Bank bailout was a mistake - TARP should be suspended

Posted by Shyam Moondra

Secretary Paulson used scare tactics to make the Congress approve the TARP and handout $350 billions to financial institutions. It's amazing that the sole objective of this program was to unfreeze the credit market and induce the banks to start lending more money to corporations, small businesses, and individuals, and yet the lawmakers didn't bother to write the legislation in such a way that it would force the banks to use the funds for that purpose and that purpose only.

The financial institutions pocketed the TARP money and used it for the following purposes:

1. Throwing lavish corporate parties and conferences.
2. Handing out bonuses to the employees, even though they are losing billions.
3. Maintaining dividends when their heavy losses would dictate that they suspend dividends.
4. Maintaining corporate jets.
5. Lobbying in the Congress.
6. Acquiring other banks.
7. Buying back their own securities (e.g., Morgan Stanley and Goldman Sachs have been aggressively buying back their own securities on the open market), thereby making CEOs' stock options more valuable.
8. Speculative trading (especially by investment banks such as Goldman Sachs).

One thing that the TARP recipients are doing very little is to use that money for lending which was the sole objective of the whole program. The TARP is a major failure and it should be suspended. The Congress should not release the rest of the $350 bi TARP funds to Paulson; that money should be used to provide stimulus via infrastructure projects and to stop home foreclosures.
There have been reports that Paulson/Keshkari misused TARP funds to help their former employer, Goldman Sachs. It's reported that Paulson gave a lot of money to AIG because AIG owed money to Goldman Sachs, so it was not about saving AIG, it was more about funneling funds to Goldman Sachs. The Justice Department should investigate Paulson/Keshkari about how they distributed the TARP money. It's shocking that given the size of the funds involved, there are inadequate accounting controls within the Treasury Department as well as lax oversight by the Congress.
In any event, investment banks should never have been included in this program because they are not in the business of lending. They are using the TARP money to do more speculative/manipulative trading for their own accounts and buying back their own securities that don't do much good for the economy.

The Congress should scrap the seniority system and older congressmen should retire

Posted by Shyam Moondra

President George Bush's approval rating has been the lowest compared to that of all other presidents in the modern history. However, the Congress fairs even worse in the eyes of the American people. The Congress, as an institution, is lethargic; it's like an over sized, old, and tired elephant that can hardly move.

While many of our problems are a direct result of Bush's ideology driven governing style, the Congress has failed to provide checks-and-balances as envisioned by the nation's founders. Bush's belief that the government should get out of the way of the private sector led to lax regulations that, in turn, led to the devastation of our free-market economy. Just as crime goes up on the Main Street if the police is not cruising the streets, it was not unexpected that Wall Street will engage in deception and manipulation if the regulators just looked the other way. Bush's doctrine of pre-emptive strike led him to blunder in invading Iraq that led to enormous costs in terms of lives and money. Bush's mantra of "lower taxes," led to disproportionately higher benefits to the rich at the expense of everybody else who are now stuck with a huge national debt that next generations would have to repay. Bush's spiritual belief is that there is no global warming and if there is something going on with our environment it's God's doing and not man-made, and, therefore, we don't really need to do anything. His recent push for health provider's conscience based denial to provide health care is rooted in his firm belief that abortion is a sin and not a woman's right. Bush's ideology driven agenda has brought nothing but ruins that now President-elect Barack Obama has to undo by pursuing more pragmatic ways of governing.

The Congress' record is even bleaker. The senators and congressmen failed to question faulty intelligence on Iraq, they authorized Bush to go to war but failed to provide oversight, they did not properly watch over the regulators who were supposed to regulate the financial sector, and they kept authorizing Bush to spend money that we didn't have. The government of checks-and-balances, as envisioned in the constitution, did not materialize.

One of the reasons why the Congress has turned in such a poor performance is that too many senators and representatives are old and they have been at the Capitol way too long. The median age of senators is 63 years compared with 36.7 years for the entire U.S. population. Most of the committee chairmen are in 70's and 80's, who are not in tune with the needs and thinking of the much younger and more dynamic population.

While older people bring experience and wisdom to their jobs, they generally have less energy and passion to accomplish big things. They tend to be comfortable in their jobs and thus have no zeal for any change. Resistance to change also means that novel ideas and solutions are not easily accepted. The older people are always behind the curve and in reactive mode; they almost never anticipate problems and they are rarely ready with proactive actions to prevent problems from happening in the first place. It's like a slow-motion movie running in reverse, very painful to watch.

Our country faces many difficult and complex problems that would require vigorous schedules and innovative approaches to solve them. The present mix of senators and representatives is out of step with the young and vibrant President-elect Obama, whom the American people chose over the aging Sen. John McCain. Obama has already outlined his ambitious agenda that includes a huge stimulus package to generate 3 million jobs, achieve energy independence during his tenure as the president, stabilize the housing market, tackle the health care crisis, win the war on terror in Afghanistan, and improve our educational system. The real question is if Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, and these tired committee chairmen are the right people to keep up with Obama in achieving grand things for our country. I look upon these old lawmakers as an obstacle in our path to progress.

I think the time has come to get rid of this unwritten rule of seniority in the Congress when deciding who should lead what committee (the House has already begun that process but the Senate has not). The selection of lawmakers for the major leadership positions should be based on who has the capacity, drive, and passion to partner with the young Obama in getting things done. And to those in the Congress who are over 68, it's time they consider retiring and letting the younger generation take over, as was made abundantly clear by the American people who elected the young Obama as the next president. Perhaps, the time has come to also consider term limits for the U.S. senators and representatives.

College education is getting out of reach

Posted by Shyam Moondra

Aside from the ever increasing health care cost, the only other cost which is not showing any sign of slowing down is the cost of college education. The high cost of college education is affecting the finances of an increasing number of middle-class families that are not rich enough to be able to afford it nor poor enough to qualify for financial assistance.

The following trends show that the U.S. higher education system is out of whack:

1. The tuition and other fees are being increased, year after year, far beyond the general inflation rate, rendering college education out of reach for many students and their families.


2. The compensation of the Presidents of educational institutions have increased drastically, in line with the excessive compensation of the executives at the corporations.


3. More and more universities and colleges are spending more and more money on sports activities. Building new stadiums and showering athletic departments with lavish budgets have become fashionable these days. Now the success of schools is judged not based on academic accomplishments but based on the game scores.


4. The endowments of many schools have grown so big as to match the annual budgets of many countries running into billions of dollars, and yet these schools are spending proportionately less and less on education.

Up to this point, the government has introduced tax credits and provided more funding for student loans to help many families pay for college education, but that's just the wrong approach. Rather than finding ways to pay for inflated tuition fees, the government needs to find ways to roll back the artificially inflated tuition by at least 30%. The incoming Obama administration and the Congress need to pass a higher education reform legislation that will have the following elements:

1. Limit the compensation of the administrators of the universities and colleges.


2. Craft the tax laws in such a way that they penalize the schools that increase the tuition fees in excess of the general inflation rate.


3. Impose hefty taxes on rich school endowments that do not spend a specified minimum portion of their incomes on helping needy students with financial assistance. Those schools that fail to spend the required amount must surrender those funds to the government to be used as part of its student loan program.


4. Limit how much money educational institutions can spend on sports activities. More and more schools are spending more and more money on sports and more and more students are spending more and more of their time on sports activities rather than studying. This whole trend of sportization of educational institutions is hurting the standard of our educational system.


5. There are just too many universities and colleges, duplicating the administrative overhead and other expenses for common functions. We should find a way to encourage the institutions to merge to reduce the costs and pass along those savings to the students.

How to fix the broken health care system?

Posted by Shyam Moondra

The escalating health care costs are impacting families and businesses. In the face of government inaction on this issue, many corporations are washing their hands off this problem by cutting back employee/retiree's health benefits and increasing co-pay and deductibles. We already have 40 million Americans without health insurance, and given corporate cutbacks and sharp increases in premiums, the ranks of uninsureds will only increase making this crisis even more serious.

The current free-market model is broken. Most health care providers are milking this cow to the hilt - the greed has taken over their any sense of moral responsibility. Insurance companies, HMOs, hospitals, doctors, and drug companies are all increasing their charges in unrestricted way. There is no free-market competition; what we have is an industry-wide conspiracy to make more and more money.

The present health care system is beyond repair. What we need is a fundamental overhaul of the whole system. Any new system should have the following elements:

1. The government should takeover the health care insurance business. Having the efficiency of a large single carrier and removing the profit motivation from the equation will reduce the costs considerably. This single carrier should offer health insurance to all Americans, either through employers or directly to the people who do not have employer provided benefits (e.g., self-employed people).

2. The government, as a single carrier, should negotiate the lowest possible prices with hospitals, doctors, drug companies, and other service providers.

3. Medical record keeping and billing systems should be automated to reduce the operating costs of the health care system. Special provisions should be made to ensure the security and privacy of medical information of individual patients that's put on on-line.

4. The medical malpractice laws should be reformed to minimize frivolous lawsuits that increase the malpractice insurance premiums and eventually the health care cost. Having more transparency on this issue will also make the doctors stop prescribing unnecessary tests that they otherwise do to just protect themselves from potential malpractice law suits. The malpractice lawsuits should be allowed only in cases of genuine incompetent errors on the parts of doctors and hospitals.

5. Eliminate all tax write-offs for drug companies and other service providers in the industry.

6. Rewrite the patent laws to allow the marketing of generic drugs sooner.

7. Impose limits on marketing campaigns by drug manufacturers and ban the practice of giving kickbacks to doctors for prescribing specific brands of drugs.

Pakistan has a history of using terrorism as a policy tool against neighbors

Posted by Shyam Moondra

Although Pakistan has denied any involvement in the multiple acts of terror in Mumbai that led to the murder of over 180 innocent people, it has been widely reported that in the past Pakistan's Intelligence Services has used terrorism as a policy tool against India and Afghanistan. It's strongly believed that Pakistan's Intelligence Services played a role in recent terrorist act against India's embassy in Kabul and attack on India's Parliament Building in New Delhi. Given the logistical complexity of the Mumbai terrorist act, it's hard to believe that whoever planned and executed this senseless act of terror didn't get any support from someone in the Pakistani government.

It's to India's credit that in spite of many provocative acts of terrorism committed by organizations based in Pakistan and supported by Pakistani Intelligence Services, India has acted with tremendous restraint to keep the hope alive for possible eventual peace between the two countries.

Pakistan has received tens of billions of dollars from the U.S. in exchange for their cooperation against Al Qaeda and Taliban. However, many observers believe that while Pakistan pocketed the aid money, it has partnered with the U.S. only half-hearted. At times, they have appeared to play both sides, helping the U.S. against Al Qaeda while using terrorist organizations against India and Afghanistan. The U.S. policy has proven to be a failure because terrorists are gaining near the border of Pakistan and Afghanistan. Also, the U.S. policy of looking the other way every time Pakistan used terrorism against India and Afghanistan has only encouraged more terror acts against these countries.

President-elect Obama needs to do a comprehensive review of the U.S. policy towards Pakistan and take the following actions:

1. Suspend all financial and military aid to Pakistan. Any future aid should be tied to specific benchmarks with regard to their help in our war on terror. We should insist that they dismantle Intelligence Services organization that itself seems to be engaged in terrorism against India and Afghanistan. We should also insist that they shut down their religious school system that is a breeding place of future would-be terrorists.
2. Offer comprehensive assistance to India in counter-terrorism tactics and intelligence sharing, and better protecting their borders to prevent terrorist infiltrators. We should seek a closer strategic relationship with India, economically, militarily, and diplomatically.
3. Develop a strategic plan to seize Pakistan's nuclear bombs and nuclear capable missiles, and destroy their WMD labs. It's a matter of time that these weapons and technologies will fall in the wrong hands and used against us. We must be prepared with a plan to take control of Pakistan's WMD.
4. If Pakistan doesn't meet our demands, we should isolate Pakistan diplomatically and economically. We should restrict visas to Pakistani citizens and limit trade with Pakistan.

Our policy in the Indian-subcontinent has not been effective. We need a different approach.

Very impressive start by President-elect Obama

Posted by Shyam Moondra

The current economic crisis is a culmination of many mistakes made by the Bush administration and the Congress. Since it became evident that we have a credit crisis, the government officials such as President Bush, Secretary Paulson, FED Chairman Bernanke, and SEC Chairman Cox, have not provided credible leadership. Their unsteady management of the crisis led to fear and complete lack of confidence on the part of investors.

President-elect Obama seems to have understood that a lot of the current problems are psychological and that's why he is so keen in demonstrating that he is on the top of things. In recent days, Obama has held press conferences almost on a daily basis that has been very reassuring. He has said the right things, he has assembled a very impressive economic team, and the fact that he comes across as very focused have soothed the nerves of many investors. His strong leadership style and a show of determination that he can fix whatever problems our economy has have helped a great deal in stabilizing the financial markets.

Obama's multi-faceted approach in providing a big stimulus to the economy for immediate positive effects, weeding out wasteful government spending, and putting in place a plan for long-term recovery are right on the mark. Obama's intelligent and thoughtful approach in managing the crisis has inspired confidence and for the first time the people are becoming more hopeful about the future.

Based on Obama's performance to date, there is a reason to believe that he may indeed turn out to be one of the greatest presidents we have had.

God has a way of equalizing things

Posted by Shyam Moondra

The rich people, who benefited the most under the Bush tax policies, are the biggest losers in the current economic crisis. Most of these people have lost almost half of their wealth and still counting.

The CEOs, who abused the system with the help of corrupt Board of Directors and enriched themselves beyond belief, are now seeing their stock options melt away right under their noses. When the market cap of a company like Citigroup crashes from $200 billions to just $20 billions in less than a year, it can only be a curse. Who could have even imagined just a year ago that Bear Stearns and Lehman Brothers would be no more or GM and Ford, icons of American ingenuity, would burn to ashes?

The powerful hedge funds, intoxicated with their successes achieved mainly by manipulating stocks and making money at the expense of small investors, are now on their knees. Over 700 of them have already gone bankrupt and many more are on their way to demise for good.

Bush ordered the invasion of Iraq, against the wishes of most of the people around the world, simply because he felt that he could. As the leader of the world's only superpower, Bush felt invincible and somewhat intoxicated with power. After sacrificing the lives of thousands of people, American and Iraqi, and wasting over $700 billions, he finally had to concede that the mission was not accomplished after all.

Given a massive destruction of the wealth of rich and powerful, who gained unfairly in recent years, one has to wonder if there is a supreme power behind all this.

Amidst the ruins lies a beacon of hope, President-elect Obama, who correctly envisioned a change in direction that would favor the middle-class, the people who were left behind. The fact that Obama, a black man, won the election against all odds can only be God's doing. It seems like God is finally on the side of the good people.

Lack of confidence in government officials causing turmoil in financial markets

Posted by Shyam Moondra

The losses of 5% or more in stock markets have become a sort of routine daily event. This economic crisis is man-made and the people around the world are paying an unimaginable price. They are losing their jobs, homes, and retirement savings. The first time in a long time, we now have reports of hunger among the American children.

The leaders in the government, including President Bush, Speaker Pelosi, Senate leader Reid, many of the committee chairmen in the Senate and the House, Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and SEC Chairman Cox, failed the country beyond belief. They failed to properly regulate risky "innovative" financial products that turned out to be "toxic." They failed to recognize the scope and consequences of the sub-prime mess. Once it became evident that the world was headed towards credit meltdown, these officials failed to respond effectively. They kept trying different things at enormous cost to the tax payers at a time when we are up to our ears in terms of the national debt. It was very unsettling to hear Paulson announce that he was discarding the idea of buying-up the "toxic" securities from financial institutions, the idea that he fought for and for which he secured the Congressional nod only days prior. All of this unsteady management of the crisis led to the loss of their credibility, which in turn led to investors' lack of confidence in the financial markets. While stock markets were plummeting, SEC was eliminating the "up-tick" rule for short selling and permitting naked short selling that only exacerbated the slide of the markets. Lack of leadership and mismanagement by Cox should be viewed as criminally negligent.

At the moment, the key problem is one of leadership and lack of credibility. All of the present government officials are tainted. The day it is announced that Pelosi, Reid, Bernanke, Cox, and some of the Congressional committee chairmen are being replaced (other incompetent and failed officials, Bush and Paulson, are leaving soon), the stock markets will go through the roof. The American people desperately want these power-hungry government officials to think hard about what's in the country's best interest. If they step aside and let a brand new leadership team at all levels led by President-elect Obama address the crisis, the confidence of the people will be restored and it will go a long way to restore the normalcy in the markets.

Is stock market bottoming out?

Posted by Shyam Moondra

There were several instances when it looked like the stock market had bottomed out but then came more bad news and the market headed lower again. However, the behavior of the market in recent days suggests that DJ may have already hit the bottom at 7,773 on October 10, 2008.

It seems that the market is being hit repetitively by the same old bad news, leaving the valuation at a level as if we are headed to the 1930's era depression. The recession has come fast and furious but it's unlikely that it will last long for the following reasons:

1. In a concerted effort, the governments of major economic powers have been reducing interest rates to the levels not seen for decades, pumping liquidity into the markets at an unprecedented rate, and increasing expenditures via stimulus packages that will eventually revitalize the global economies.
2. The credit crisis is easing, as is evident from the inter-bank Libor rate that has come down to the levels not seen since 2005.
3. The latest housing data suggests that the housing market may be stabilizing. Recent positive actions by several major lenders will reduce the number of home foreclosures, which will help revitalize the housing market.
4. In general, the corporate balance sheets are very strong with unprecedented levels of cash. This explains why corporate bankruptcies are far fewer than seen during the past recessions.
5. The corporations were quick to adjust their inventories when the credit crisis first became evident. The current extremely low inventory level suggests that the industrial production may be ready to bounce, which will boost the employment.
6. The current stock valuations seem ridiculously low when compared with the valuations at the bottom of the past severe recessions.
7. The collapse of the prices of oil and other commodities is a welcome news for the consumers. The lower commodity prices will dampen inflationary expectations that will free the FED to reduce interest rates even more. Low inflation and low interest rates are generally good for the equity markets.
8. The incoming Obama administration is poised to cut taxes for the middle-class and small businesses, aid the ailing auto industry, and invest in alternative fuel research and development and infrastructure projects. These initiatives will boost employment and consumer confidence.

The current stock market is being driven more by fear rather than the economic reality. In this kind of market, as Warren Buffet said, investors need to be greedy.

Pelosi, Reid, Frank should resign and Bernanke and Cox must be replaced

Posted by Shyam Moondra

Given the credit market turmoil and the stock market crash that led to people losing their jobs, homes, and half of their retirement savings, it's imperative that people who were in a position to prevent this catastrophe step aside to bolster the confidence of the people in the government. As President-elect Obama assembles his new administration, it's important that we have new leaders in the Senate and House as well as new committee chairmen.

I call upon Nancy Pelosi, Harry Reid, Barney Frank and other committee chairman to take moral responsibility for the major government failure to protect the people and step aside so that we have new leaders and a new beginning.

FED Chairman Bernanke should also be replaced. He unnecessarily increased interest rates, at a time when inflation was not a problem, which precipitated housing foreclosures. He continued to insist that sub-prime was not a problem. He waited too long to address the problem once it became clear that it had the potential to become a major crisis.

SEC Chairman Cox and his key people should be fired. He allowed hedge funds and investment banks to manipulate the markets and failed to enforce the laws. He eliminated the "up-tick" rule for short selling and naked selling became wide spread under his chairmanship that made it easier for hedge funds to manipulate the markets and make money at the expense of small investors. Cox did not serve his country well and he must be removed immediately.

The road ahead for President-elect Obama

Posted by Shyam Moondra

Barack Obama's election as President is not only historic but it instantly restores America's image as a beacon of democracy, freedom, and ideals. President-elect Obama ran an exceptionally competent campaign, he showed tremendous perseverance, calmness and steadiness on the long campaign trail, and he used the power of his words to inspire the country and the rest of the world.

It's interesting to note that while it took America 232 years to reach to the point of electing a minority as the President, India, that became independent only 61 years ago, has elected a Moslem as the President (Abdul Kalam), a woman as the Prime Minister (Indira Gandhi), and a Sikh, another minority in Hindu-dominated country, as the current Prime Minister (Man Mohan Singh).

President George Bush blundered by invading Iraq, mismanaged economy, and left our relations with the allies in ruins. Now President-elect Obama has the task of not just repairing the craters and pot-holes that Bush created in our road to peace and prosperity, but creating brand new pathways to better life for all the citizens of the world.

Since economic issues played a major role in Obama's victory, that's where the focus would have to be. Obama's first task would be to select a first-rate economic team that should include former FED Chairman Paul Volcker as his WH Economic Advisor. Obama must appoint a brilliant Treasury Secretary and replace FED Chairman Bernanke and SEC Chairman Cox, both of whom failed to recognize the brewing sub-prime credit problems early on (how many times Bernanke appeared before the Congress and proclaimed it was not a serious problem?) and stock market manipulation, and act in a timely manner to prevent the economic meltdown. The first step in winning the confidence of the people is to install a brand new economic team. Reducing taxes for the middle-class (and not renewing Bush tax cuts for the super rich) should be a top priority.

The second priority would be to end the Iraq war and increase the troop deployment in Afghanistan. Obama must also get tough with Afghanistani President Karzai to stop the drug trade and redouble the efforts of reconstruction of the war raged country. We also need to redefine our relations with Pakistan; we should suspend military aid unless it's specifically tied to the war on terror.

On the broader issue of the Pentagon, Obama needs to retain Defense Secretary Gates, who is doing a good job, and appoint Sen. Chuck Hagel as the deputy Defense Secretary with one mission - transform the Pentagon. The Pentagon is a wasteland of tax dollars (remember $100 hammers and $300 toilet seats ordered by the Pentagon?). We need to start from scratch and build a new defense organization with adequate controls to prevent waste and fraud involving large amounts of tax dollars and no-bid contracts. I like to joke that the best way to transform the Defense Department is to move it out of the sprawling Pentagon and into a smaller building, which will force the DoD to do away with wasteful bureaucracy.

I would also like to see Colin Powell brought back as the Secretary of State. Powell is not a right-wing ideologue, but a skilled conciliator, and that's exactly what we need to repair our tattered relations with our allies and initiate vigorous diplomacy to deal with our adversaries. Powell is supremely qualified to play this role.

I think the EPA and Energy Departments should be combined into one Department and Al Gore be appointed as its head and charged with the task of putting energy independence and global warming on the same track and creating millions of new jobs related to renewable energy sources. Al Gore made a name for himself talking about the issues, so it seems appropriate that he be given a chance to now walk-the-talk and prove to the world that he deserved all the Nobels, Oscars, and Emmys he won.

The time has finally come to tackle the health care problem. Sen. Hillary Clinton should play a major role, whether as a cabinet Secretary or in some other capacity, to get this done as quickly as possible. Let's once and for all create that Health Security Card, that President Bill Clinton flashed during his first State of the Union message to the Congress.

Our economy is in a dire condition. We need a stimulus package. We should initiate a major infrastructure improvement program, which will create millions of new jobs and give a boost to the sagging construction industry.

The current economic meltdown is partly because of the lack of Congressional oversight that led to inadequate regulation of the sub-prime market. I think Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, along with some of the Congressional Committee Chairmen, should step aside. Because of their failures, people lost their jobs, homes, and half of their retirement savings. It's the American way to hold the people, who were in a position to prevent this catastrophe, accountable.

Stock markets headed higher prompted by global coordinated actions

Posted by Shyam Moondra

The stock markets were oversold around the world primarily because of fear and uncertainty. However, coordinated actions by the governments of major economies are beginning to have a positive impact on investor sentiment. This kind of coordination is unprecedented and is a direct result of interdependencies of world economies caused by increasing global trade.

Although the 3Q08 earnings reports of many companies were much better than expected, they generally gave a cautious guidance for the 4Q08 based on the negative impact of the global credit squeeze. However, aggressive infusion of liquidity by the governments around the world and lowered interest rates seem to have worked and the credit markets appear to be inching towards normalcy.

The housing market in the U.S. has been in a downward spiral, but the latest reports of an unexpected increase in new home sales and increase in mortgage applications seem to suggest that the housing sector may have hit a bottom. Recent rapid decline in home prices and lower mortgage interest rates are finally bringing new home buyers to the market. More and more existing homeowners are also flocking to the refinance market.

The stock market started its decline after DJ index hit a peak of over 14,000 at a time when the average PE ratio was around 17, significantly less than 30 when the 2001-2002 bear market began. With a dramatic stock market decline of almost 45% since the beginning of 2008, the average PE ratio has come down to a level not seen since the early 1970's. The current extremely low valuations of many companies make the overall market so attractive that an explosive up move of almost 1000 points on DJ, like the one we had yesterday, doesn't seem that surprising.

Many analysts blame Alan Greenspan, the former FED Chairman, for keeping the interest rates too low for too long that fueled the housing bubble. I don't think it was the low interest rate that led to the housing excesses; the main culprit was the lack of regulations that led to risky lending practices and to the unregulated mortgaged-based derivative securities. Had we been more diligent in recognizing the risky nature of unregulated practices, we might have seen continued prosperity for many more years to come.

The recent polls indicate a land-slide victory for Sen. Barack Obama, who will become the next president of the United States. His priorities on reducing taxes for the middle class, creating new jobs in the construction industry through a massive infrastructure improvement program, pursuing an aggressive energy policy that will not only stop the flow of money to OPEC countries but also create high-paying jobs here in the U.S., and significantly reducing health-care cots could spark the next bull market which could last for many years.

Stock Market plunge made worse by computerized trading by hedge funds

Posted by Shyam Moondra

Undoubtedly, risky mortgage-backed securities led to credit crunch, which, in turn, is causing global economic slowdown. The stock markets have lost value by as much as 80% in some parts of the world. The panic selling is getting aggravated by computerized trading by hedge funds and other financial institutions. When the Dow-Jones average moves up and down by several hundred points several times a day, this shows that big players' unregulated trading practices are only making nervous markets even more volatile.

The stock markets were formed to help corporations raise capital for expansion. The stock prices moved up or down based on the company fundamentals. However, since banks and hedge funds started computerized frantic buying and selling, including short selling, the stocks move up or down not based on fundamentals but speculation, turning stock markets into gambling casinos. These computerized high-speed trading practices have harmed our financial markets and require investigation by the Congress to decide if limits be placed on the trading practices of big organized players that have created their own modern version of financial mafia.

Secretary Paulson, SEC Chairman Cox, and FED Chairman Bernanke all have done a terrible job in managing the economic affairs of the country. They discounted the risks associated with mortgage-based derivative securities, they failed to properly monitor the capitalization of highly leveraged banks, and they consistently failed to understand the dire consequences of what was going on in the financial markets. What they have done since then is a patch-work of spur-of-the-moment remedies, without fully understanding the scope of the problem. President Bush has failed to provide leadership and the Congress failed in its oversight responsibilities. I think electing Sen. Obama as the next president is now imperative to bring a transformative change to our regulatory regime and provide leadership in calming down the nerves of the investors. It's also the right time to give filibuster-proof majority to the Democrats in the Senate to speed-up the implementation of the Obama plans and strategies. I believe bringing in new people at SEC, Treasury and FED will help stabilize the markets.

The Congress needs to start deliberating on the role of organized computerized trading by hedge funds and banks and implementing regulations to stop market manipulation and abuse by these big players. We need to bring back the markets that move based on fundamentals. We also need to ban or at a minimum limit short-selling (e.g., no more than, say, 2% of outstanding shares can be shorted at any given point in time) and options trading.

McCain's extreme comments against Obama are harmful to our democratic process

Posted by Shyam Moondra

Lately, Sen. John McCain and his running-mate, Gov. Sarah Palin, have been using extreme tactics against Sen. Barack Obama that are totally out of line and are very damaging to our democratic process.

Bill Ayers, who is now a university professor, committed terrorist acts to show his opposition to the Vietnam war at a time when Obama was just eight years old. A few years ago, Obama and Ayers had brief association because they both served as board members in connection with community projects in Chicago area. Ayers is not an Obama advisor nor he is in any way involved in Obama's presidential campaign. Given these facts, this is a huge stretch to use this brief association between the two men as a basis to imply that Obama may be a "terrorist." This is a smear tactic, plain and simple.

McCain and Palin have also implied that Obama may be a "corrupt" Chicago politician or he is "dangerous" or he has "character" problems. These are all flimsy charges without any proof to support any of these charges. McCain's surrogates have called Obama "unpatriotic" and they have used Obama's middle name "Hussein" to imply that he may be a Muslim even though they know that he is in fact a Christian.

During the first debate, McCain was visibly angry and disrespectful towards Obama that didn't win McCain any points in the eyes of many voters. During the second debate, McCain referred to Obama, his colleague in the Senate, as "That one," which was totally uncalled for.

McCain has been utterly ineffective in articulating his vision for the pressing problems of economy, jobs, health care, and education that the American people have been dying to hear about. McCain has impulsively offered flawed solutions or said something and then changed or retracted his solutions or comments. That makes him look indecisive and confused.

McCain's erratic leadership and his extremism have in fact hurt him because a majority of Americans believe in fair play and they are not happy at the political terrorism being practiced by McCain and Palin. McCain has run a dishonest and dishonorable campaign, second only to Richard Nixon.

McCain should be careful not to enrage his hard-core racist supporters to the point that one of them may contemplate to assassinate Obama or if McCain loses, Obama may have a hard time to govern. Just because you can't win, it doesn't mean that you unfairly torpedo your opponent's chances to govern and do the good work for the country. Country comes first, which means keeping the political discourse civil and fair.

Most polls indicate that Obama may be headed to a landslide victory, so McCain and Palin should tone-down their extreme rhetoric and be mindful that if Obama wins he should have an environment where all the people could work together to solve tough problems we face as a nation.

FED should buy stocks to stabilize the markets

Posted by Shyam Moondra

It's amazing to see how people have become used to the DJIA declining 500+ points a day. The ramifications are far reaching; the crash of financial and housing markets will inevitably lead to declining living standards and increasing poverty around the world. While people enjoyed the fruits of globalization when things were going great, now they must share the pain when the sky is literally falling down.

The question is what can we do now? The government has many other tools at its disposal that it can use to build up the investor and consumer confidence. One thing the federal government could do is to buy the stocks in the open market which will surely move the market up and improve the investor sentiment. At the current fire-sale stock prices, the tax-payers will eventually reap huge profits in a year or two when the stock markets reflect the true value of the corporations. Those profits could then be used by the new president to invest in education, health care, and infrastructure improvements.

Here is a list of what the government should do:

1. FED and Treasury Department should buy stocks of major blue-chip high quality stocks in the open market at the current outrageously low prices.
2. Extend FDIC insurance to all deposits regardless of the amount.
3. Close-down weaker banks immediately, so that banks can start freely lending money among themselves.
4. FRB should immediately lower funds rate by another 0.5%.
5. FRB should extend credit to corporations and small businesses to avoid layoffs.
6. Implement $700 bi bailout without any delay.
7. Treasury Department should also buy foreclosed houses on sale and sell later when the housing market recovers, as was done during the last depression.
8. President Bush should coordinate actions with EU, Japan, and China, and convince oil-rich countries to use their sovereign funds to invest in American companies.

Sen. Biden performed superbly in his debate with Gov. Palin

Posted by Shyam Moondra

Sen. Biden did a superb job in articulating why the next administration needs to focus on the middle-class, need to move away from disastrous Bush-McCain policies on Iraq, regulation, tax cuts for the rich, and confrontational foreign policy. He brought out his common touch when he talked about his middle-class upbringing. I was afraid he will say something stupid, as Sen. McCain hoped for, but he didn't. Biden offered a lot more substance than Gov. Palin did - she just provided some talking points. Biden was very gracious and treated Palin with respect which provided a sharp contrast to how McCain treated Sen. Obama during their first presidential debate - McCain came across as angry and disrespectful which made him look unpresidential.

Biden, with complete command of the issues, is clearly ready to be president but I didn't feel the same way about Palin, who came across as shallow in her understanding of the complex issues and she offered simplistic common-sense views rather than well thought out solutions.

McCain has run one of the worst campaigns in the history: telling lies, being not forthcoming, having no vision for the future (there is more to the problems than just pork-barrel projects!), and offering no solutions to a wide range of problems. McCain has proven to be erratic and impulsive (lacks calmness and steady hands in the face of crisis - almost as if he doesn't know what to do, as demonstrated in his suspending campaign and saying that he will not debate and then flip-flopping), a man who could very easily make a bad decision. Also, McCain made an unwise choice in Palin who is clearly not qualified and not ready to be the vice president, heart-beat away from the presidency.

Combine top-down and bottom-up approaches to deal with the credit crunch

Posted by Shyam Moondra

The reason the $700 bi bailout bill failed in the House is that it was perceived as a handout to corporations that made unwise decisions. Many people feel that we should never mix public money and the private sector; let the private sector find a solution to the problem it created. Unfortunately, the magnitude of the problem is so big that it is imperative that the federal government be part of the solution.
To make the bailout politically more palatable, perhaps we should approach this problem top-down as well as bottom-up, meaning the government should help the financial institutions to unload the mortgage-based securities (top-down) while at the same time help the homeowners (bottom-up) to halt the wave of foreclosures that is destabilizing the housing market, which, in turn, is making these mortgage-based securities less marketable. Therefore, by approaching the credit issue from both ends will speed-up the process of dissolving the worst financial crisis of modern times in an equitable and fair manner.

The federal government should take a series of steps some of which will require an action by the Congress and others could be dealt with by the regulators on their own authority:

1. Freeze all foreclosures for one year.


2. The government should form a separate entity to financially assist the homeowners, who are in foreclosure or close to it, thereby reducing the number of foreclosed houses that are put on sale. This will help stabilize the housing prices.
3. In extreme cases, where the homeowners can't be helped, this new government entity should buy the houses and sell them at a future date after the housing market has stabilized, hopefully at a profit that will partially pay for the cost of this whole program.
4. The FRB should reduce the funds rate by 0.75% immediately, which will bring down the mortgage rates. This will help increase the demand for houses and thus stabilize the prices and also reduce the number of new foreclosures especially those that involve adjustable mortgage rates.


5. The FRB should provide loans to financial institutions and corporations and small businesses that are not able to get credit even though they have good credit rating, especially if the use of those funds will help create new jobs.

Combining the bottom-up and top-down approaches is beneficial because they both are complementary, meaning by stopping the wave of foreclosures we will be able to stabilize the housing prices which will enable the government to sell the mortgage-based securities at a profit thereby eventually recovering the taxpayers' bailout money.

The United States and Europe need to be firm with Russia

Posted by Shyam Moondra

The U.S. and EU need to be firm in dealing with Russia in the aftermath of Russian invasion of Georgia. The Russian leaders Medvedev and Putin and the Russian military have behaved in a very irresponsible way without any regard for the well being of innocent civilians. Russian leaders signed a cease-fire agreement but they failed to fully comply with it. They initially insisted that they have no desire to invade any other neighbors, but lately they are talking about maintaining their "sphere of influence." Russian response to the initial military action by Georgia was undoubtedly brutal and disproportional. They ventured way beyond the disputed regions, threatening the democratically elected Georgian government. The unprofessional behavior of the Russian military, such as looting Georgian banks, stealing computers and furniture from the civilians' homes, destroying bridges and railway infrastructure that have no military value, and even hauling away the U.S. humvees that were waiting to be shipped to the U.S., made Russia look not as a great power but as a country of thugs.

It is important that the West take a firm stand against illegal Russian invasion. They need to go beyond just saying that it wouldn't be business as usual; they need to take concrete actions to send a clear message that this kind of behavior will not be tolerated in the 21st century. The EU summit, which is scheduled for September 1, 2008, is the right forum for taking forceful actions to clearly demonstrate that they mean it when they say that it wouldn't be business as usual.

Here is a list of things the EU, the U.S., and NATO could do to punish Russia. These actions will do a serious damage to Russian economy and will force them to change their behavior.

1. Send immediate financial and military aid to Georgians to help them rebuild their country and shore up their defensive capabilities.
2. Move overwhelming naval and other military assets to the Black Sea to prevent any possible action by Russia against other neighbors such as Ukraine.
3. Put the consideration of NATO membership of Ukraine and Georgia on a fast track.
4. Freeze relations with Russia, diplomatically and militarily. Isolate Russia, not just in Europe but world wide.
5. Drop Russia from G-8 (go back to G-7) and the Middle-East peace group.
6. Reduce energy dependence on Russia. Russia needs to sell their energy products just as much as EU needs to buy them. The reduced energy purchases from Russia will hurt their pocket-book and it will tame their aggressive posture.
7. Impose trade sanctions such as ban on business deals and technology transfer to Russia.
8. Deny Russia the entry to GTO.
9. Freeze the bank accounts of Russian officials and business executives in Europe and the U.S. It has been reported that many Russian politicians, including Putin, may have amassed vast hidden fortunes in secret EU and US bank accounts.
10. Arm Russian Federation provinces (e.g., Chechnya) that want to be independent.
11. Stop granting visas to Russians for visiting the EU and the U.S. This will hurt affluent Russians.
12. Limit the number of Russian diplomats and their movements within the host countries, including the U.N. (NYC).

McCain's desperate and risky move

Posted by Shyam Moondra

Sen. John McCain selected Sarah Palin, the young and inexperienced governor of Alaska, as his running mate. The selection partially restored McCain's image as a maverick, but it left many of his supporters scratching their heads. McCain's decision appears to be flawed, risky, and dangerous for the nation's security. Since McCain is not making headway in national polls and he certainly can't run on President Bush's record, he desperately needed to do something to shake things up, and so he did.

Palin has very thin and unremarkable resume. She was a mayor of a small town (population 9,400) and has been the governor of Alaska for less than two years. She has zero experience in foreign affairs and security matters. She does have conservative credentials, being a staunch opponent of abortion rights and a life-time member of NRA. Palin has aggressively worked to stop wasteful spending by the state government and to expose corruption within the Republican party of Alaska. These conservative values will help McCain energize his evangical base.

It's hard to understand what motivated McCain to pick Palin as his running mate. He has been pounding on Obama for being inexperienced and not ready for the presidency. All of sudden, McCain turns around and selects a woman, who has even less experience in national and international issues than Obama. Given McCain's advanced age, it was particularly important that he selected someone who could step-in as president, should that unfortunate need arise. By selecting someone who is utterly unprepared for that eventuality, McCain has unwisely gambled on the nation's security. This gamble may in fact make McCain lose support of many male voters, who would be unwilling to vote for the ticket if they thought it was too risky for the country. The voters would think more in terms of whether Palin has what it takes to be the commander-in-chief and deal with terrorists and such adversaries as Russia, Iran, North Korea, and Venezuela.

It appears that McCain was motivated to pick Palin, a woman, thinking that she might help him pick up the votes of disaffected Sen. Hillary Clinton's women supporters. The problem is that Clinton supporters are not going to vote for an unqualified Palin just because she is a woman, and certainly not for a woman who opposes abortion rights and gun laws. I suspect McCain will lose more votes because of the perception that Palin is not ready to be the commander-in-chief than gain votes because she is a woman.

McCain met Palin only once, so I doubt he really knows her well. The funny thing is that when he made the announcement, which was only a few sentences long, he had to read it from a script just to make sure that he got her name right. If McCain doesn't know Palin that well, how can he expect the American people to trust him? McCain made a snappy decision to choose Palin as his running mate. This raises a serious question about McCain's decision making process and whether he has the right temperament and sound judgment. He tends to make quick decisions without thinking through strategically. His blistering attack on Russian Prime Minister Vladimir Putin on Georgia, compared with a tough but measured response from Obama which leaves room for Russia to back down, is an example of how McCain could easily get us into another conflict.

McCain took a huge risk by selecting a relatively unknown woman, who is not tested on a national level in a brutal nature of presidential politics. Because of his cowboy style temperament and his legendary short-fuse anger, McCain was risky to begin with, but now with an unqualified woman as his running-mate, the ticket is way too dangerous for the country's security.

Has John McCain lost his bearings?

Posted by Shyam Moondra

In recent weeks, Sen. John McCain, the presumptive Republican nominee for the presidency, seems to have lost it completely. His campaign is so poorly run that one has to wonder how he is going to manage the country! He has not presented any cohesive plan to deal with the pressing substantive issues of economy, energy, etc. Lately, he has resorted to attack ads against Sen. Barack Obama, which is inconsistent with his reputation as being straight shooter and above dirty politics.

Let's look at some facts:

1. McCain made statements that had factual errors and had to be later corrected. And it happened, not just once or twice, but may be as many as half-a-dozen times. Is that because of his advanced age? Is he fit to be near the nuclear button (not to forget his legendary red hot temper)?

2. When McCain ran for the presidency the last time, he proclaimed that he wanted to change the politics of Washington, DC and would run a clean campaign. Well, all that has changed this time. He is now running non-stop attack ads against Sen. Barack Obama. He is back to the old dirty politics, championed by mostly Republicans. This time dirty politics may not work because the people are going through tremendous hardship and they desperately want a leader who would solve problems of economy, oil prices, healthcare, etc. As a result, dirty politics may help McCain solidify his support among hard-core Republicans, but his attack ads will cost him the votes of the Independents and conservative Democrats. To them, McCain, as a straight shooter, was the main attraction, but once he resorts to dirty politics, he loses that attraction. His comparing Obama to Britney Spears and Paris Hilton has backfired; even Spears is reportedly unhappy about her image being used in political commercials.

3. He keeps changing his position on a variety of issues.
a. He first strongly criticized Obama for talking about setting a time-table for the withdrawl of American combat forces from Iraq, But when President Bush started talking about "time-horizon" and Iraqi President al-Maliki's expressed support for Obama's position, McCain switched his position and now he says that he could live with a "time-table." Now that's a big u-turn from his previous plan to stay in Iraq for 100 years.
b. Initially, he gave "no new taxes" pledge, but now he seems to be backing away from it.
c. First, he proclaimed that he would balance the budget by the end of his first term in office, while also making the Bush tax cuts permanent. But when questions were raised about if it's at all possible to do that (the numbers don't add up), he seems to be backing away from such a lofty goal. McCain instantly lost his credibility. This seemed to prove, what he once said himself, that he doesn't really understand economics.
d. First, he said that Iraq was a top priority, but now he seems to be shifting focus to Afghanistan/Pakistan, but only because Obama has been talking about this for a long time and now even Pentagon seems to agree with Obama.

4. The main concern American people have right now is economy, but McCain – 'The Surge Man" – keeps talking about the Iraq war and hammering Obama on this issue. He erroneously thinks that this election is about the war in Iraq. He is just out of touch.

5. McCain's response to the high oil prices was to give the consumers an "oil tax holiday," saving them a whopping $30! The idea was so silly and laughable that, not just most economists, but even President Bush and most Republicans in the Congress wouldn't even go near it.

6. He has been trying to project himself as a tough guy. How is he going to deal with Iran? McCain parodied the Beach Boys' song, saying "Bomb, Bomb, Iran…" Well, the macho strategy in Iraq has cost the U.S. dearly; the American people have no appetite for another war. Again, McCain seems to be out of touch. Recently, President Bush sent a top diplomat to a meeting with Iran on the nuclear issue, which is consistent with what Obama has been saying for some time now.

McCain was not making progress, at least in terms of polls, so someone must have advised him to go on the attack, spending millions of dollars on ads against Obama. These attacks worked in the past when the country was prosperous and there were no major issues. But this time, the people desperately looking for leadership to end the war in Iraq (that has cost thousands of lives and two trillion dollars), to reduce huge budget deficit that Bush has piled up, to create more jobs, to come up with an effective energy policy that combines alternative fuel sources and conservation, to address the healthcare crisis, and do something about the decline in education. McCain, by going on the attack and not offering any strategic vision on important issues that people care about, he is simply making himself as an irrelevant candidate.

Is President George Bush secretly trying to help Sen. Barack Obama?

Posted by Shyam Moondra

Sen. Barack Obama has been talking about his strategic vision on a number of different issues, only to be mocked by Sen. John McCain and his surrogates. However, in the last few weeks, President George Bush seems to be embracing some of Obama's ideas, which lends the question if Bush is secretly trying to torpedo the campaign of McCain, his one-time political foe.

Here are a few examples:

1. Obama has been consistently advocating direct diplomacy in dealing with Iran. He was the first to say publicly that he would be willing to meet with the Iranian president to discuss the nuclear issue. McCain and others quickly jumped on Obama, calling him naïve and inexperienced in foreign affairs. However, recently, President Bush dispatched a top State Department official to join the representatives of other major powers at a meeting with the Iranian officials to discuss the issue of nuclear enrichment, undercutting McCain's position on the issue.

2. Obama has been talking about setting a time-table for withdrawing American combat forces from Iraq, His main reason for this position is that a time-table will force the Iraqi government to speed-up the internal political reconciliation, so that Iraq could become a full-fledged sovereign country sooner rather than later. McCain is, of course, opposed to setting any time-table. But now Bush is talking about a "time-horizon" within which American soldiers could be pulled out of Iraq. Even Iraqi officials are now in agreement with Obama, leaving McCain in a very awkward position.

3. Long time ago, Obama correctly identified Afghanistan/Pakistan as the region to focus on in the war on terrorism and not Iraq, He even suggested that 2-3 brigades from Iraq could be moved to Afghanistan to deal with the deteriorating situation there with respect to Al Quaeda and Taliban. Lately, the Defense Department is also talking about the need to send more forces to Afghanistan. That led McCain to also jump on the band wagon and call for more troops for Afghanistan.

4. When McCain proposed a gasoline tax holiday, Obama called the idea a "gimmick," which will not provide any meaningful relief to the consumers. The Bush administration and other Republicans seemed to agree with Obama, and the McCain proposal was dead-on-arrival.

5. Obama proposed to make a major investment in transportation and infrastructure projects to create thousands of jobs in the construction industry. McCain thought that was pork-barrel spending. However, many in the Congress in both parties seem to agree with Obama, and now efforts are underway to position infrastructure spending as the second round of stimulus to give a boost to the sagging economy. While Bush has not explicitly signed-up on a second stimulus package, he has not said "no" either.

Lately, the way Bush has been aligning himself with Obama on so many different issues, it is forcing McCain to make u-turns, again and again. That makes McCain look like a typical politician, while Obama is winning the praise from the electorate as being a pragmatist, a strategic thinker, and a problem solver.

Should SEC ban short-selling by investment banks and hedge funds?

Posted by Shyam Moondra

It appears that investment banks and hedge funds are involved in massive stock manipulation via short selling and options trading. It's ironic that SEC issued orders not to engage in "naked" short selling of 16 financial stocks, including those of many investment banks, but these investment banks are free to do the same thing to other stocks and manipulate their prices. The stock markets were originally created to assist companies with capital formation so that they could build new factories and hire more workers. The stock prices of individual companies moved up or down based on fundamentals. But now, because of the computerized short-term trading practices of big institutional players, the markets have become very volatile and risky places in the mode of casinos. These big players make money at the expense of unsuspecting small investors

Since SEC eliminated the "up-tick" rule for short-selling, these big players have been abusing the markets and are engaged in manipulation of stocks of smaller companies that are powerless to stop their stocks from being beaten down, even though their fundamentals are strong. Case in point, Terex (TEX), whose CEO has gone public saying that the company's outlook for the next two years is very good, and yet its stock has been brought down by short sellers from $95 in Dec'07 to $42 last week. These investment banks and hedge funds have so much money that by engaging in relentless short selling they can bring any stock down, whenever they wish.

The usual practice they deploy is that they first sell a stock short and bring it down before the options expiry date and then they start buying call options, and then they start covering the stock to bring the price up again. In the process, they may lose some money on short positions but they make proportionately much more money on options (because of leverage). They repeat this process for multiple stocks every month before the options expiry date. Some times they play the reverse game just to make options worthless and pocket the premiums they collected from other investors when they wrote the options. Time and time again, we see certain stocks behaving in a peculiar way before the options expiry date, from which it's obvious that they are being manipulated. The losers are, of course, small investors and small and medium-sized companies that are powerless against these enormously resourceful investment banks and hedge funds that can afford to throw, say, $20-25 millions at a stock and pretty much dictate in which direction the stock will move. I saw a YouTube video clip, featuring financial TV commentator Jim Cramer, in which he talked about how hedge funds manipulate the stock prices (the clip has since been removed by the owner Thestreet.com because of the copyright claim). Even Warren Buffet has talked about increased trading in derivatives and how it is damaging our financial markets.

These big institutional players often spread false rumors to move a particular stock in a particular direction. The SEC is currently investigating some investment banks and hedge funds, who shorted Bear Stearns stock, to determine if they spread false rumors about the health of Bear Stearns just to propel its stock price downward. If these investment banks and hedge funds can do what they did to a prominent institution such as Bear Stearns, it's so easy for them to bring down a helpless smaller company.

Another irony is that many of these investment banks now qualify to borrow money from the FED credit window and thus potentially use those resources to manipulate the stock prices. This raises the question why the government is helping big institutions with tax dollars to manipulate the markets and make money at the expense of small investors (i.e the tax payers)!

Under the lax enforcement by the SEC, the stock markets have become casinos where fundamentals don't matter any more. These trends are very damaging to our system because they directly affect the integrity of the markets. If corrective actions are not taken soon, these big institutional players may completely destroy our financial markets.

The Congress should hold hearings and have the CEOs of investment banks and hedge funds answer questions under oath about stock market manipulation. The Congress needs to do the following:

1. Put in place regulations over hedge funds to discourage illegal manipulation.

2. Ban short-selling by big players such as investment banks and hedge funds (such a ban already applies to mutual funds).

3. Limit trading in derivatives that often enable big institutional players to manipulate the financial markets and make money at the expense of individual investors.

4. Impose stiff penalties for manipulating financial markets, including jail term for the CEOs of companies engaged in such activities.

5. The SEC needs to do more in terms of investigating and enforcing laws against stock market manipulation. In recent years, they have been way too lax and the rules changes they made (e.g., eliminating the "up-tick" rule for short selling) have only made the situation worse.

Is Dow Jones Industrial Average headed to 10,000?

Posted by Shyam Moondra

The stock markets around the world are going through turmoil. The markets in China, India, and elsewhere are down 30-40 percent from their respective records set last year. Inflation is heating up everywhere, thanks to the high oil and commodity prices. Many countries in Europe and Asia have been increasing interest rates to fight inflation. These actions, combined with consumer's reduced capacity to spend, will slow down the global economy. Many of these countries are also experiencing reduced demand for their products and services from the U.S. because of the weakening economy here.

The U.S. has its own special set of problems. The credit crisis, which the government officials declared was under control not long ago, seems to be in the forefront again. After the government bailout of Fannie Mae and Freddie Mac, the investors are now fixated at who is next. It has become a guessing game for the economy watchers about which bank will go under. It has been said that around 150 banks, mostly regional banks, could file for bankruptcy. It’s like Savings & Loan fiasco all over again. These credit problems will have negative impact on the economy. Because of sustained high oil and commodity prices, inflation is creeping through the economic system and we will see awful inflation numbers over the next few months. Just today, it was reported that the PPI increased in June by 1.8 percent, the largest increase in 27 years. Those kinds of headlines will persist for a while. The housing industry was hit hard because of the mortgage mess and now it looks like the auto industry is on the ropes. The consumer-driven U.S. economy is sliding down because consumers are busy trying to cope with the high gasoline, heating oil, natural gas, and food prices. They cut-down their discretionary spending and leisure travel, putting airlines and Las Vegas and Atlantic City casinos in dire situation.

The only segment of the U.S. economy that was doing well was the exports business helped by weak dollar, but even that's slowing down because of the shrinking economic growth around the world.

Unfortunately, the large federal budget deficit precludes any dramatic stimulus effort by the Bush administration. The FRB has already reduced interest rates as much as they could. So there is nothing any one can do right now to turn things around. We may very well be headed for a prolonged recession, like the one we had during 1970-1975. The tougher times are still ahead in terms of high inflation, high unemployment, meager or negative economic growth, and continuing bank failures – all of these will eventually affect the corporate profits. While the U.S. stock market has declined over 20% from the peak of 2007, the extent of the economic problems around the world suggests that the worst may not be over. A stream of bad news about inflation, unemployment, and corporate profits over the next few months is likely to sink the DJIA to 10,000.

Should Federal Reserve Board increase the interest rates?

Posted by Shyam Moondra

Economy in deep recession, the unemployment rate zooming up, inflation out of control, corporate profits declining, dollar taking a plunge in the currency markets, and the stock market in a huge downward spiral. No, I am not talking about "today," I am talking about the 1970's.

The 1970's were the troubled years. Huge government expenditures necessitated by the Vietnam War and the oil embargo by OPEC (after the Yom Kippur War in October, 1973, which led to a big spike in oil prices), fueled the inflationary pressures throughout the economy. The people were losing their jobs and everything seemed to be falling apart. If there was such a thing as stagflation, that was it. President Carter had no stomach for the failed Nixonian style wage and price controls of 1971 (free-market economy and massive government intervention are like oil and water, they never mix!). Then in 1979, came to the rescue Paul Volcker, the FRB Chairman, who rapidly increased the interest rates to get some control over the inflationary spiral. The elderly people were in a dreamland earning more than 15% on money market accounts and CDs. The sustained high interest rates broke the back of the inflationary spiral. By 1987, Volcker left an economy that was getting ready for the biggest economic expansion we have seen in the modern history. The 1990's go-go years were the years when we had very low interest rates, low inflation, low unemployment, high house ownership, budget surpluses at federal and state levels, and "irrational exuberance" in the stock market. The people generally felt very prosperous and confident about the future.

What we see today is not much different from what we experienced in the 1970's. We have the Iraq War, which has drained our economy of at least two trillion dollars (and still counting), oil and commodity prices fueling inflationary pressures, joblessness increasing, stock markets in the dumps, and people are generally feeling financially insecured. May be what we need is the Volcker treatment of high interest rates combined with responsible fiscal policies (especially on the side of government spending) to bring back the happy days again. It will surely be a painful period of several years before we are able to put our economic house in order.

At this juncture, high interest rates would have more upside than downside. Higher interest rates will strengthen dollar, which will bring down oil and other commodity prices and thus lower the inflationary expectation. Lower gasoline and food prices would enable consumers to spend more on other things, thereby revitalizing the economy. Surely, higher rates will make it difficult for the housing market to recover, but the housing troubles have more to do with the fact that mortgages were given to unqualified people, who are defaulting on their loan repayments. Overall, higher interest rates will be more beneficial than detrimental to the economy and they might even boost the stock market (which may seem strange, but it did exactly that in the 1970's).