Question

1) What are the Goals of the World Bank and the IMF? Why are some people upset and protesting about the World Bank and IMF? (15 points)

2) Give the pros and cons of Flash Trading and Dark Pools. How and should the U.S. government regulate them? (15 points)

3) Due to the recent Brexit vote, the British pound and Euro have both depreciated relative to the dollar, how does this impact exports and imports, AD and GDP? What should the Fed. due to respond? (20 points)

4) What happens to the value of the dollar if the European Central Bank (ECB) does quantitative tightening to the money supply? How will this impact the value of the dollar, exports and imports, AD and GDP? (20)

5) What are 5 financial innovations and deregulations that led to the financial crisis in 2008? What are 5 policy responses by the Federal Reserve and the U.S. Government and Treasury department that helped us to get out of the financial crisis? Who are the winners and losers? (20)

6) Explain the “flight to quality” that is happening in the U.S. bond market due to the uncertainty in the rest of the world and how this impacts the price and interest rates of U.S bonds? Who does this help and hurt? (10)

Answer 1

1)

The goals of World Bank are as follows-

The World Bank works with developing countries to reduce poverty and increase shared prosperity.

The World Bank provides financing, policy advice, and technical assistance to governments, and also focuses on strengthening the private sector in developing countries.

The goals of IMF are as follows-

International Monetary Fund serves to stabilize the international monetary system and acts as a monitor of the world’s currencies.

The IMF keeps track of the economy globally and in member countries, lends to countries with balance of payments difficulties, and gives practical help to members.

Some people are upset and protesting about the World Bank and IMF because-

1. The IMF is clamping down on democracy. Its loan packages are intended to lock in market fundamentalist policies.

2. User fees denying people the right to healthcare. The World Bank continues to support charges -- known as user fees -- for basic healthcare.

3. Maniacal support for privatization.

4. Fueling climate change and environmental destruction.The Banks' fossil fuel portfolio, IPS estimates, will generate roughly twice as much carbon dioxide (a potent greenhouse gas) as industry produced worldwide.

5. Bankrolling forest destruction.

6. Sham debt relief. With many countries in Africa paying more in debt service than they spend on healthcare, the IMF and World Bank continue with their failed debt relief program. Not only does it require "beneficiary" countries to implement harmful policies as a condition of receiving debt relief, it doesn't offer much relief. Of the first two dozen countries eligible to get relief, internal IMF/Bank analyses show that at least half will end with what are considered "unsustainable" debt burdens -- and the institutions believe poor countries can send huge amounts of money out of the country in debt payments and still be "sustainable."

7. Spurring the spread of HIV. Many IMF/Bank policies disrupt social structures and facilitate the spread of HIV/AIDS. For example: With the removal of tariffs on food products and promotion of food exports, imports undermine local farmers and the shift to large-scale plantations for exports further displaces the rural population. Many men leave rural villages for work in big cities or in mines, contract HIV/AIDS from casual sex partners or sex workers, and then spread the disease to spouses in their home village. The displacement of children and young women into the cities has led to a sharp increase in commercial sex work and heightened rates of HIV/AIDS.

8. Torturing Argentina. After helping plunge Argentina into economic chaos, the IMF has sadistically demanded a ceaseless set of additional moves to deregulation and austerity.

9. Collaborating with Enron. In the last decade, the World Bank made a dozen loans totaling more than $750 million for projects involving Enron. In the Dominican Republic, World Bank-supported privatization let Enron swoop in, buy parts of the electric utility and jack up rates. When consumers and the government couldn't pay the high prices, Enron turned off the power. Enron and other buyers of the privatized utility are now alleged to have paid too little, thanks to a valuation performed by … an Arthur Andersen subsidiary.

10. Protest works. In the aftermath of the last major U.S. demonstrations against the IMF and Bank, Congress in 2000 passed a law requiring the U.S. to oppose IMF or Bank loans including user fees for primary education or healthcare. That helped force a reversal in the Bank's policy on school fees, with results that are slowly being felt on the ground. After Tanzania lifted primary education user fees, 1.5 million additional children -- mostly girls -- were able to go to school.

2)

Pros of Dark Pools

• Limited market impact: The main reason why dark pools came into existence was because of their promise to significantly reduce the market impact of large orders. Institutional investors and traders have to constantly contend with the fact that the market moves adversely when they buy or sell large blocks of shares. As a result, they end up paying more than they would like for purchase transactions, and receive lower prices than they may have expected for sale transactions. The public markets' feature of complete transparency does not work to the advantage of large investors, since their trading intentions are visible to all. In contrast, because dark pools are not accessible to the public and are completely opaque, large block trades can be crossed without retail investors being any the wiser about the parties involved, the trade size, or the execution price. As a result, trades executed in dark pools will have very limited market impact compared with similar trades executed on public exchanges.
• Potentially better prices: Since dark pools typically only have large players as participants, big orders can be matched by the pool operator at prices that may be more favorable than those on public exchanges. For instance, crossing orders at the midpoint of the best bid and ask prices would result in a better price obtained by both the buyer and the seller.
• Lower costs: Trades executed on dark pools do not incur exchange fees. This can add up to significant cost savings over time. Orders crossed at the midpoint of the bid-ask spread also reduce costs associated with the spread.

Cons of Dark Pools

• Off-market prices may be far from the public market: The prices at which trades are executed in dark pools may diverge from prices displayed in the public markets, which puts retail investors at a huge disadvantage. For example, if a number of large institutions decide independently to dump their holdings of a stock, and the sale gets executed within a dark pool at a price well below the public exchange price, retail buyers who are unaware of the selling that has taken place privately are at an unfair disadvantage.
• Possible inefficiency and abuse: The lack of transparency in dark pools could result in poor execution of trades or abuses such as front-running (buying or selling for one's own account based on advance knowledge of client orders for a security). Conflicts of interest are also a possibility. For example, the pool operator's proprietary traders could trade against pool clients. The Securities and Exchange Commission has already cited violations and fined some banks that operate dark pools.
• Predatory tactics by high-frequency traders: In his bestseller Flash Boys: A Wall Street Revolt, Michael Lewis points out that the opacity of dark pools makes client orders vulnerable to predatory trading practices by high-frequency trading firms. One such practice is called pinging (see You'd better know your high-frequency trading terminology). A high-frequency trading firm puts out small orders so as to detect large hidden orders in dark pools. Once such an order is detected, the firm will front-run it, making profits at the expense of the pool participant. Here's an example: a high-frequency trading firm places bids and offers in small lots (like 100 shares) for a large number of listed stocks; if an order for stock XYZ gets executed (i.e., someone buys it in the dark pool), this alerts the high-frequency trading firm to the presence of a potentially large institutional order for stock XYZ. The high-frequency trading firm would then scoop up all available shares of XYZ in the market, hoping to sell them back to the institution that is a buyer of these shares.

Pros of Flash Trading:

Proponents of flash trading believe that it helps to provide greater liquidity in secondary market exchanges
Cons of Flash Trading

Opponents of flash trading believe that it gives an unfair advantage and can lead to higher risk of flash crashes.

In high-frequency trading flash orders for small amounts are utilised to find large orders so that the high frequency trader can buy or sell all available stock before the large order reaches the rest of the market. This may be done within a dark pool or over a number of electronic exchanges where the speed of the order routing is critical to the success of the strategy. According to the US Securities and Exchange Commission (SEC) by 2009 this practice had become controversial, with some market participants saying that high frequency traders could use flash orders to unfairly exploit others and that it is akin to front running.