By Lee Jamieson, on September 5th, 2008
Dmitry Medvedev, Russia’s new president, was welcomed with open arms by the Western world. It was hoped that this well-mannered lawyer would usher in a new era of diplomacy and finally allow Russia to step out of the shadow of the cold war.
But did we forget? This is Russia.
In August, Medvedev demonstrated his appetite for war by formally declaring the independence of two Georgian rebel regions. Military action surely followed, and the entire episode incited international condemnation. “We’re not afraid of anything including the prospect of a cold war,” said Medvedev. “Russia is a state which has to ensure its interests along the whole length of its border. This is absolutely clear.”
Economic Power
Since the Cold War, Russia’s economy has undergone an unprecedented transformation: its stock market has mushroomed by 1,922% and growth has averaged 7.5% since 2000. Russia’s new-found prosperity has come from its gas and oil industry. With one of the world’s largest reserves and an estimated 100 billion barrels yet to be extracted, Russia has taken full advantage of the soaring oil price.
So, it seems that Russia holds all the cards in this game. As a major gas and oil supplier to Europe, Russia is in a position to exert its economic and political power with devastating affect. The EU is currently considering sanctions, but Russia’s retaliation could be far more devastating to Europe’s economy. Russia has already proved that it is willing to disconnect gas supplies to whole regions unless its demands are met: in 2006, Russia cut off gas supplies to Ukraine after a price dispute.
Furthermore, two major pipelines run through Georgia supplying gas and oil to Europe from the Middle East. Without these pipelines, Europe is heavily reliant on Russian supplies.
Economic Cost
Economically speaking, Russia’s military action is ill-advised in the long-term.
Since 1991, Russia has attracted $220 billion of foreign investment (much of which is western capital), and many Russian companies are now listed on western stock exchanges. In short, Russia’s economy is much closer to the west than it would like to believe, and the Georgian conflict could therefore have a large economic cost.
According to the Wall Street Journal, the situation has already made it difficult for Russian firms to borrow money because the Georgian conflict has “sparked prohibitive funding costs and an increasingly risk-averse investor base.”
By moving away from a diplomatic relationship with the west, Russia runs the risk of weakening investor confidence and driving money out of the country during a time of global economic uncertainty. According to Deutsche Bank, Russia could loose up to 40% of its foreign investment if the political fallout from the conflict continues to escalate. However, Russia has amassed huge reserves with which to protect its economy. Deutsche Bank also predicts that in the worst case scenario, the Georgian conflict would only slow Russia’s growth by 0.5%.
Russia seems to be having an identity crisis: in one moment they seem to welcome foreign investment into the country, but in another they are pursuing aggressive foreign policies. However, Russia currently holds the ultimate economic weapon: gas and oil. If Russia decides to hold Europe to ransom, then we may well find ourselves on the brink of a new “cold” war.
By Evelyn Black, on September 5th, 2008
In an election year, we hear a lot about the rich and the middle class and usually thrown into the discussion is the word “tax” and lots of rather heated rhetoric concerning how heavily the government should lean on people. One of the reasons this has become an issue this election is that Democratic candidate Barack Obama’s economic platform includes a plan to scale back tax breaks for people making over $250,000 a year while John McCain’s plan preserves tax breaks for anyone making under $5 million per year.
So, somewhere between $250,000 and $5 million is an imaginary line drawn in the economic sand that separates the middle class from the flat-out wealthy.
The million dollar question is, precisely where is that line located?
Newsweek columnist Dan Gross points out in an engaging column on the topic that an informal poll conducted by CNBC found that only 35% of the people making over $250,000 a year considered themselves rich, even though the median household income as of 2007 was only $50,233. Only the top 1.2% of U.S. households report incomes of $250,000 or better, and only 20% of all U.S. households report household incomes greater than $100,000. In some states, such as Mississippi, the median annual household income is closer to $36,000. That means in Mississippi, half of all  household incomes reported are lower than that.
Statistically speaking, these figures suggest “middle class” technically ends just shy of $100,000 per year per household, with some leeway this way or that depending on the specific state. This also feels intuitively right to me, speaking as a person who has for the past five years lived right in that income ballpark. Most of the working people I know in West Michigan have an annual household income in the $40,000 to $80,000 range, and most of the people who make more than that are people that we (at the lower income level) would consider rich.
But statistics and emotions are two very different things. In some of the priciest cities in the nation, a household income of $250,000 will not buy you a home in a really nice neighborhood. That’s obscene, but we have to ask ourselves if that fact alone means that a household placed squarely in the top 1.2% of all working American households is really experiencing the kind of distress that warrants tax relief. Certainly the family that can’t buy the house they want would say yes. And yet, a family in Mississippi getting by on $20,000 each year would say, “Give us a break.”
I recall as a child assuming my family was more or less “middle class.” My father was the sole breadwinner for a family of four kids and my stay-at-home mother. We had a small house in a city neighborhood inhabited mostly by factory workers.
By the time I entered high school I’d become painfully aware of an entire income class several rungs above us; the families of attorneys, dentists, accountants, and other white collar workers. These families also considered themselves to be “middle class.” Their lifestyle was so much more upscale, their problems so seemingly high-class (from my vantage point as a teenager in hand-me-downs), that I started to refer to our family as “lower middle class” or “working class.”
The blue collar/white collar distinction became a big deal in high school and an even bigger deal in college, where my blue collar roots branded me an interloper on campus and a traitor inside my old neighborhood: the worst of both worlds. It seemed to me that the fight over ownership of the middle class label was being won by white collar workers, with blue collar families by that time widely seen as uneducated and slightly more brutish by nature.
That was 35 years ago. Now, my husband and I have three jobs between us and worry about our health and our retirement. We seem to work all the time, and we’ve already accepted that we likely will never retire. We won’t be able to afford it, even though we’ve worked for our entire lives. A single healthcare crisis could sink us in a very short time, even though we both have insurance through our jobs. (We are still paying off about $7,000 in medical debt accrued for three days in a hospital over a year ago. That was what was left after insurance, for only three days’ admission.)
Our combined income is greater than $50,000 but nowhere near $100,000, and we do not look or feel rich. We feel stressed. We feel worried. We feel tired. Most people, looking at his truck-driving job and my entry level clerical job and freelance moonlighting work, would consider us “working class” even though we are both educated. The jobs we have are the jobs we have been able to get in the area in which we live. I worked my way through college (twice), and my kids had to do that, too.
Looking at the world today, it does seem to me that 1.2% of the population has successfully co-opted the “middle class” label. What’s more, the middle class label seems to me to have been floating upward for nearly forty years now, and if it floats any higher, it will turn in on itself, and we will all be living in some absurd economic farce. Perhaps that is how we are living now, and I just tire of thinking about it.
Whatever your feelings, whatever number you personally would choose to define the folks in the middle, it’s a pretty good bet you will include yourself in the category, and that you will feel strongly that you deserve more tax breaks. That much we know for certain.
But $5 million? How many houses does McCain own?
By G.L.C., on September 5th, 2008
In the present financial crisis, the municipal bonds arena has been remarkably calm. Municipal bond holders so far have been spared the roller coaster ride that mortgage security owners had to endure. With tax revenues declining and operating conditions strained, there are strong indications that things may change soon. What happened in Jefferson County, Alabama, could just be the tip of the iceberg: on August 29, the sewer authority in Jefferson County received a one-month reprieve to renegotiate $3.2 billion in debt. It has repeatedly been on the verge of default. Without the reprieve, it would have been the biggest municipal default in U.S. history.
In 2007, municipal issuers had $2.6 trillion of debt outstanding – most held by individual investors. Investors have little way of recognizing when trouble is brewing. There is a severe lack of financial disclosure by municipal issuers – the municipal bond market is a place where disclosure is pretty much voluntary and investors receive only spotty financial reports.
A recent study by DPC Data concludes that disclosure among municipal issuers in both annual filings of financial statements and other reports of material changes that are of concern to investors are dismal. From 1995 through 2006, more than half of the municipal bonds failed on one or more occasions to file required financial statements. More than 25% missed three or more years of disclosures.
Laws from the 1970s restricts the Securities and Exchange Commission from going after issuers that do not make the required disclosures. The SEC can regulate only brokerage firms that underwrite these bonds, holding them to a requirement that no issuer can sell debt without being up to date on filings for the most recent five years and can pursue only issuer fraud.
Issuers tend to shrug off disclosure failings, pointing to historically low default rates among municipal issues of around 1.5%. In today’s world, past default performance means little in the here and now.
In the municipal bonds market, nondisclosure appears to be an established practice. It is a breach of the fundamental principles of investor protection, suggesting hidden problems or potential fraud.
The lawmakers in Washington, D.C., need to wake up to these indications before a major crisis hits the market. There is a lot at stake. The municipal bond market is enormous with roughly 54,000 municipal issuers with debt outstanding, and 25,000 of those issue debt about every two years. Disclosures must be made mandatory, and new legislation must be passed to give SEC the authority to enforce the disclosure requirements. The right of investors to know material facts on a timely basis is the foundation of a fair market, enabling them and their advisers to take rational actions to protect their financial interests.
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