary sovereignty; and
• Of those considerations, what options apply to Uganda?

The U.S. urges countries to adopt currency boards rather than central banks since many central banks have had a poor performance record over the past 40 years.

BANKING SERVICES FOR EVERYONE? BARRIERS TO BANK ACCESS AND USE AROUND THE WORLD.
Thorsten Beck, Asli Demirguc-Kunt and Maria Soledad Martinez Peria. The World Bank. December 2006.
Full Text [pdf format, 60 pages]

Information gathered from 193 banks in 58 countries was used to analyze the physical access, affordability and eligibility barriers to deposits, loans and payments services. There was substantial cross-country variation to these barriers which excluded a significant portion of the population from access to banking services.

The authors found that “Correlations with bank- and country-level variables show that bank size and availability of physical infrastructure are the most robust predictors of barriers. Further, we find evidence that in more competitive, open and transparent economies, and in countries with better contractual and informational frameworks, banks impose lower barriers. Finally, though foreign banks themselves seem to charge higher fees than other banks, in foreign dominated banking systems fees are lower and it is easier to open bank accounts and apply for loans. On the other hand, in systems that are predominantly government-owned, customers pay lower fees and also face greater restrictions . . .”

AA06412
BUILDING ON SUCCESS: THE NEXT CHALLENGES FOR MICROFINANCE
Wendt, Henry; Eichfeld, Robert. (Development Policy Outlook, No. 4, 2006, pp. 1-7)
View on publisher's website

Microfinance institutions have spread across Asia, the Middle East, Africa and Latin America, yet many more of the world's poorest people could benefit from the tiny loans the institutions make. While microfinance demand probably exceeds $300 billion, supply so far has amounted to only about $4 billion. The kind of money needed can only come from big banks and major capital markets. As these big institutions learn more about the success of the small ones, they could find a way to collaborate on bringing a proven solution to poverty up to the scale of the immense problem.

AA06410
THE OTHER OIL THREAT
Garten, Jeffrey. (Newsweek, October 23, 2006)
View on publisher's website

While the U.S. economy has become somewhat less vulnerable to a sharp drop in foreign oil, it has become more vulnerable to financial turmoil that hostile oil-producing countries could create. Because of the $3 trillion debt owed by the United States to creditors in the rest of the world, central banks in unfriendly countries such as Iran and Venezuela could, for example, sell off their own massive reserves of dollars to create a plunge in the value of the dollar and a stampede against the U.S. economy. OPEC countries stand to gain more leverage over foreign policy in the United States and other developed countries.

AA06409
FINANCIAL DIPLOMACY
Field, Alan. Journal of Commerce, September 4, 2006, pp. 18-19)
Full text available from your nearest American Library

Even as China's trade surplus with the United States continues to soar, U.S. businesses operating in China are pressing diplomacy to diffuse trade tensions between the two countries. The Bush administration has, in fact, turned away from confrontation with China over the exchange rate of the yuan. Instead, U.S. officials are working with the Chinese on making the reforms to their financial system that would make possible a fully floating currency.

AA06362
Rogoff, Kenneth WILL EMERGING MARKETS ESCAPE THE NEXT BIG SYSTEMIC FINANCIAL CRISIS?
(Cato Journal, vol. 26, no. 2, Spring/Summer 2006, pp. 337-341)
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For the past four centuries, emerging market debt crises have broken out like clockwork, says Rogoff, a professor of economics at Harvard University. But in today's world, he notes, emerging market debts are near record lows and most countries are able to borrow liberally on international capital markets. Rogoff summarizes both the optimistic and the pessimistic views of globalization's impact on the financial future of emerging markets. He concludes globalization has helped yield a deeper and more sustained expansion than in the past, but he also expects emerging market debt crises are likely to recur during the next decade.

AA06342
Brittan, Samuel THE GLOBAL IMPLICATIONS OF A DOLLAR COLLAPSE
(The International Economy, vol. 20, no. 3, Summer 2006, pp. 24-27)
Full text available from your nearest American Library

The author, a columnist with Financial Times, discusses the political and economic implications of a dollar collapse and describes possible scenarios. He says that if the dollar collapsed, one result could be an offsetting boost given to demand in the Euro area and in Asia. At the other extreme, the U.S. would be accused of deliberately weakening its own currency for domestic political reasons and some politicians could retaliate through protectionist barriers, attempts at competitive devaluation, or ill-conceived taxes on international capital movements. The most likely trigger for a dollar collapse would be that of the U.S. housing market, but such a drastic fall in the dollar's external value could well be the signal for Asian authorities to cease stockpiling assets and even start dumping them. If the world is experiencing excess demand, as the pressure on oil and commodity markets and the abundance of credit suggest, a modest recessionary movement in the U.S. might be good. Both the immediate economic prospects and the behavior of international interest rate differentials would be bearish for the dollar. It is an unfortunate aspect of both financial commentary and journalism that a five percent movement up or down in any key variable in one day would create huge excitement, whereas a much bigger movement spread gradually over a couple of months may hardly be noticed.

AA06323
Kotlikoff, Laurence J. IS THE UNITED STATES BANKRUPT?
(Federal Reserve Bank of St. Louis Review, vol. 88, no. 4, July/August 2006, pp. 235-249)
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The author, professor of economics at Boston University, points out that the U.S. has never defaulted on its debt, and its debt-to-GDP ratio is substantially lower than that of Japan or other developed Western democracies. However, he notes that analysis suggests that the U.S. "is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds". In an article combining complex mathematical equations and readable layman's language, Kotlikoff expounds on the total U.S. fiscal gap, citing a U.S Treasury Department-sponsored study in 2002 that calculated the total U.S. debt at an eye-popping USD 65.9 trillion -- an amount five times the total U.S. GDP, and twice the size of national wealth. He notes that, in a few years, the 77 million "baby boomers", ages 41-59, will start collecting Social Security and health-care benefits from the next generation, an "onslaught of obligation" that the country has done little to prepare for. Apart from draconian tax increases and benefit cuts, Kotlikoff proposes to allow direct Chinese investment in the U.S. economy with their massive dollar reserves, and a radical overhaul of U.S. financial institutions -- a national retail sales tax, personalized Social Security accounts, and a budgeted universal health-care system.

FOREIGN INVESTMENT AND NATIONAL SECURITY: GETTING THE BALANCE RIGHT.
Alan P. Larson and David M. Marchick. Council on Foreign Relations (CFR). July 2006.
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The Committee on Foreign Investment in the United States (CFIUS) was established by Executive Order 11858 in 1975 to monitor and evaluate the impact of foreign investment in the United States. The chair of the Committee is the Secretary of the Treasury. The remainder of the CFIUS membership comprises: the Director of the Office of Science and Technology Policy; the Assistant to the President for National Security Affairs; the Assistant to the President for Economic Policy; the Department of Homeland Security. The other members are the Secretaries of State, Defense, and Commerce, the Attorney General, the Director of the Office of Management and Budget, the U.S. Trade Representative, and the Chairman of the Council of Economic Advisers. Recent public attention on CFIUS's approval of the Dubai Ports World (DPW) acquisition of several U.S. port operations has prompted Congress to reform the CFIUS review process.

This CFR report maintains that CFIUS is an effective tool for reviewing the national security concerns associated with foreign investment. The report agrees that when considering changes, Congress should balance the "twin objectives of maintaining openness to foreign investment and protecting national security." However, this must be done without creating a "restrictive foreign investment climate marked by unnecessarily cumbersome regulatory reviews," that may motivate other countries to follow suit, adversely affecting U.S. investments abroad. Larson and Marchick maintain that legislation reforming CFIUS should not:

• Incorporate "economic security" criteria.
• Allow Congress to force an investigation or to override a presidential approval of a particular transaction.
• Create a presumption that foreign investments in critical infrastructure create a national security risk.

BABY BOOM GENERATION: RETIREMENT OF BABY BOOMERS IS UNLIKELY TO PRECIPITATE DRAMATIC DECLINE IN MARKET RETURNS, BUT BROADER RISKS THREATEN RETIREMENT SECURITY.
[GAO-06-718] United States Government Accountability Office (GAO). July 2006.
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The first wave of U.S. baby boomers (born between 1946 and 1964) will become eligible for Social Security early retirement benefits in 2008. In addition to concerns about how the boomers' retirement will strain the nation's retirement and health systems, concerns also have been raised about the prospect of boomers selling off large amounts of financial assets in retirement, while relatively fewer younger U.S. workers will be available to purchase these assets.

GAO examined (1) whether the retirement of the baby boomers is likely to precipitate a dramatic drop in financial asset prices; (2) what researchers and financial industry participants expect the effect of the boomer retirement to have on financial markets; and (3) what role rates of return will play in providing retirement income in the future.

GAO's analysis of national survey and other data suggests that retiring boomers are not likely to sell financial assets in such a way as to cause a sharp and sudden decline in financial asset prices. A large majority of boomers have few financial assets to sell. The small minority who own most assets held by this generation, will likely need to sell few assets in retirement. Also, most current retirees spend down their assets slowly, with many continuing to accumulate assets. If boomers behave the same way, a rapid and large sell off of financial assets appears unlikely.

Other factors that may reduce the odds of a sharp and sudden drop in asset prices include the increase in life expectancy that will spread asset sales over a longer period, and the expectation that many boomers will work past traditional retirement ages. A wide range of academic studies has predicted that the boomers' retirement will have a small negative effect, if any, on rates of return on assets.

TRADE-BASED MONEY LAUNDERING.
Financial Action Task Force (FATF)/OECD. June 23, 2006.
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The primary focus of this study is trade-based money laundering involving the international exchange of goods, and the false documentation and declaration of traded goods and services. The relative attractiveness of the international trade system stems from the:

• Enormous volume of trade flows, which obscures individual transactions and provides abundant opportunity for criminal organizations to transfer value across borders.
• Complexity associated with (often multiple) foreign exchange transactions and recourse to diverse financing arrangements.
• Additional complexity that can arise from the practice of commingling illicit funds with the cash flows of legitimate businesses.
• Limited recourse to verification procedures or programs to exchange customs data between countries.
• Limited resources that most customs agencies have available to detect illegal trade transactions.

This study notes that customs and law-enforcement agencies, financial intelligence units, tax authorities, and banking supervisors currently face similar challenges with respect to understanding the techniques of trade-based money laundering and detecting such activities. There appears to be a number of practical steps that could initially be taken to improve the capacity of national authorities to cope with trade-based money laundering. These steps can be summarized as building better awareness, strengthening measures to identify trade-based illicit activity, and improving international cooperation.

[Note: Contains copyrighted material.]

REPORT ON FOREIGN PORTFOLIO HOLDINGS OF U.S. SECURITIES AS OF JUNE 30, 2005.
United States Treasury; Federal Reserve Bank of New York; Board of Governors of the Federal Reserve System. June 2006.
Download [pdf format, 194 pages]

This report presents the findings of the annual survey of foreign holdings of U.S. securities for portfolio investment purposes as of June 30, 2005.It includes comparisons with the results of previous benchmark surveys since 1984. The surveys are conducted under the authority of the International Investment and Trade in Services Survey Act (22 U.S.C. 3101 et seq.). Reporting is mandatory for all institutions meeting the Survey's reporting criteria, and significant penalties can be imposed for failure to report.

This report collects information on securities issued by U.S.-residents that are owned by foreign residents, including U.S. equities, U.S. short-term debt securities (including selected money market instruments), U.S. long-term debt securities, and U.S. asset-backed debt securities. Reportable securities may be traded or issued in the United States or in foreign countries, and may be denominated in any currency. Neither the country in which the securities are traded or issued, nor the currency in which the securities are denominated, is relevant in determining whether the securities are reportable.

The report's summary notes: "Between June 2004 and June 2005 the proportion of total outstanding U.S. long-term securities held by foreign residents increased for each security type, with the largest increase recorded for holdings of U.S. government agency debt. Overall, the share of total U.S.

long-term securities held by foreigners has more than tripled since the first survey in 1974, increasing from 4.8 percent as of year-end 1974 to 15.8 percent as of June 2005. Foreign holdings of long- term marketable Treasury securities held by the public reached 51.7 percent of the total amount outstanding as of the most recent survey date, by far the highest percentage of foreign ownership in any security type. This high concentration of foreign ownership is explained in large part by holdings of foreign official institutions."

THE CASE FOR AN INTERNATIONAL RESERVE DIVERSIFICATION STANDARD. Edwin M. Truman and Anna Wong. Institute for International Economics (IIE). May 2006.
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The principal reason why policymakers and participants in financial markets are interested in reserve diversification is that they are concerned that substantial changes in the currency composition of reserves of the major holders will trigger violent exchange market adjustments. These adjustments, in turn, can have major knock-on effects on other financial markets, with possible additional macroeconomic effects. Participants in financial markets also have short-run profit motives. If there is a major trend toward diversification of reserves away from dollar holdings (or in favor of dollar holdings), they want to be ahead of the pack of official investors. However, only a small number of countries have foreign exchange holdings that are sufficiently large that their substantial diversification at a rate of $10 billion a month ($500 million a day), for example, would have pronounced exchange market effects.

The authors argue that countries do, and should be able to, change the currency composition of their foreign exchange holdings, and that reports on their actual or rumored activities can have pronounced effects on market psychology and behavior. Therefore, a cooperative effort by national monetary authorities to minimize the market effects of rumors and changes in policies about reserve diversification, building on previous efforts to increase the transparency and accountability of official policies in this area, would be desirable.
[Note: Contains copyrighted material.]

AA06165
Caryl, Christian POCKETBOOK POLICING (Newsweek, international edition, April 10, 2006)
View article on ProQuest (password required)

The author writes that the U.S. is going after North Korea's sources of illicit cash worldwide, and the efforts are putting serious pressure on the regime. An intense three-year effort by numerous U.S. government agencies has resulted in the confiscation of some $48 million in fake $100 bills and effectively curtailed North Korea's dealings with international financial institutions, he notes. For example, a warning from the U.S. Treasury that designated a Chinese bank as a "primary money laundering concern" for North Korea, brought on a run on the bank, which subsequently cut all its ties with Pyongyang and froze nearly 50 accounts linked to North Korean companies and institutions. Other banks around the world have also begun to cut ties with North Korea for fear of similar U.S. actions. In February a North Korean spokesman complained that the U.S. had effectively banned North Korea from having normal international financial transactions, and recently Pyongyang has claimed that it, too, has been a "victim" of counterfeiting and promised to punish any North Koreans involved! Fears that North Korea may collapse are worrisome to its neighbors, he writes, but the U.S. insists it is simply trying to force the regime to give up its nuclear program rather than foment regime change.

AA06125
Johnston, E. Barry; Nedelescu, Oana THE IMPACT OF TERRORISM ON FINANCIAL MARKETS (Journal of Financial Crime, vol. 13, no. 1, 2006, pp. 7-25)
Full text available from your nearest American Library

The authors, both with the International Monetary Fund, analyze lessons for effective policy and regulatory responses to protect financial systems in the face of terrorist attacks, using the events in New York on Sept. 11, 2001, and in Madrid on March 11, 2004, as examples. In the subsequent regulatory responses to protect the financial systems from abuse by terrorists, the authors found diversified, liquid, and sound financial markets that were quite efficient in absorbing the shocks of these terrorist attacks. They noted well-organized crisis management responses were key to the market's ability to continue to function in an effective way. At the international level, a coordinated effort was made to bolster the global payments system, strengthen confidence, and shore up financial markets. Monetary authority from major economies such as Canada, the Euro area, Japan, Switzerland, and the United Kingdom, directly injected large amounts of liquidity and made immediate interest rate cuts in response to the Federal Reserve's actions. Within a short period of time after the New York attacks, a majority of countries stepped up the fight against terrorism in an effort to maintain peace and security and to fight terrorism financing.

AA06108
Rich, Bruce BANK HEIST (The Environmental Forum, vol. 22, no. 5, September/October 2005, pp. 28-35)
Full text available from your nearest American Library

Rich, director of International Program at Environmental Defense, says corruption -- both in international development lending and embedded in the international economy itself -- threatens hopes for poverty alleviation and sustainable development. According to Congressional testimony, crooked contractors and bureaucracies in borrowing nations have stolen over $100 billion from the World Bank over the past five decades; and, ongoing theft from lending from multilateral development banks may total 20-30 percent, he reports. It's not just corrupt Third World elites, either, he says -- western international banks facilitate corrupt and illegal financial capital flight from poor nations at and estimated $500-$600 billion a year. The current anti-corruption efforts may punish a token few, he asserts, but they don't even begin to resolve this interdependent culture of corruption in the international economy.

CREDIT MARKETS, CREDITORS RIGHTS AND ECONOMIC DEVELOPMENT.
Kenneth W. Dam. The Brookings Institution. February 2006.
Download the document [pdf format, 36 pages]

According to the author, a law professor and Brookings Institution fellow, credit markets are just as important as equity markets to financial development. In most countries, far more finance is generated in credit markets than in public equity markets. He notes that even in the United States, which is usually thought of as the country with the most pronounced equity culture, far more money is raised in credit markets than in equity markets.

Because banks play such a central role in the developing-world economies, the author says it is important to look at the special role of banks in those countries. The focus of his working paper is banks and the special problems that creditors -- not just banks but all creditors -- face when the borrower cannot pay or fails to pay. He examines the legal issues germane to creditors' rights and bankruptcy law.

[Note: Contains copyrighted material.]

AA06091
Sharma, Shalendra MONEY TALKS: REVALUING CHINA'S CURRENCY
(Georgetown Journal of International Affairs, Vol. 7, No. 1, Winter/Spring 2006, pp. 59-64)
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The author, a professor in the Department of Politics at the University of San Francisco, analyzes the controversy surrounding the exchange rate of China's currency, the yuan, including recent changes, the effect on the U.S. trade deficit, and future expectations. Since the under-valued yuan has contributed to the recent acceleration in China's GDP growth rate, the excessive growth in credit, and the "overheating" caused by large capital inflows, the author argues that now is a good time for revaluation. There is also considerable pressure from U.S. manufacturers and lawmakers who contend that the under-valued yuan amounts to an unfair trade subsidy. However, Sharma notes, a revalued yuan could also spell trouble for the U.S., since a more expensive yuan not only means higher prices for Chinese goods, but greater domestic U.S. inflationary pressures. Sharma also suggests that an appreciated yuan might be counterproductive for the U.S., because Asian central banks might then sell their dollar assets; it might also lead to higher oil prices, since China would increase its imports because oil would become relatively cheaper. It is likely that any revaluation will be gradual.

AA06088
Hertz-Bunzl, Noah. FINANCING HOPE: IMPROVING MICROFINANCE
(Harvard International Review, Vol. 27, No. 4, Winter 2006, pp. 32-34)
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Hertz-Bunzl says microfinance has enjoyed a recent boom throughout Africa, but poor loan management and lack of critical innovation have limited its reach. Microfinance needs to improve in order to reach its potential to alleviate poverty, he states. For example, microfinance banks must operate in a sustainable manner, which means aligning interest rates with repayment rates to ensure they remain in the black -- and driving both of those rates in the right direction by insisting on collateral and following through by collecting from loan defaulters. Additionally, increased availability and use of banking services, such as credit, money transfers and checking accounts, is essential to encourage savings and increase productivity, he writes. The cash-only, subsistence economy of much of rural Africa is a major obstacle in the fight against poverty, says Hertz-Bunzl, but banks can help by implementing innovative ideas such as integrating village institutions into their operations.

ECONOMIC AMNESIA: THE CASE AGAINST OIL PRICE CONTROLS AND WINDFALL PROFIT TAXES.
Jerry Taylor and Peter Van Doren. Cato Institute. January 12, 2006.
Full report: [pdf format, 20 pages]

The authors, CATO Institute senior fellows, discuss the economic impact of oil price controls and windfall profit taxes, and dispute their effectiveness. The recent rise in U.S. gasoline prices, they write, has led many observers to call for government price controls and special taxes on oil companies. Yet policies that restrain prices result in less supply and conservation. Additional taxes reduce the incentive to invest in new supply. Moreover, because price controls and profit taxes can be levied only by the U.S. government on U.S.-based companies, such policies also increase the economic attractiveness of foreign, relative to domestic, oil. The U.S. experience with price controls from 1971 to 1980, and the Crude Oil Windfall Profit Tax from 1980 to 1988 demonstrates the problems.

The authors contend that there is no evidence to suggest that recently reported oil company profits are particularly large when contrasted with the profit margins of all public companies. Profits in the oil sector have historically been lower than profits in the rest of the U.S. economy, so profits would have to be quite large for some time before they equaled returns in other sectors of the economy. Restricting profit opportunities now would amount to a form of one-way capitalism in which meager profits are allowed but more robust profits are punished. Intervention under those conditions, they conclude, would certainly reduce the incentive to invest in the oil business.

[Note: Contains copyrighted material.]

AA05362
Aliber, Robert Z. THE 35 MOST TUMULTUOUS YEARS IN MONETARY HISTORY: SHOCKS, THE TRANSFER PROBLEM, AND FINANCIAL TRAUMA (IMF Staff Papers, vol. 52, Special Issue, 2005, pp. 142-159)
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The author, an emeritus professor at the University of Chicago, discusses what he considers to be the most tumultuous period in international monetary history. He includes in this period the unprecedented failures of nearly one hundred national banking systems; the enormous swings in market exchange rates and their extensive deviations from real exchange rates; the large variability in the flows of national saving across national boundaries; and four major asset price bubbles (Japan; Sweden and two Nordic neighbors; Thailand, Malaysia, and several other countries in Southeast Asia; and the United States). The author says these events were inter-related and based on changes in the cross-border flow of funds, changes in the foreign exchange values of national currencies, changes in the prices of financial securities and real estate in countries that experience inflows of foreign funds, and prolonged economic booms. He questions whether these financial troubles were larger than in previous periods, or whether the impact was due to differences in the institutional structures -- especially the absence of parities for national currencies.

AA05364
Freedman, Michael THE INVISIBLE BANKERS (Forbes, Vol. 176, No. 8, October 17, 2005, p. 94+)
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Freedman says terrorists, drug dealers and smugglers are using a global system as old as the Silk Road to finance their operations -- and, there is not much we can do about it. This informal remittance system -- called hawala in Arab countries -- is impossible to track since it is unregulated; involves little, if any, written records; and the funds typically start off "clean" and only become "dirty" much later. He notes that attempts to regulate informal remittance systems have been largely unsuccessful, as costs of compliance and cumbersome paperwork are driving legitimate, licensed operations out of business. In turn, he explains, customers seeking to send legitimate remittances home -- in the cheapest, fastest way possible -- tend move to the illegitimate money services operations that regulators wish to shut down.

AA05270
Jusko, Jill BEEFED UP BOARDS (Industry Week, Vol. 254, No. 8, August 2005, pp. 53-56)
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The author says the Sarbanes-Oxley Act and other corporate reforms are making today's boards of directors more diligent and accountable -- and they are scrutinizing executive compensation like never before. The reforms have fundamentally created a shift in governance from the executive suite to the boards by placing greater responsibilities on boards, Jusko writes. Most companies already practiced good governance -- the corporate reforms have generally been codified based on many of the "best practices" that were already in place -- but formal reforms should protect against the bad actors who launched to corporate scandals of the late 1990s and early 2000s, says Jusko. It's too early to tell how these new boards will impact executive pay trends, she notes, but it is very difficult to reduce compensation, particularly if the CEO and executive team are doing well. Notably, reforms have definitely been a damper on the old CEO-as-king model, she states, since credible boards are no longer willing to just sign off on whatever the CEO provides.

FOREIGN PORTFOLIO HOLDINGS OF U.S. SECURITIES AS OF JUNE 30, 2004.
Department of the Treasury; Federal Reserve Bank of New York; Board of Governors of the Federal Reserve System. June 2005.
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This report presents data and analyses on foreign portfolio holdings of U.S. securities. The data are drawn primarily from the latest benchmark survey of foreign holdings of U.S. securities -- a joint undertaking of the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System.

Among the survey's findings:

• Foreign holdings of U.S. securities as of June 30, 2004, totaled $6,006 billion, of which $5,418 billion were holdings of U.S. long-term securities (original term-to-maturity in excess of one year) and $588 billion were holdings of U.S. short-term securities.
• Foreign holdings of all categories of U.S. securities increased significantly between June 2003 and June 2004.
• Foreign investors continued to acquire U.S. long-term securities at a faster pace than U.S. investors acquired foreign long-term securities during the June 2003 to June 2004 period.
• Residents of Japan were the largest portfolio investors in U.S. long-term securities by a wide margin, followed by residents of the United Kingdom.
• Holdings attributed to Europe have far outpaced holdings attributed to other regions, and the gap between European and Asian holdings was little changed in the two most recent surveys.

INTERNATIONAL TRADE: TREASURY ASSESSMENTS HAVE NOT FOUND CURRENCY MANIPULATION, BUT CONCERNS ABOUT EXCHANGE RATES CONTINUE. [GAO-05-351].
United States Government Accountability Office (GAO). April 19, 2005; Web-posted May 19, 2005.

Editor's Note: See the Treasury Department's Report to Congress on International Economic and Exchange Rate Policies

.

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The 1988 Trade Act requires the Department of the Treasury to annually assess whether countries manipulate their currencies for trade advantage and to report semiannually on specific aspects of exchange rate policy. Some observers have been concerned that China and Japan may have maintained undervalued currencies, with adverse U.S. impacts, which has brought increased attention to Treasury's assessments.

For this report GAO examined:

• Treasury's process for conducting its assessments and recent results, particularly for China and Japan.
• The extent to which Treasury has met legislative reporting requirements.
• Experts' views on whether or by how much China's currency is undervalued.
• The implications of a revaluation of China's currency for the United States.

GAO notes that Treasury has not found currency manipulation under the terms of the 1988 Trade Act since it last cited China in 1994. Treasury officials make a positive finding of currency manipulation only when all the conditions in the Trade Act are satisfied -- when an economy has a material global current account surplus and a significant bilateral trade surplus with the United States, and is manipulating its currency with the intent to gain an unfair trade advantage. Treasury said that in its 2003 and 2004 assessments, China did not meet the criteria for manipulation, in part because it did not have a material global current account surplus and had maintained a fixed exchange rate regime through different economic conditions. Japan did not meet the criteria in 2003 and 2004 in part because its exchange rate interventions were considered to be part of a macroeconomic policy to combat deflation.

Among experts, says GAO, views differ on policy steps to correct a valuation imbalance in Chinese currency. A revaluation of China's currency could have implications for various aspects of the U.S. economy, although the impacts are hard to predict. They depend on multiple factors, including how much appreciation is passed through to higher prices for U.S. purchasers and the extent to which reduced imports from China are replaced with imports from other countries. In addition to affecting trade-related sectors, a revaluation could have implications for U.S. capital flows.

REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICIES.
United States Department of the Treasury. May 17, 2005.

Editor's Note: See related document

for GAO's analysis of this report.

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This report reviews developments in international economic policy, including exchange rate policy, during the second half of 2004. The report is required under the Omnibus Trade and Competitiveness Act of 1988, which states that: "The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade." After reviewing developments in the United States, the report evaluates exchange rate policies in major economies across five regions of the world - the Western Hemisphere; Europe and Eurasia; Sub-Saharan Africa; the Middle East and North Africa; and South and East Asia.

The report says that no major US trading partner manipulated its exchange rates in the last six months of 2004. However, according to the report, the Treasury "has engaged, and will continue to engage, with several economies, including some in Asia, to promote the adoption of market-based exchange policies and regimes. Most notable among these is China. Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners, and global economic growth. Concerns of competitiveness with China also constrain neighboring economies in their adoption of more flexible exchange policies. If current trends continue without substantial alteration, China's policies will likely meet the statute's technical requirements for designation."

AA05124
THE CASE FOR FLAT TAXES? (The Economist, Vol. 375, No. 8422, April 16, 2005, pp. 59-61)
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While the United States talks about flat taxes, some countries are already doing it. In 1994, Estonia became the first European country to introduce a flat tax, followed by Latvia, Lithuania and others. Russia overhauled its tax system in 2001, collapsing three tax brackets into one uniform 13 percent rate. After one year, the article notes, Russia's revenues showed an increase of 26 percent, partly due to increased income, but significantly attributable to a conspicuous increase in compliance with tax authorities. In the year before Russia moved to the flat tax, Russians in the highest two tax brackets reported only 52 percent of their income -- after the flat tax, this same group reported 68 percent of their income. This suggests that the principal virtue of the flat tax may be that its simplicity encourages compliance.

INFORMATION SECURITY: SECURITIES AND EXCHANGE COMMISSION NEEDS TO ADDRESS WEAK CONTROLS OVER FINANCIAL AND SENSITIVE DATA. [GAO-05-262].
United States Government Accountability Office (GAO). March 23, 2005; Web-posted March 24, 2005.
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Under the authority of the Securities Exchange Act of 1934, the Securities and Exchange Commission (SEC) enforces U.S. securities laws, regulates the securities markets, and protects investors. The SEC relies extensively on computerized systems to support its financial and mission-related operations. As part of the audit of SEC’s fiscal year 2004 financial statements, GAO assessed the effectiveness of the Commission’s information system controls in protecting the integrity, confidentiality, and availability of its financial and sensitive information.

In this report GAO concludes that SEC has not effectively implemented information system controls to protect the integrity, confidentiality, and availability of its financial and sensitive data. Specifically, the commission had not consistently implemented effective electronic access controls, including user accounts and passwords, access rights and permissions, network security, or audit and monitoring of security-relevant events to prevent, limit, and detect access to its critical financial and sensitive systems. In addition, weaknesses in other information system controls, including physical security, segregation of computer functions, application change controls, and service continuity, further increase risk to SEC’s information systems. As a result, sensitive data—including payroll and financial transactions, personnel data, regulatory, and other mission-critical information—were at increased risk of unauthorized disclosure, modification, or loss, possibly without detection.

GAO recommends that the SEC Chairman direct the Chief Information Officer to take several actions to fully develop and implement an effective agency-wide information security program, with priority on the establish and implementation of comprehensive information security policies and procedures.

AA05076
Baker, Gerard THE DEFICIT DEBACLE (Foreign Policy, Vol. 147, March/April 2005, pp. 42-47)
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The International Monetary Fund has warned that "large U.S. deficits pose significant risks for the rest of the world", but Baker points out that any success the U.S. has in reining in its mounting budget and trade deficits will have repercussions everywhere, particularly in Europe, Japan and China. If the U.S. is to halve its fiscal deficit in the next four years, it would remove a sizeable chunk of money from the global economy that has driven global growth these last four years, he writes. A shrinking U.S. fiscal deficit would lead to growth of European deficits which would further complicate Europe's political challenges of balancing monetary policy set by the central bank with the fiscal policies of 12 separate governments, he says. Japan's fiscal deficit is already 9 percent of its national income, and if Tokyo continues its tendency to export its way out of economic woes at the expense of the rest of the region, resentment is sure to escalate. China's economy, says Baker, would perhaps have the largest and most unpredictable changes, caused by declining foreign investment and banking crises. He says the world may not be ready for the global political and fiscal ramifications of halving the U.S. deficit.