Day: November 12, 2008

The Subprime Crisis: What Happened and What Should Be Fixed?

According to the Case-Shiller Index, median housing prices doubled from 1987 to 2000 in major housing markets, including L.A., Miami, D.C. and San Diego. In less than half that time, from 2001 to 2006, housing prices in L.A. and Miami almost doubled, while prices in D.C. and San Diego shot up 1.5 times. Overall, nationwide median housing prices doubled from 2001 to 2006. In an economy as mature and developed as the United States, how could nationwide housing prices almost double in a span of only six years? As emerging nations (particularly China) expanded, they exported more and more to the developing world. By the early 2000s, these nations were awash with unprecedented amounts of cash. Not wanting to re-invest in their own or other developing economies, foreign governments and investors began throwing cash back into the safest, most stable economy of them all: the U.S. economy. This windfall of foreign capital changed the investment landscape on Wall Street, making money cheaper by driving down interest rates and yields on various fixed-income securities, including U.S. Treasuries. At the same time, from 2001 to 2003, the Federal Reserve cut interest rates from 6.5% down to 1% and kept it at this 50-year low for an entire year. By the end of 2003, yields for U.S. Treasuries were so low that, after inflation adjustment, they were actually negative. Meanwhile, Americans began...

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Making Foreign Aid More Effective

As the United States forms a new government in the coming days, developing nations anticipate a change in the approach to international development. Can President-elect Obama increase the impact of foreign assistance? During the campaign, Obama said he would double the amount of U.S. foreign aid to $50 billion by 2012. Yet, the question is not how much money is given, but how well it is spent. He has a golden opportunity to exhibit leadership on the international stage by taking a more effective approach to aid. Obama’s promise to double the amount of aid funding was music to the ears of countries on the receiving end of such assistance. However, his five-part strategy to create capable and democratic states does not address how the funds will be dispersed or how well receiving countries will use the economic assistance. The new U.S. government must exercise persistent vigilance to ensure aid funds are used properly. The United States has made such a commitment at various forums most notably the 2005 Paris Declaration on Aid Effectiveness. The Paris Declaration brought together representatives from donor countries, developing nations and international development agencies to promote aid utilization. Signatories agreed on five principles for aid: ownership by partner countries; harmonization among donors; alignment with country systems; managing for development results; and mutual accountability. However, even though all participants voiced support for these principles in...

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