Five Banks in Regulators’ Sights

C Adam Pfander

Five major US Banks have failed to satisfy regulators that their failure would not spell doom for the national financial system. JP Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Bank of New York Mellon Corp., and State Street Corp. must now rewrite their living wills – contingency plans that spell out how a bank would wind down quickly in the event of collapse. The banks have until October 1 of this year to revise their plans to regulators’ satisfaction, or else they will be subject to restrictions.

Three banks produced living wills, sufficient to bar a complete rewrite: Citigroup Inc., Goldman Sachs Group Inc., and Morgan Stanley. The latter two, however, were cited by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, respectively, as having serious issues with their contingency plans.

These banks must produce living wills under the Dodd-Frank Act, the primary financial regulation passed in the wake of the Great Recession. Each living will is analyzed by the FDIC and Fed to determine whether the Bank can adequately wind down, without sinking its counterparty banks or its subsidiaries (companies owned by other companies, but not necessarily operated by them). This action was deemed necessary after the failure experienced by Lehman Brothers during the Great Recession.

Lehman Brothers bank filed for bankruptcy in 2008 – the same year that it reached a market capitalization of $60 billion and controlled $639 billion in assets and $619 billion in debt. The collapse is estimated to have eroded $10 trillion in market capitalization from global equity markets, and threatened the longevity of many financial institutions. In the wake of its meltdown, the federal government had to bail out many of its partner institutions, who suddenly saw their Lehman assets become worthless.

Lehman’s case highlights the problem with banks that are “too big to fail.” While undoubtedly efficient, these large banks carry a lot of downside risk. To avoid another Lehman scenario, the Dodd Frank Act demands that banks be prepared for failure, and if they fail, they must limit the damage to their customers, partners, and subsidiaries. Many of the failing institutions were cited for having inadequate liquidity measures – that is, in the event of a crash, they would not have enough cash on hand to pay their obligations.  Others, like the BNY Mellon, were cited for having overlapping business entities, making it difficult to liquify particular entities if the need arose.

If these banks are unable to produce adequate contingency plans by October, they face further restrictions from the government. The Dodd Frank Act provides that failing institutions face increased capital requirements and severe limits on their activities. Ultimately, the federal government could get authority to break up a bank if it consistently fails. The Banks have all assured their investors that these issues will be redressed well before the deadline.

Regulators, however, are not confident in the banks’ ability to produce adequate contingency plans. Neel Kashkari, President of the Minneapolis Federal Reserve Bank, said in a speech on Monday that Dodd Frank does not go far enough to ensure the stability of the financial system. He believes that regulators must either break up the large banks, or simply allow such large institutions to go bankrupt.

Federal Showdown Over Increased Monetary Access to Iran

Henry Whipple

As his final year in office winds down, President Barack Obama has been making his mark on the world. In recent weeks, the president has made headlines with his historic visit to Cuba, the first by a sitting President in 88 years. Following his return to the United States, he turned his focus towards further progress with Iran, albeit facing some backlash within the federal government. 

Under the 2015 nuclear arms agreement between the US and Iran, critical nuclear technology sanctions against Iran were eliminated. However, such measures have done little to help Iran’s long-constricted economy expand and prosper, and the Obama administration is currently considering options to relieve economic sanctions. A key part of this relief package is unprecedented access to U.S. currency, via licenses that would allow foreign financial institutions to conduct trade with the dollar in order to support Iranian business dealings.

It’s critical to note that Iran would still be shut out of the American financial system; the Obama administration’s proposal would only lighten the burden upon Iran when trying to do business with Western nations. Congress finds a problem with this policy, however, since President Obama previously assured its members that, under the nuclear arms deal, Iran would never be granted access to the dollar and financial markets. Several Republican legislators fear that Obama’s attempt to boost Iran’s economic standing would go too far, cutting into the United States’ own economic influence while concurrently putting the global economic system at stake. Two Republicans in particular, Mark Kirk and Mike Pompeo, are propelling forward this viewpoint on behalf of many frustrated colleagues. 

“Any administration effort to get foreign financial enable Iran’s terror-sponsoring regime to conduct transactions in U.S. dollars...would benefit Iran’s terror financiers while fundamentally undermining the USA PATRIOT ACT 311 finding that Iran’s entire financial sector is a jurisdiction of primary money laundering concern,” argues Kirk of Illinois. 

The Republican senator, who is already supporting a new push in Congress to confront Iran’s recent ballistic missile test with increased sanctions, sees a direct relationship between increased financial access and supporting a culture of terrorist ideas and illicit economic activities. Congressman Pompeo of Kansas similarly fears the empowerment of the Islamic Revolutionary Guards Corps (IRGC), Iran’s most powerful security and military organization, which also maintains extreme economic influence via its authority over political decisions (Nader, USIP). “American and international businesses can’t ignore the [IGRC]’s vast control over the Iranian economy and the threat Iranian banks pose to the international financial system,” Pompeo emphasized to The Free Beacon.

The surface-level numbers for Iran’s economy are poor enough: high levels of inflation, a weak currency, skyrocketing youth unemployment rates, and incomplete construction endeavors are all putting the country in a bind. Yet since U.S. sanctions began isolating Iran’s economy, corruption has dominated the nation by way of the IRGC’s immense market influence (for example, filling the shoes of major international companies that fled Iran following the sanctions). 

Current President Hassan Rouhani has failed to attract new investors into the country in order to help eliminate widespread market corruption, a shortcoming that is encouraging U.S. lawmakers to push back against President Obama’s economic proposal. The administration sees little issue with granting Iran the same conventional economic freedoms held by most economically involved countries, but many Republican legislators are concerned with expanding economic access to a nation caught in the crossfire.

The Economics of Trump

C Adam Pfander

Our coverage of the 2016 Presidential campaign now turns to the leading Republican candidate, Donald Trump. Trump’s economic philosophy is familiar within the Republican Party: a top-down approach that loosens regulation on big business. The core engine of this belief is that bigger businesses hire more people, creating jobs and boosting output. But beyond simply toeing the party line, the business magnate – true to form – is full of bold, broad goals on the economy. 

The first of Trump’s proposals regards trade policy. The candidate wants to completely overhaul the United States’ trade agreements, especially with China. Beyond simply negotiating better trade terms, Trump has outlined a plan to fundamentally change how the US deals with China. 

First and foremost, Trump will declare China a “currency manipulator” – a conviction, which means a country is deliberately undervaluing its currency to steal trade from its neighbors. Should Trump win such a declaration, the US will heavily tax Chinese imports. Such bold action is designed to force China to accept better trade terms. However, many economists – including the International Monetary Fund and the Bank for International Settlements – feel that the Chinese yuan is actually overvalued by as much as 50 percent, according to the International Business Times.

Further, Trump wishes to close the trade deficit with China. That is, he wants to sell more American-made goods to China, while buying fewer Chinese products. To accomplish this goal, the candidate wants to hold Chinese businesses to higher labor, environmental, and intellectual property standards – regulatory practices, which should make Chinese goods more expensive. Further, Trump wants to subsidize American manufacturing, while imposing tariffs on Chinese imports. These practices are designed to end China’s global dominance in industrial manufacturing.

The second of Trump’s proposals targets tax reform. Like many Republicans, Trump wants to lower taxes across the board. His tax plan would eliminate income taxes on households earning less than $50,000 per year; income taxes for the remainder would decrease by an average of $1,000 per year. He also wants to cap taxes on businesses at 15 percent. However, breaking from the traditional party line, Trump also wants to close many tax loopholes for the wealthy, effectively raising rates on the highest earners. However, Trump’s plan has come under fire for not covering the government’s budget. The Tax Policy Center, a collaboration between the Urban Institute and the Brookings Institution, estimates that Trump’s tax plan would create an additional $9.5 billion dollars in debt over the next decade.

The last of Trump’s proposals is not directly targeted at the economy, but has definite economic implications. Trump’s policy of expelling illegal immigrants is frequently decried as damaging to the American economy. Currently, illegal immigrants compose 5.1 percent of the domestic workforce according to the Pew Research Center. Further, his proposed plan of making citizenship more difficult to acquire hampers future growth. This constraint on the workforce could hamper the ability of the American economy to grow. In a poll of 22 conservative and liberal leaning economists conducted by NPR, all 22 agreed that Donald Trump’s immigration policy would be bad for the economy.

Know the Candidates Series: Hillary Clinton


C Adam Pfander

In the 2016 race for the White House, we turn our attention to former Secretary of State Hillary Clinton. Much like her Democratic counterpart Senator Bernie Sanders, the Clinton campaign is vocal in its rhetoric to reduce income inequality. Clinton, however, takes a much different tack in approaching this issue.

First and foremost, Clinton would raise the federal minimum wage to $12 per hour, while encouraging States to raise their minimum wage even higher. This plan is designed to boost incomes for working-class Americans, but is not completely beyond reproach. Some economists speculate that this higher minimum wage would be too expensive for rural areas, and would thus choke small businesses who cannot afford to raise wages. This pressure may be alleviated, however, by Clinton’s plan to reduce the tax burden for small businesses.

Beyond simply raising wages, Clinton wants to raise the aggregate productivity and job preparedness of American workers by making college education more affordable. This goal is epitomized in her “New College Compact,” which would make community college completely free, state college loan-free, and provide tax cuts up to $2,500 per student to alleviate the burden of paying for college. The Clinton campaign estimates an approximate $350 billion price tag for this program over the next 10 years – a tall order, which Clinton contends can be met by closing tax loopholes - an issue we will explore momentarily.

Turning away from the workforce, Clinton wants to invest heavily in American infrastructure. As President, Clinton would establish a National Infrastructure Bank, whose sole purpose would be to give funds to construction projects for roads, bridges, power lines, etc.. This type of financial support is designed to make infrastructure development easier and cheaper.

Economists normally love this type of investment spending. Better roads mean less cost, more efficient production and transportation, and ultimately, higher economic growth. However, in a recent poll of 22 economists conducted by National Public Radio (NPR), emotions are mixed. Some economists feel that the practical aspect of establishing a bank this size is too costly; others are not convinced that a bank is even necessary, when the federal government can just spend directly on investment.

How does Clinton plan to pay for these projects? Her main budget proposal is to simplify the tax code. Specifically, she wants to close the numerous tax loopholes that effectively allow corporations and the wealthy to pay lower taxes. In other words, Clinton feels that the federal government is leaving money on the table when it comes to tax revenue; she wants to get it back. In this manner, Clinton would increase the progressivity of the tax code. Economists, however, debate whether there is enough money left on the table to cover her proposed spending.

Apple Takes on the Feds


Emily Han

On December 2nd, 2015, a married couple opened fire in a rented banquet room in San Bernardino, California. In the aftermath, it became clear that the shooting was an act of terrorism, but at the time, no one could have predicted that the situation would lead to a heated dispute between Apple and the FBI.

Following a failed attempt to unlock the attacker’s iPhone, the United States Justice Department demanded that Apple provide the means to get inside the phone. More specifically, the FBI wants Apple to produce an iOS software that will breach key security features on any iPhone.

The software requested by the FBI allows any user to unlock an iPhone in their physical possession. Apple refused this demand almost immediately, and publicly announced that it will never breach the privacy of its customers.

While this may be comforting to many Americans, there are presumably other motivations behind Apple’s decision. Particularly, Apple has a huge business incentive to protect privacy, which has given the Justice Department reason to denounce the company. The Department of Justice believes that Apple’s refusal is “based on its concern for its business model and public brand marketing strategy,” rather than legal rationale.

Apple is the world's largest information technology company by revenue. The company has maintained a high level of brand loyalty, and is the first U.S. company to be valued at over $700 billion U.S. dollars. Privacy and security have become part of its brand, especially internationally, where two-thirds of its nearly $234 billion a year in sales are made.

China has recently become one of Apple’s biggest iPhone markets, second to America. However, this was not easily achieved. It took Apple six years to persuade China Mobile, the country’s largest wireless carrier, to finally sell the iPhone. When taking into account the efforts Apple has put into opening a market in China, as well as the abundant profits it is generating there today, Apple clearly has a huge incentive to keep China in check.

Hence, if Apple were to cooperate with the FBI’s demands, major problems may arise on the global stage. China would certainly be interested in obtaining such software, and Apple would have limited ability to control their use of it. As a brand that attracts many of its customers with its innovative safeguards and ensured privacy, this is a situation they want to avoid.

The major issue that concerns the majority of Americans, however, is their right to privacy. Many citizens have showed their support of Apple’s resistance via social media posts. Apple supporters have even held protests in cities such as San Francisco to demonstrate their approval of the company’s decision.

Obama Heads to Cuba

Erich Wohl

Conflicting ideologies define the heated relationship between the distinctly capitalist United States and proudly communist Cuba. President Barack Obama is scheduled to go on a diplomatic visit to Cuba for the formal purpose of examining progress on human rights. The US currently has commercial, economic, and financial embargos on Cuba that forbid any US corporation from doing business with Cuba. Obama’s visit represents a chance that the embargos on Cuba will be lifted.

Following Cuban independence, the United States had tremendous economic influence over Cuba; 45% of Cuban firms were owned by the US. Under the regime of Fidel Castro, relationships between the two countries became progressively more heated resulting in the United States instituting a full trade embargo on Cuba in 1962. Tensions between the two culminated in the infamous Cuban missile crisis when Cuba had Soviet nuclear weapons pointed at the US. The strained relationship between the two countries slowly eased towards civility as communist countries, especially Cuba’s main ally, the Soviet Union, collapsed. With the help of Pope Francis, efforts were made to normalize relationships between the two countries and potentially lift the embargo. Diplomatic relations were recently restored on July 20, 2015 with the implementation of an embassy in each country.

Recently, there has been tremendous progress in relations between the US and Cuba. In slightly less than a year, there have been clear signs of progress; ferry services have resumed transporting US citizens to Cuba; American cell phone companies now provide service in Cuba; and there have been talks about environmental and investor protections. Despite progress between the two countries, the Cuban economy is very restricted and has recently faced a stagnation in growth. Economic restrictions have caused state-owned firms to be uncompetitive and have inequitable payrolls. Cuba additionally has the 2nd oldest population and Cuba’s workforce participation rate is estimated to be one of the lowest in the world.

Obama’s visit is the first by an incumbent US president since Calvin Coolidge in 1908. Assuming diplomatic relationships are successful, pundits predict there is a strong possibility of the trade embargo being lifted. Doing so would liberalize Cuba’s economy by bringing in unprecedented direct foreign investment. Obama’s visit will ultimately be critical in influencing future economic relations with Cuba.

The Economics of Bernie Sanders

C Adam Pfander

Last week, the First Report briefly outlined the economic platforms of each of the major candidates – as well as one dark horse – in the 2016 presidential campaign. In the coming weeks, we will pick apart these positions and discuss their economic basis. To kick off this series, we take a closer look at Senator Bernie Sanders and his proposed plan to reduce inequality.

The backbone of Sanders’ economic agenda is a progressive tax plan. In this context, “progressive” is an economic term, not a value judgement, which means that the tax rates increase with income. A progressive tax system thus forces the wealthy to pay the lion’s share of taxes. To implement this plan, Sanders intends to expand the estate tax – the tax levied on inheritance exceeding $3.5 million; he also wants to increase taxes for big corporations and big banks.

With this newfound revenue, Sanders intends to fund numerous public projects. Most notable among these, he has pledged $1 trillion in public works investment. He plans to put an estimated 13 million Americans directly on the government payroll to build roads, bridges, dams, and other critical infrastructure. He has also announced a $75 billion a year college tuition plan, which would make public colleges and universities completely free, while cutting interest rates on student loans for private institutions. This latter program would be completely paid for, Sanders argues, by taxing speculative behavior on Wall Street.

The goal of these spending projects is to help the American workforce. The Sanders campaign has stated that his plan would lower the unemployment rate to below 4 percent, compared to the current level of 4.9 percent, while also bringing the long-term unemployed back into the labor force. Ideally, his education plan would also raise the productivity of the American workforce. Further, Sanders intends to raise the federal minimum wage to $15 per hour, a move designed to raise the standard of living for many American workers.

Sanders’ critics, however, have not embraced his ambitious, and undoubtedly expensive, economic agenda. Some economists speculate that he is overestimating his revenues while underestimating the burden of his newfound expenses, a combination that would add to the nation’s growing debt burden. Others – including New York Times columnist Paul Krugman along with four former chairs of the Council of Economic Advisers – disagree with the supposed benefits of Sanders’ economic plan. They contend that his forecasts for the unemployment rate are more conjecture than fact. Krugman went so far as to call Sanders’ claims, “voodoo” economics.

Finally, Sanders has made no secret of his hostility toward big investment banks. If elected, he intends to break up the largest investment banks and increase government oversight of Wall Street. These actions are designed to limit the risks Wall Street can take on, and thus protect our economy from financial collapse. However, critics –especially bankers – argue that Sanders’ regulation would reduce market efficiency; in avoiding the bust, we forestall the boom.

Zero Lower Bound No More

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Andrew Stiles

For months now, the world’s central banks have been contemplating the use of negative interest rates. This means that central banks lower their target interest rate below 0%.

During times of economic recession, most banks, including the Federal Reserve, and the European Central Bank, lower their interest rates to near-zero values. This is designed to encourage borrowing and keep money moving through the economy; however, consumer confidence in Western Europe has fallen so low that people still won’t borrow, despite record-low interest rates.

Because of this, some central banks have decided that more aggressive measures, such as negative interest rates, need to be implemented to encourage consumption and borrowing. A negative interest rate reverses the traditional relationship between depositor and bank; instead of the depositor receiving interest for keeping their money in the bank, they must now pay interest to the bank to hold their money. The idea is that people will find it more economical to use their money for consumption, investing, and other purposes instead of letting their wealth dwindle away in a bank account.

Few times in modern history has a central bank implemented negative interest rates– one example being Switzerland in the 1970s. For the most part, negative rates are uncharted monetary policy territory.

The brave souls to venture into the world of negative rates thus far are Japan, Sweden, Denmark, Switzerland (again), and the European Central Bank. The rest of the world banks are waiting to see what happens to these lab-rats before taking the plunge.

As for the United States, negative interest rates are becoming a more likely scenario as time goes on. The Fed recently released its 2016 stress test, which assesses the ability of systemically important financial institutions (massive banks on which the economy depends) to withstand economic shocks and other unexpected financial market events. One such scenario was the implementation of negative interest rates. This has lead many investors to speculate that the Fed is seriously considering negative rates as an option for their near-future policies.

So far, the negative interest rate experiment has gone surprisingly well. Banks feared that discouraging deposits would result in depositors running on banks to stuff cash under their mattresses - as was common practice in the US during the Great Depression. In reality, however, the negative rates are performing exactly as policy makers hoped - people are using their money more actively, since there is less incentive to store it in a bank.

Many players in the financial industry are still highly skeptical of negative rates. Huw Van Steenis from JP Morgan Chase & Company recently stated that negative rates are a “dangerous experiment” that has severe long-term consequences for monetary policy.

If, in the following months, negative interest rates don’t prove as disastrous as some fear, then more countries could adopt this policy – the United States’ Federal Reserve is no exception. The question will become not about the impact of dropping rates below zero, but rather, how to raise them back above what economists used to call the “zero lower bound.”

The Bright Future of Tech


Eli Lichtman

Millennials have been at the forefront of technology’s ascent in our society, as wearable technology, driverless vehicles, and virtual reality have become less of a “wow” and more of a “when and how”. While IPhones, GoPros, Snapchat and Instagram are keeping us entertained right now, it’s compelling to look into the future of technology’s evolution, seeking the gadgets (both small and large) that will be the next major successes. Each of these innovations will play a role in our lives, whether companies in the future adopt them or they simply act as useful devices for friends and kids.

Wearable technology, in a sense, can be a needless duplication of the million devices we have in our homes between computers, televisions, phones, and other gadgets. But for some, it has become absolutely essential in acting as an extension for our constantly connected lives. Having realized this, companies have been producing wearable technology that resonates with consumers. A company that stands out in particular is Fitbit, whose involvement has led its stock on a crazy ride.

As part of the wearable activity-tracking market, Fitbit has a market share of 68% - significantly greater than any other single competitor. In late 2015, Fitbit landed a deal with Target, which agreed to offer Fitbits to its 335,000 employees. This represents the rapid rate at which Fitbit is growing as part of a healthier lifestyle. Fitbit’s stock has been in freefall since the start of 2016, similar to many other companies’ performances in the market. Blaze, the company's new smartwatch product released at the beginning of 2016, was met with heavy criticism because it was seen as a weak effort at rivalling the more established Apple Watch. While slowed production in China has greatly impacted Fitbit’s recent stock performance, it has the capabilities and name recognition to grow consistently, although still in need of more openness from consumers to wearable technology.

Wearable technology is becoming an established part of our lives, yet widespread use of driverless cars may be further away than we think. At the moment, Tesla, led by the infamous Elon Musk, has incorporated the option for self-steering on straighter roads as part of a new update to the car’s technology. Very recently, Tesla’s stock took a turn for the better, due to its prediction that their electric, sleek cars will produce profitable and positive cash flow in 2016 for the first time in the company’s existence. Both Telsa and Google have been investing hundreds of millions of dollars in the long-term project of driverless cars, as they are convinced that this is the technology of the future. However driverless cars pose many obvious flaws. Without a human behind the wheel, the road’s many dangers can be exploited by malfunctioning technology or unanticipatable situations. Driverless cars are something to look out for, but they may become popular later rather than sooner.

Virtual Reality is upon us. Oculus, owned by Facebook and easily the biggest company in the virtual reality space, is soon releasing its Oculus Rift virtual-reality headset. For personal use, the $600 price tag seems a bit steep, but gamers and others are likely to flock to such a unique piece of equipment. In addition to traditional virtual reality, many consumers have seen the simple add-ons to iPhones or videos online that allow a 360-degree view of the surroundings. Simple advances such as these allow everyone to feel as though they are part of the environment that they’re viewing. Three-dimensional printing, another recent phenomenon, is also becoming more popular in mainstream mediums such as classrooms, and even for personal use. In a practical sense, companies can also use 3D printing to produce products and avoid using more expensive materials.

Each of these companies employs the use of technology differently, yet as a whole, they highlight the tech industry’s popularity and profitability. Constant research and development dedicated to producing and perfecting new technology ensures that both companies and consumers will enjoy a bright technology-filled future.


Decision 2016


C Adam Pfander

Economists do not like to talk about voting; however, Election 2016 will undoubtedly be an economic decision. Each candidate brings their own vision for the shape of our economy – from the progressive tax plan of Bernie Sanders to the laissez faire ideology of Donald Trump. Here are the economic platforms for each of the major candidates.

The major tagline of the Sanders campaign is income inequality, and more importantly, how to shrink it. To achieve this goal, Sanders has laid out a progressive tax plan that places most of the burden on the wealthy. Most of this newfound tax revenue will stem from an expansion of the estate tax—the tax placed on inheritance. Sanders plans to use this money to fund a variety of government spending programs, including infrastructure investment (building roads and bridges), expansion of Social Security, and free public higher education along with substantial college-loan subsidization. Sanders is also known for his harsh stance toward Wall Street. If elected, he intends to break up the largest investment banks, curb the use of advanced and risky financial derivatives, as well as cut most Wall Street bonuses. Finally, Sanders wants to raise the federal minimum wage from $7.25 to $15 per hour by 2020.

Sanders is of course vying with former Secretary of State Hillary Clinton for the democratic ticket. As Sanders and Clinton are both ideologically liberal, they naturally share many common goals; where they differ, however, is in their approach. Clinton hopes to lower inequality by reducing tax loopholes – the means, by which many Americans as well as corporations avoid paying high taxes. She intends to use this revenue to provide tax relief for low-income families, cut interest rates on college loans, and invest in infrastructure. She also wants to raise the federal minimum wage from $7.50 to $12 per hour, as well as incentivize profit sharing within corporations – in this manner, employees would reap more benefits from their employer’s success. Finally, Clinton intends to tighten regulation on Wall Street. She does not go so far as Sanders, calling for a breakup of the major investment banks; she does, however, advocate for more stringent oversight and the limit of risky derivatives.

Crossing the aisle, we come to Senator Ted Cruz of Texas. As a Republican, Cruz takes a much more growth-oriented approach to economic policy, as opposed to the regulation-based approach favored by the Democrats. Cruz intends to eliminate any progressive tax code in favor of a flat tax rate; he also wants to simplify the tax code so dramatically as to render the IRS obsolete. This simplified, small income tax is designed to offer more wealth to everyday Americans, as well as give businesses the wherewithal to expand and – hopefully – hire more. Cruz also wants to eliminate regulations regarding small businesses, most notably Obamacare and provisions from the EPA; cutting this red tape would hopefully let Main Street businesses expand. Finally, Cruz has very specific monetary goals. He wants to audit the Central Bank and pass legislation regarding the pace of inflation. In this way, Cruz intends the Federal government to have a more active role in monetary policy.

And of course, we have the leading Republican candidate, Donald Trump. The business magnate is focused on a top-down approach that would loosen many restrictions on big business. He wants to cut taxes for corporations and the wealthy – the idea being that this increased private capital would allow them to hire and expand. He also wants to impose dramatic tariffs on any goods made overseas. This tax includes goods owned by American companies but assembled abroad like iPhones. This tax is designed to help American manufacturing. Further, Trump wants to not only balance the budget, but eliminate the $19 trillion deficit currently held by the federal government. The campaign has been silent, however, on how Trump intends to accomplish this lofty goal. Finally, Trump wants to repeal any restrictions on small businesses, especially Obamacare. His goal is to allow businesses to expand with almost zero intervention from the federal government.

After covering the big names from each party, we have one potential dark-horse to consider—former New York City Mayor Michael R. Bloomberg. This potential candidate boasts hefty name recognition among financial circles. His news outlet, Bloomberg LP, is the number one source of news on Wall Street. This proximity with the financial sector leads many to suspect that the multi-billionaire’s economic policy will be particularly market-focused. That being said, pending an official announcement, we cannot say definitively what Bloomberg’s economic goals are. However, we can glean hints from his time in the Mayor’s office. As Mayor of New York City, Bloomberg grew small business by generating investment opportunities for startups. He also grew New York’s tourism industry, a move that helped create a budget surplus in New York City. Bloomberg has set the first week of March as a self-imposed deadline to officially announce; we will see how his budding candidacy develops.

Balancing The Dual Mandate


Henry Whipple

For weeks, months, and even years on end, economic analysts around the world had wondered when the Federal Reserve was going to finally raise interest rates above zero percent. While the recovery from the Great Recession was painfully slow, an unemployment rate trending downward and a positive turnaround in economic growth were encouraging signs for those seeking the first rate hike since June of 2006. The good news finally came in December of 2015 with Fed Chair Janet Yellen’s announcement that the benchmark interest rate would be raised by 0.25 percentage points. Yet, lingering fears of a global economic downturn, both domestic and foreign, are prompting controversy over the Fed’s initial plan to continue raising interest rates throughout 2016.

Yellen has consistently been optimistic about the pace of the economy’s recovery, but is now offering conflicting testimonies to members of the Senate. On one hand, she has highlighted strong levels of consumer spending as well as the opportunity for growth stimulated by falling oil prices. Yellen also cited stronger wage growth as a reason to ignore pessimism about the effectiveness of an interest rate increase. However, on February 11 she noted in an exchange with Senator Chuck Schumer of New York that “wage growth is not a litmus test for changes in monetary policy.”

Members of Congress have questioned the effectiveness of the Fed to improve the economy’s productivity using monetary policy. Yellen’s position is that the Fed’s responsibility is to encourage growth via gradual interest rate hikes to capitalize upon an improving labor market. An economic downturn leads companies to reduce investment; rising interest rates are intended to be a symbol of a recovering economy. Senator Bob Corker of Tennessee, however, feels that it is critical for Congress to invest in key sectors (i.e. education) in order to improve the skills of the labor market and enhance productivity. In conversing with Yellen, Corker was steadfast in his claim that unusually slow growth in the productivity of the average worker is translating to slow rates of economic growth.

The Federal Reserve’s dual mandate is to control both unemployment and inflation: as job growth continues to be the backbone of the economy’s recovery, the increase in interest rates is Yellen’s primary method to keep a lid on inflation. No one can deny the importance of maintaining both figures at healthy levels, particularly while the United States economy is showing signs of a return to pre-recession success. But particular members of Congress like Schumer appear to have little interest in current inflation levels, and are more concerned about the impact of slow wage growth on the job market. It is true that despite strong job gains in recent months, the lack of wage growth for most employed Americans has hurt the economy’s potential. No matter if the Fed sticks with its agenda to gradually raise interest rates throughout 2016, or reverse course, any unexpected deviation from this plan will damage the Fed’s image of transparency and raise even more concerns among investors.

Anything But Normalized

Andrew Stiles

On December 16 2015, the Federal Reserve System announced that it would raise interest rates. This is causing turmoil in US financial markets, since it is the first time since the 2008 Great Recession that interest rates are rising.


Commonly known to financiers as “The Fed”, this is the central bank of the United States, which acts as a public entity and caters to the interests of the United States’ general financial stability, unlike private banks that seek only profit.

The Fed played a major role in the Great Recession of 2008. It purchased large quantities of Mortgage-Backed Securities, which were failing investment products that many major private banks owned but could no longer sell. The Fed also lent enormous amounts of cash to some of the largest banks in America, preventing these banks from failing, and thereby preventing a ‘domino effect’ collapse of other US banks, the financial industry, and subsequently the entire economy.

How does this explain the current calamity over interest rates? When lending to these banks in 2008, The Fed lowered the Federal Funds Rate (the interest rate that banks pay on overnight loans to each other, which keep them in business) to as low as .25%, easing the financial burden on the panicking banks. The Fed maintained rock-bottom interest rates for years following 2008 in order to prop-up the US economy and prevent a full-force depression.

Eight years later, the US is in a state of faux-growth; the economy is growing, but household income has not grown significantly. Additionally, young people of the millennial generation are struggling to gain financial traction, spending much of their incomes on student loan interest payments, or monthly rent. As opposed to a mortgage on a home, which builds ownership value with each monthly payment, paying rent brings no return on investment, and is sucking up much of the savings of young Americans.

Because of these conflicting economic signals, Americans are worried that the US economy escaped the frying pan only to fall into the deep fryer. This makes raising interest rates a challenging task for members of The Fed, who hope that the US economy is finally strong enough to progress without artificially low interest rates. Only one fact is now certain: the quest to return interest rates to pre-recession levels (an action known as Normalization) has begun.

The Fed’s approach to raising interest rates is like that of a nervous child entering a swimming pool; test the waters slowly, with small changes over time. On Wednesday, January 27th, The Fed announced that it would not raise interest rates until at least March, if not later.

A daunting task lies in front of The Fed to remove the floats from the US economy’s arms. US financiers are more worried than ever, wondering whether the economy will sink or swim. At the very least, the recession is behind us, and the economy continues to grow (kind of).

Why Oil Matters

C Adam Pfander

It’s no secret that the stock market is hurting right now—and we can place a lot of the blame on low oil prices. The explanation appears counter-intuitive at first; cheap oil spells cheap energy, which means we all save on gas and heat and anything plastic. That should improve our wealth, not damage it, right? Yes. In fact, the Economist reports that declining oil prices have historically resulted in economic growth. So why are stocks tanking?


The current upheaval in the stock market represents the decoupling of finance from economics. While our economy is gaining strength, some of the world’s largest companies, along with once-prosperous oil-producing nations, are struggling with depressed oil prices. These companies are, most notably, energy manufacturers like Chevron and Exxon Mobil. The nations that are suffering are export based-economies like Russia, Saudi Arabia, and Venezuela - the latter two are members of the Organization of the Petroleum Exporting Countries [OPEC].

The economic well-being of these countries and companies rises and falls with the price of oil. Adding to the uncertainty, many oil-producing nations are politically unstable. Venezuela recently declared an economic state of emergency, and while governments in the Middle East are in a tenuous situation now, conditions will worsen if their main source of income dries up.

What is behind the plummeting oil prices? The market forces of supply and demand. In the past 18 months, oil producing nations have been manufacturing full-tilt. Pair this with the rapid expansion of natural gas production in the United States, and the market is simply flooded with oil.  According to the New York Times, approximately one million barrels of oil are produced (supplied) in excess of what is bought (demanded) each day. One million barrels of excess oil act like one million anchors, dragging the price of oil down to historic levels.

The depressed oil market does not alone affect a small group of energy producers and oil-exporting nations. Fossil fuels lie at the heart of the US economy, so trouble in the oil market threatens the US economy as well. Cheaper oil means less energy exploration and extraction, a significant source of fixed capital investment – that is, sales of machines in the economy.

All of this unrest spooks financial markets. If oil companies stop expanding production today, then they could fail to meet their debts in the future, which can cause bankruptcy. Investors grow wary of whether or not they will get their money back from these companies. Should the Middle East erupt into political turmoil due to decreased oil revenues, then emerging market investors also become worried of losing their money. This concern over the future is contagious, and has spread to financial institutions across the globe.

Last month, oil reached a low of $28.35/barrel in mid-January - that is less than a 20-piece bucket of KFC chicken. Recently, the per barrel price has risen to the mid-$30 range largely due to rumors that Russia is negotiating with OPEC to curb oil production. This is not the first time that Russia has attempted to influence OPEC, but previous attempts have failed. Each day that oil prices remain low causes oil based countries, companies, and investors to worry more. This could change if Russia succeeds in its talks with OPEC, but the talks seem like a ‘hail-mary’ in the oil game.