VW Financing Operations Take a Hit

Mackenzie Wolfgram

October 1st, 2015

VW Financing Operations Take a Hit

As was recently brought to light, Volkswagen has been installing “defeat devices” in order to cheat emissions standards on their diesel models.  These vehicles are in actuality, producing 40 times the level of legal nitrogen emissions, while the EPA testing had deemed them legal. This scandal has obviously had a massive impact on the stock price and sale rates of VW vehicles, however the impacts don’t stop there as the financing division of VW is encountering severe difficulties with bond prices and loan abilities.

As the largest car company in the world, VW is flush with cash, and has taken over many of its loan and financing operations. This has been very lucrative for them as their financing division Volkswagen Financial Services AG, (former name) was responsible for about 14% of VW’s overall profit. This is equivalent to around 18 billion annually, representing 12.6 million different contracts. Now VW officials are worries that they are going to have to cut back on loaning activity.  VW uses their stock of cars as collateral when offering loans, and now, it looks like their cars are about to become quite a bit less valuable, in the short term at least. For them, this not only means a decrease in the ability to earn profit from selling cars, but an impending write down of the value of their assets, harming the balance sheets.

Another big hit that was taken since this scandal broke was VW’s place in the bonds market. The European Central Bank has temporarily disallowed VW asset backed bonds in their bond buying programs, as they continue to review to implications of the situation, and what it means for the future of VW, and well as the value of their bonds. The value of VW bonds has already dropped significantly, and the value of their companies shares of stock fell by about a third immediately following disclosure of the scandal. In addition, VW was taken off of the Dow Jones Sustainability Index, a tracking of the top 10% of environmental leaders in different industries. Another bad piece of news for VW is a recent credit downgrade by Moody’s, who no longer considers the outlook of VW “stable.”

This credit downgrade will make it harder and more expensive for VW to borrow money, downgrade the price of their long term assets, and do even more to hurt their stock price. Also, even once the emissions scandal blows over, which it probably will, this poor credit rating will likely remain. Making a full recovery even more difficult for the car maker. Fading into obsolescence, at least in the short term, is very unlikely for VW, who manufactures one of every four cars in western europe. However, in the short term, they are definitely hurting.

VW Scandal Hurting its Financing Arm

http://www.wsj.com/articles/ecb-suspends-purchase-of-some-bonds-issued-by-volkswagen-1443379650?mg=id-wsj

EYK HENNING BRIAN BLACKSTONE

Volkswagen Scandal in Two Minutes

http://money.cnn.com/2015/09/28/news/companies/volkswagen-scandal-two-minutes/

CNN Money

China to Offer $2B in Aid, Write off Undeveloped Nations’ Debt

Mackenzie Wolfgram

Econ 411

September 28, 2015

China to Offer $2B in Aid, Write off Undeveloped Nations’ Debt

At a recent UN summit, Chinese President Xi Jinping announced that China is rolling out multibillion dollar foreign aid/climate change funds, as well as writing off the debt owed by the world’s underdeveloped countries in an effort to facilitate their growth. While many are skeptical that the Chinese are attempting to win the favor of African Nations in order to exploit their labor and resources I believe that the Chinese move is one towards progress and modern ethics.

At it’s core, this is one of the first major foreign aid packages that China has pledged, citing a moderately newfound financial ability to stop focusing on their own growth and move towards a global focus. The Plan includes $2 Billion in financial aid, $3 Billion to fight climate change, and in addition, they are writing off the debt owed to them by some of the less developed countries globally. They also plan to pay for the training of 500,000 global warming experts in the coming years. Jin Canrong an international relations expert at Renmin University thought that these aid numbers were a bit low for a country with a $10 Trillion GDP, but he expects the numbers to go up steadily, since China has “not given enough” aid in the past. This is in agreement with Xi Jinping, who foresees the fund reaching $12 Billion in the next 15 years.

The Reason that this plan has so many critics is China’s history with both Africa, and pollution. The Country and its investors have been criticized for making heavy investments in poor African countries in order to profit from lax environmental regulations as well as non-existent labor laws. These business strategies have ravaged many African ecosystems.  China is no stranger to pollution at home either, their factories fill the skies with smoke at an alarming rate often resulting in unsafe breathing conditions. It may be that these are not so much aid packages, but investments made to gain access third world countries, in order to air their dirty laundry there instead of at home.

Critics of this plan have a point, but there are cheaper ways to access African Labor and environmental standards than a $12 Billion aid package. China could just as easily be attempting to make bribes and pay off local governments of countries whose entire GDP is outshadowed by this aid package. Chinese politicians are making legitimate positive change.

It was not long ago that the United States had it’s own industrial revolution, which caused a great deal of pollution. While we criticize China, we too are a culprit of environmental harm.  And while they are training 500,000 specialists on the issue, half of our government doesn't even believe in global warming. Obviously, we are still leaps and bounds ahead of China on environmental and humanitarian issues, but this is an interesting indicator of change.

Te-Ping Chen

China Commits to More Aid for Developing Countries

http://www.wsj.com/articles/china-commits-to-more-aid-for-developing-countries-1443455535

Alex Linder

Xi JinPing Pledges $2 billion for developing world, promises to write off debts of poorest countries

http://shanghaiist.com/2015/09/28/china_pledges_2_billion_to_developing_world.php

Revised: Why the $15 Minimum Wage is Bad for the Poor

Mackenzie Wolfgram

Econ 411

9/28/2015

Why the $15 Minimum Wage is Bad for the Poor

New York Governor Andrew Cuomo has already issued official recommendation for all fast food chains in New York City to raise the minimum wage for employees to $15 per hour, and he doesn’t intend to stop there. On Thursday the Democrat unveiled plans to hike the statewide minimum wage for all workers to a hefty $15 per hour. On the surface, these wage hikes seem like a benevolent plan. One that is only fair to the people who work low paying jobs only to live in relative poverty; after all, paying poor people more money should lead them out of poverty. Again, that is on the surface. In reality, this wage hike is one of the worst things that legislators can do to these lower class workers. Raising the minimum wage this drastically will have huge negative effects on employment, the profitability of thousands of businesses, and the condition of the lower class.

The arguments against this movement are laid out fantastically in Tim Worstall’s, “Yes, New York's $15 Fast Food Minimum Wage Will Be A Failure--Why Do You Ask?.” In this article, Worstall effectively dismisses any good that the $15 minimum wage is rumored to do.  Cuomo claims that his plan will benefit the people of New York in the following ways.

1. Ending government welfare as a means of subsidies to employees of large corporations
2. Saving taxpayer money at the sole expense of multimillion dollar corporations
3. Having minimal effects on employment

Effectually, these benefits are meant to raise low wage workers out of poverty. Unfortunately, not one of them is fundamentally sound.

Governor Cuomo attacked fast food corporations, namely Burger King and McDonald’s, for paying such low wages that their employees were required to live with the aid of state funded subsidies, costing the state millions of dollars annually. However, as Worstall points out, welfare is by no means a subsidy program. This can be clearly proven.

A subsidy to the workers of a fast food franchise would lead to the employer paying lower wages. Since part of the reserve wage would be met by the government subsidy, the employer would only have to make up the difference between the subsidy and reserve wage. So, a true subsidy would cause businesses to pay lower wages, since the government would step in and pay a portion of their workers salaries.

With exception made for EITC, which is pretty clearly effectively a subsidy (and which I will ignore due to its making up only a small percentage of welfare) most forms of government welfare offered today do not allow companies to pay lower wages, and therefore cannot be considered subsidies. In fact, welfare is cause for a higher reserve wage. When a person is unemployed with no welfare, they are willing to work for a lower wage. So without welfare, companies can attract people to jobs that offer lower wages. When a person is unemployed, but has welfare, it will take a higher wage to get them to accept a position. This is because welfare will theoretically give them a bargaining point, and a means of holding out for higher paying positions to come along, as they no longer need the money as desperately as they did when there was no welfare. Since welfare does not lower wages, it cannot be considered a subsidy.

Although Cuomo’s point about subsidies was not exactly correct, I find it immoral to take the stand that we should force people to take the lowest paying jobs for fear of homelessness and starvation. In addition to immorality, the subsidy argument is mainly a semantic one. Yes, Cuomo is wrong to claim that he is subsidizing fast food workers, but the fact remains that these workers are not making a living wage, and require welfare to live. Semantics aside, there is still a problem. However, I maintain that this wage hike is only going to hurt both the employees and employers.

Cuomo’s next point was that this higher wage will save millions of dollars of taxpayer money at the sole expense of big businesses. For the sake of argument, we will give Cuomo an advantage, put on rose colored glasses, and say that companies will not lay off a single employee as a result of this wage hike. (Unlikely, and these newly laid off employees will require even more welfare than they already require.) However, even with these unrealistic expectations, Cuomo is still wrong to claim that he is only hurting McDonald's and Burger King type businesses. Just because a store says McDonald’s on the outside does not mean that the McDonald’s corporation owns it. In fact, the vast majority of these businesses are owned by franchisees. This wage hike would double the cost of labor for these franchisees and cause many to go out of business, since they cannot afford to staff their restaurants. This plan only attacks these small franchisees. In a way Cuomo is right, he will be hurting these big brands, but indirectly, and only by shutting down their franchised locations, ending the livelihood of hundreds of franchisees, and causing mass layoffs of low wage employees. Again, this is not good for the people his plan “helps.”

Cuomo’s last point is that, empirically, wage increases have not caused widespread changes in employment levels, so this one shouldn’t either. He is wrong. This wage hike is magnitudes bigger than any that we’ve ever seen. The new price floor on labor will be binding for many work positions, unlike prior wage bumps where only a small percentage of workers were forced below the new minimum wage. In this case, a huge percentage of workers would have to be given substantial raises, many nearly doubling their salaries. Businesses cannot afford this hit. We will see vast layoffs, as well as robotics and new computer tech taking over low skilled, formerly manned jobs. Currently, these low skill low pay laborers have jobs, once they become low skill high pay laborers, they will no longer be employable. Again, this plan hurts everybody.  

Eric Orden Josh Dorsey

Andrew Cuomo to Push for $15 Hourly Minimum Wage in New York

http://www.wsj.com/articles/n-y-gov-andrew-cuomo-to-make-push-for-15-hourly-minimum-wage-statewide-1441830531

Tim Worstall

Yes, New York's $15 Fast Food Minimum Wage Will Be A Failure--Why Do You Ask?

http://www.forbes.com/sites/timworstall/2015/07/22/yes-new-yorks-15-fast-food-minimum-will-be-a-failure-why-do-you-ask/

Trading Meat for Tires: Not Exactly Progress for Greece

Mackenzie Wolfgram

Econ 411

Trading Meat for Tires: Not Exactly Progress for Greece

Greece is not doing well, and a New York Times article about a recent rise of bartering as a common form of currency highlights just how poorly the country is doing as a whole.  While this article frames the new bartering systems as a brilliant innovation showcasing resilience and adaptability, the truth is that trading meat for tires is hardly a step forward for Greece.

Since 2009, Greece has been doing exceptionally poorly as a whole. Requiring bailouts from other Euro Members, passing austerity packages, suffering through a multitude of downgrades from the big three credit ratings agencies, and the biggest issue of all, becoming the first developed country to default on national debt. These events all cumulated into a very unfortunate reality in Greece, where the liquidity crisis is still going full boar, and the general populus seems to have lost faith in the government and the banks.

It appears that people have taken matters into their own hands, thrown the euro out the door and just started bartering with one another.  While Liz Alderman’s article frames this rise of bartering as a fantastic idea, the bigger picture is a huge problem for Greece in the long run. As a disclaimer, I do not disagree with Lil Alderman, this is a smart adaptive strategy that the people of Greece are employing. I just think that it paints a bleak bigger picture.

Some of the examples listed in the NY Times article include a butcher trading a month's worth of meat for a refurbishing of his van, and, notably, an electrician claiming that one out of five jobs that he does are paid for by bartering. These transactions are largely facilitated by a couple of barter trading websites that have popped up as a response to the liquidity crisis.

While it is somewhat of a laughable concept, people paying for things in meat in a modern day, developed country, the consequences are dire. If bartering continues to grow as a means of trading, then the Greek Central Government will be even further crippled, unable to implement monetary policy, and unable to collect taxes.

The system is great for the short term fix, there is no money available but you have a skill. So does your neighbor, both require the other’s skill but neither could pay the other, since neither have any money. Since nobody could pay the other, neither neighbor would ever use their skill.  Bartering turns skill into currency. Right now, people might love bartering, since it is allowing them to finally make purchases, but it will not allow the government to recover or for the country to regain it’s former economic might.

The government needs tax revenue to function, and while a couple of “I’ll give you this cow if you mow my lawn” transactions aren’t going to do any damage, large scale bartering could really hurt. As the aforementioned electrician mentioned, 1/5 of all of his work is payed for by bartering. That means he only pays taxes on 4/5 of his income, and if that ratio is indicative of wider trends, then Greece is losing a lot of tax revenue.

Another way that this hurts Greek recovery is that it takes monetary policy away from the Greek Government. For example, in the USA, the Fed dropped interest rates to near zero levels in order to cause people to borrow and spend money, and cause economic growth in the long run. This would not have worked if people just didn’t want dollars anymore. In a world where chickens are currency, how is Greece going to keep people from saving all of their chickens indefinitely? We were able to lower rates, making saving less attractive and borrowing more attractive. They are going to have to send Prokopis Pavlopoulos to people's houses and have him kill a few of their chickens each month if they want to enact monetary policy.

Anil Kashyap

A Primer on the Greek Crisis

http://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-the-Greek-Crisis_june29.pdf

Liz Alderman

Trading Meat for Tires as Bartering Economy Grows in Greece

http://www.nytimes.com/2015/09/22/business/international/trading-meat-for-tires-as-bartering-economy-grows-in-greece.html

Fed Waits to Raise Rates

Mackenzie Wolfgram

Econ 411

Fed Waits to Raise Rates

In one of the most highly anticipated meetings of the year, the Fed has yet again delayed the inevitable climb of interest rates, citing mainly slow economic growth overseas. Officials worry that this misfortune overseas could potentially negatively affect US markets, or at least cause investors to panic if combined with an interest rate hike. I believe that the Fed made the right call, and that there is absolutely no rush to raise interest rates.

Odds are, that the recent global economic slowdown is not going to be catastrophic. Many believe that it was just a natural market adjustment, and the turbulence seems to have mostly died down for the time being. The large crash that was triggered by this international trouble seems to have mainly passed us by.  

I feel that the Fed made the right call, but not everybody agrees.

“...higher interest rates could also provide a boost to job growth by making automation more expensive. At the same time as the Obama administration has claimed that jobs are its top priority, it made employees more expensive with Obamacare. Simultaneously, low interest rates mean businesses can borrow money cheaply and use that money to buy machines that replace people. Raising interest rates makes capital equipment more expensive, meaning that the famed substitution effect will cause managers to use more people and fewer machines.”

Jeffrey Dorfman - 5 Reasons Why the Fed Should have Raised Interest rates

From the random jab at Obamacare, to the ill informed points about rate policy, automation, and inflation, Jeffrey Dorfman manages to completely miss the point with this criticism. I’ll ignore the strangely placed Obamacare comment, as well as the implication that Obama was somehow behind the interest rate decision and skip to the heart of why his comment makes no sense.

Low rates are not causing our low wage laborers to be replaced by machines en mass. We have had these low rates for almost a decade now, if this was going to happen it would have happened by now. Leaving the rates low for a couple months isn’t going to all of a sudden cause robots to take all of the jobs. It’s just in there to make Jeffrey’s article more interesting.

There are other criticisms of the decision to leave rates low, another big one being that this will increase inflation. This is not a valid critique since an increase in inflation would be welcome  by the Fed currently. The Fed has targeted 2% inflation for the past three years, and has come up short of that each year.

All in all, I believe that the Fed made the right call leaving rates at near zero levels. Rates have been low for a long time and the likelihood that waiting a little while longer to raise them will cause some sort of catastrophe is very slim. The Fed being cautions about something as weighty as raising interest rates is very reassuring, mistakes in the financial world are very costly.

Joh HIlsenrath

Fed Delays Interest Rate Liftoff

http://www.wsj.com/articles/fed-leaves-interest-rates-unchanged-1442512974

Jeffrey Dorfman -

5 Reasons Why the Fed Should have Raised Interest Rates

http://www.forbes.com/sites/jeffreydorfman/2015/09/17/5-reasons-why-the-fed-should-have-raised-interest-rates/

Uber Comes Under Fire for Outcompeting Taxis

I used to have to take taxis places, and I hated it. Drivers take longer routes when I admit to being unfamiliar with the city, often don’t accept cash, overcharge, and generally provide an altogether overpriced and unpleasant experience. Then along came Uber, with reasonable prices, fast reliable service, and a fantastic platform; it’s no wonder that Uber is hurting the cab industry, it is literally better in every single way.  However, as with all change there is opposition, in this case notably Chicago Alderman Ed Burke, among other Chicago officials who recently have passed “Uber Taxes”. This is unfair and unfortunate. Levying extra taxes and regulations on rideshare services like Uber goes against market principles, and prevents the superior service from outcompeting and succeeding against the cab industry, this is bad for the consumer and the economy as a whole, as well as being glaringly unfair.

This new Uber tax includes a $1 per ride fee, which doubles to $2 per ride during “surge pricing” this type of pricing can occur during inclement weather or when there is excessively high demand for rides. These new taxes would not affect the cab industry. Some other nonsensical parts of Chicago’s most recent rollout of proposed rules are as follows: Uber’s app cannot be used to hail taxis, Uber cars cannot have internal or external advertising, Uber cars cannot take both time taken and distance traveled into account when pricing a ride, and worst of all, Ubers cannot pick people up or drop them off at airports.

All of these rules are just plain stupid. They do nothing but hurt business and inconvenience/overcharge people. Ed Burke went as far as to hail the laws for bringing in a potential $70 Million per year in extra taxes, but that $70 Million is unfairly charged to people who use rideshare services. These rules are unfairly slanted in a way that is so clearly trying to attack Uber in order to preserve an outdated and underperforming cab industry that I am shocked that anybody ever thought that they were a good idea, let alone anything other than morally corrupt. For example, cabs have advertisements on them, internally, externally, on little tvs in the cab, you name it. Step into a cab and you’re bombarded with ads. Yet Uber can’t do the same thing. The same argument goes for the prohibition of pricing in way that takes into consideration distance and time, that is clearly the best way to price a personal transportation service. It is unfairly slanted. In addition these rules are a huge inconvenience to people who want to use rideshares. You cannot be dropped off at the airport from an Uber, and you cannot use their app to hail taxis. It is almost like the last two were products of a brainstorm session titled, “how to make Uber unusable”. Why on earth is that a real proposed set of laws?

There is absolutely no way that any of those rules can be perceived to benefit the people of Chicago. They are obvious jabs at Uber and Uber alone, and a prime example of politicians using their power at the expense of the general population and refusing to let the market decide what company wins. This is like if instead of allowing Burger King and McDonalds to compete and let what the people want to win win, the government randomly passed laws that prohibited Burger King from selling Whoppers, forced them to double all of their prices, and paid a government employee to sit at the entrance and poke you in the eyeball whenever you entered a Burger King.

The government should not be passing this sort of regulation to preserve a dying cab industry, it is bad for everybody. Not to mention how unfair the regulations are, it is unnecessary to take aim at Uber and roll out some of the biggest tax hikes and strictest regulations for no reason other than that the cab industry is too big to let die and too foolish to live.

Chicago Alderman With Taxi Ties Poised to Pass the Nation’s Highest Uber Tax

Austin Berg

http://www.chicagonow.com/city-limits/2015/09/chicago-alderman-with-taxi-ties-poised-to-pass-nations-highest-uber-tax

The Seven Worst Parts of Chicago’s Proposed Uber Ordinance

Jacob Huebert

https://www.illinoispolicy.org/the-7-worst-things-in-chicagos-proposed-uber-ordinance/

Will The Fed Raise Rates on the 17th?

Mackenzie Wolfgram

Econ 411

Will the Fed Raise Rates on the 17th?

Prior to the minor stock market meltdown last month I would have guessed that yes, for the first time since 2006 the Fed was finally going to bring rates back up. However now, for a myriad of different reasons, things are looking uncertain.

In the midst of the largest American economic falter of my lifetime, the 2009 recession, the Fed dropped the interest rate to near zero percent. This effort, one that I consider largely successful, was intended to turn around the economic slowdown by encouraging borrowing, thus spending. By making money widely available the Fed was able to stimulate the economy into the growth that we have enjoyed for the last couple of years. While nobody would go so far as to say that the economy has fully recovered, few would argue that there has not been very significant improvement.  So is it time to pull the plug? Some officials think so. Yet others believe that allowing interest rates to jump back up to prior levels would just wreak havoc on investor faith and cause another phenomenal slowdown, reversing the recent uptick that the fed has allowed its balance sheet to grow to $4.5 trillion to achieve

While it is clear that the interest rate will have to rise sooner or later, it is up for debate whether or not the Fed’s September 16-17 meeting is the time to do it. The recent devaluation of China’s currency and the damage that it caused is, for me, reason enough to lean towards delaying allowing the rates to go back to natural levels. The recent issues with the renminbi caused one of the biggest U.S. stock drops in history, and things are still quite shaky for many stocks that have been performing well since the 2009 crash. Investors are understandably anxious about this most recent hit to their portfolios, if rates jump up on top of that our economy may very well shrivel up and die again.

I will cede that it is important to allow rates to return to normal before too long, as Jon Hilsenrath points out in his article “Fed Wavers on September Rate Rise” there could be “bubbles of assets” funded by low borrowing rates, that later blow up due to interest rate expansion. This could cause a high degree of turbulence in the future economy. Also, it is true that although growth has been tentative, the economy is performing well overall. Unemployment is down to extreme lows, and stock prices have been rising steadily.  (With disregard to our recent panic, as trends are still positive.)

So while the economy is headed in a positive direction, I believe that the Fed will look to low oil prices, the recent stock hit due to the renminbi, and the overall shaky nature of our economic position, and wait until March to start to expand rates.  Right now is not the right time, and acting now would surely harm our economy. However the only person who knows what will happen for sure is Janet Yellen, and she doesn't tell me anything.

Jon Hilsenrath

Fed Wavers on September Rate Rise

http://www.wsj.com/articles/agreement-on-september-rate-increase-eludes-fed-1441825296

Kevin Granville

When Will the Fed Raise Rates

http://www.nytimes.com/interactive/2015/business/economy/fed-interest-rates.html?_r=0