Saturday, May 30, 2009

Latest European survey, just ahead of the EU elections

There are some interesting results from a survey in the 27 countries of the European Union, just published but done between March 25 and April 15, 2009:

* Respondents considered the following criteria the most favourable when considering voting for candidates for the European Parliament: a full 30% thought it most important that candidates would work full-time on their role as EuroMPs; 21% thought the critical factor was "experience in European issues"; 20% thought the most important thing was "on the ground contact with the electorate"; by contrast, only 14% thought that experience of national politics was important, and only 6% thought that being "well known in the media" mattered

* 68% would support the introduction of further limits on CO2 emissions from cars in order to protect the environment, while only 23% would oppose it

* only 31% prefer more being spent on supporting individuals, while 62% would support spending more money on creating new companies; similarly 65% would support increased aid to European enterprises - interesting, considering that supporting individuals would be egalitarian, while helping companies is both inegalitarian (it would help certain individuals and groups) and falls into the category of state intervention in the economy as well as of trade-distorting subsidies which are forbidden by the WTO agreement

* only 28% would support strengthening immigration controls (at least when given a choice between that and investing in increasing investments and helping companies to create employment)

* In order to communicate their opinions to politicians, here are the percentages of people who thought that the following were key: voting 46%, taking part in debates with politicians 20%, signing petitions 14%, joining a political party TIED WITH expressing your views on a blog or internet forum - 13% each. Joining a trade union was favoured by 10%. Worryingly, 11% favoured taking part in a demonstration, 7% favoured striking, and 4% preferred "other more radical methods, like obstructing economic activities or means of transport" (respondents could choose two options for this question, not just one)

* 49% preferred televised debates between leaders of the different NATIONAL political parties, while only 29% preferred EUROPE-WIDE televised debates dubbed in the different languages; the latter option came marginally ahead of the desire for a website bringing together information on the elections, candidates and programmes (28%). Surprisingly, only 18% favoured public debates between candidates LOCALLY; this was as unpopular (also 18%) as election spots on TV or radio presenting the programmes of the different parties/ candidates (respondents could choose two options for this question, not just one)

* 41% would increase spending on education and training, while only 7% would reduce it; 31% would increase spending on economic growth, while 9% would reduce it; 27% would increase spending on social affairs and employment, while 11% would decrease it; 26% would increase spending on public health, while 9% would reduce it; 23% would increase spending on climate change and protecting the environment, while 10% would reduce it ((respondents could choose two options for this question, not just one)

* Stunningly, for one of the richest parts of the world, only 8% would increase spending on defence and security, while 35% would decrease it (do they really know what the result would be?)

* 16% would increase support for agriculture and rural development, while 14% would reduce it

* only 3% would increase aid to countries neighbouring the EU while 33% would reduce it (is this a sign of increasing selfishness/ protectionism? what does this say for EU expansion?)

* Disappointingly, when people already know how important the European institutions are (in that they override national institutions), only 11% said they were "very interested" in the elections, those who said they were "fairly interested" tied with those who said they were "not very interested" (35% each), while 18% said they were "not at all interested". On balance, then, a win by 7% for "not interested". A sad comment on European interest in democratic processes.

* Astonishing, particularly in view of 56% who consider the EU "more of an opportunity"; while only 17% consider it "more of a threat", and only 20% consider it "neither one nor the other".

Here is the profile of the respondents:
- 52% female, 48% male
- 36% between 35 & 54, 35% above 55, 17% between 25 & 34, and 11% between 18 & 24
- educated up to the age of: (20+) 33%, (16-19) 41%, and (15 or less) 17%; 7% were still studying
- 34% employees (including managers/ supervisors), 25% retired, 12% manual workers, 8% self-employed, 7% unemployed, 7% students, and 7% "Other".

All in all, with 15,130 respondents, this is probably as representative of the EU as we are likely to get at least this side of the elections.

The survey was carried out by TNS Opinion on behalf of the Fondation pour l’innovation politique, together with the Centre for European Studies, with the contribution of the Konrad Adenauer Stiftung and the Fondation Robert Schuman, using face-to-face or telephone methodology depending on the country. Sphere: Related Content

Now Europe wants its own Risk Council too! What is needed is a Global Systemic Risk Council....

Following the two-tier approach suggested by Jacques de Larosiere, The European Commission has now come out in favour of the creation of the following bodies:

1) European Systematic Risk Council (ESRC), whose job will be to monitor and assess risks to the stability of the financial system as a whole and provide an early warning system; and

2) European System of Financial Supervisors (ESFS), whose job will be to supervise individual financial institutions (where Europe's national financial supervisors will work in co-ordination with new European supervisory authorities).

Naturally, several countries (notably the UK) are not happy about losing authority to non-national bodies. But this is to be sentimentally attached to the past: Britain could foreseeably continue to go it alone in many areas, but surely supervision is one area where it should see that national supervision makes no sense where the bodies being supervised are supra-national.

The proposal is that the President of the European Central Bank would be the Chairman of the Risk Council, which would include financial supervisors and central bank representatives from each EU country.

This is not a proposal wholly without merit, since it would bring together all the regulators, supervisors and central bank representatives.

However, is the cure suited to the disease? Is it not precisely these regulators, supervisors and central banks whose failure contributed to the current crisis? If you cry "Foul!" to that last question on the grounds that the charge is excessive, pleading that the current crisis was not caused in Europe, you might want to consider that creating such a European Council would do nothing to prevent future crises originating in other parts of the world.

Consider also that the Asian crisis, only 20 years ago, did not originate in either America or Europe.

It does not make sense to try to keep an eye on a global industry by means of national or regional Risk Councils. Clearly, what is needed is a Global Systemic Risk Council. Moreover, in order to prevent "group think", it is essential for this to be a statutory body, consisting of say seven independent experts (not necessarily retired central bankers and suchlike), appointed to a maximum of a 7-year term, with one of the seven retiring each year and being replaced by a new person appointed for 7 years. This Global Council should have the power to summon not only regulators, supervisors and central bank governors, but anyone else they think relevant, and the Council should be obliged to accept submissions by anyone (for example academics and consultants) who has anything to say on the subject. Further, the Global Council would be obliged to issue, every week (or, at most, every month), a Global Risk Indicator of global risks as well as of regional and of sectoral risks.

Such a Global Council would of course instantly make all National or Regional Risk Councils unnecessary, but leave national authorities in place. While meeting the objections, for example of the UK, a Global Council would be both cheaper and more efficient than national or regional councils. Sphere: Related Content

Review of Willi Brammertz (et. al.), Unified Financial Analysis: The Missing Links of Finance (Wiley, UK, 2009)

Can our current systems of accounting, which are so expensive and murky, be replaced by a system that produces genuine financial transparency without being even more expensive?

I did not think so, till I read this book.

With increasing astonishment, I realised that if, as a result of the current crisis, there actually is increased regulation, and companies are simply respond in their usual way –"each regulatory request triggers new projects inside each bank, lasting for many man years" – then increasing regulation will increasingly strangle all companies, whether financial or non-financial. But the good news is that there is a way through.

It starts, as does the book, with understanding how and why we have such an "expensively produced mess" of a system in all companies around the world, because of which everyone from Chairmen and Chief Executives to Treasurers, Auditors and CFOs is doomed to have an insufficient idea of what is in their own accounts. (If that seems an extreme statement, consider that that was the precise defence offered by such officials when summoned as a result of the current crisis to legislative leaders around the world to explain why they should not be thrown in jail – and consider further that that explanation was accepted as valid by the legislators).

In any case, Brammertz and his colleagues take us through the history of the development of our world's costly, complicated, confusing and unclear system of accounting, which has been at least one contributor to the creation of the current crisis – and which now calls for taxpayers to rescue financial and manufacturing companies even though no one can quantify anything like the scale of either the risks or indeed even the full costs.

What we need is not more information, argue the authors. What we need is higher quality information. And it is quality not quantity of information which will be demanded in order to increase regulatory effectiveness.

That is why it is imperative to find a way of providing the information by means that do not increase the financial and management burden on companies.

The enormous merit of this book is that it shows not only how it might be possible but indeed has been possible in hundreds of cases with which the authors have been quietly involved over the last 20 years.

The solution proposed in this book "could become an opportunity, since it would trigger a common unified financial language" which could be understood by any and all of the principals involved, be they treasurers, bookkeepers, actuaries, investment officers, controllers, ALM managers or the individuals responsible for budgeting. No longer would such parties be at loggerheads with each other, living in their own silos.

Additionally, the language would enable genuine dialogue between banks, insurance and reinsurance companies (in my view, perhaps making bancassurance really possible for the first time).

Most attractively, this language would be all that is needed to bring together the interests of the whole of the financial community with that of its regulators.

The result would be improved information content for all participants at reduced cost, well-ordered, thought-out and efficiently displayed.

Starting with the actual situation of financial institutions today, the authors analyse the elements involved in each individual financial transaction and then build up to the level of the system as a whole, taking in liquidity, value and income, risk and sensitivity analysis, combining all that with detailed considerations of market risk, counterparty risk, behaviour and cost accounting, as well as issues of natural time, valuation concepts and risk groups. The authors show how easily (and incontrovertibly) the elements can be computed to derive virtually any static financial information of interest. They expand the scope to dynamic simulation, and follow it up by extending it to insurance and reinsurance, and indeed to non-financial industries. Aggregation should not be allowed at the level of individual deals, argue the authors. However, as the chain from there to the global level is very long, aggregation needs to be allowed by means of rules that are agreed with regulators for the purpose of being able to drill down or helicopter up to any level, from single deal to the whole economy.

Here is an illustrative quote from the discussion of risk: "Depending on which of the elements fluctuate, the system produces the corresponding risk results. If only market risk factors are (changed), then only market risk will be produced; if only credit ratings are (changed), credit risk will be produced, and so on. If two or more of these risk factors are (changed), a combined, consistent and fully integrated risk figure will be produced. If all risk factors are allowed to (change), then the integration of all risk categories is complete" (brackets mine).

In other words, the authors propose "a unified financial language that merges all financial concepts in a fully consistent and natural manner". The "language" is based on financial events seen in terms of cash flows, value and income - of any flavour, sensitivity and risk – providing the
power to ask any defined financial instrument what its value or income or anything of financial interest would be under all market conditions.

This is breathtaking by itself.

Further, the system provides for spot checks as well as continuing analysis of liquidity, value, income, sensitivity and risk of any part of a company, of a whole company, of an industry, of a region, of a nation, of a group of nations or indeed of the whole of the world – if we all followed this elegant system which is based on a fresh fundamental analysis of the elements that go to make up finance, industry and commerce.

The most important advantage of the proposed system, however, is that entrepreneurs and managers can save all the energy which they invest at present in addressing problems of data quality. Instead, they can devote their energies to the key task of making, on the basis of the best quality of information, much better business decisions.

The same applies to administrators and politicians, who no longer need to tear their hair out at all the uncertainties and obfuscations created by the present systems, and can focus their attention on the question of what is the wisest decision.

It is the strength of the system that it can provide not only all the known ratios, but also any new ratios and reports (such as environmental or social ones) that are thought necessary or useful in future, so that the system becomes a sort of "financial laboratory where new things can be discovered or invented, and accordingly expressed and presented".

While the book does not include current “hot issues” such as the practicalities of counter-cyclical provisioning, the venality of leveraged betting or the practical issues around complementary currencies, I’m sure that all those can be integrated in the system, and the consequences clearly mapped.

The time for such a system has come, and Brammertz and his colleagues provide here a book that is carefully argued from step to step, thoroughly thought-through, simple, elegant, and comprehensive.

There is simply no way of avoiding taking this book and its proposed system seriously.

It is essential reading for everyone, lay person or expert, interested in the issues of the entire industry, since it addresses the cost and quality issues involved at every level, from global governance to individual deals. Sphere: Related Content

Friday, May 29, 2009

The new Manifesto of the Christian People's Alliance (the UK's Christian Democrats) for the European Elections

The Manifesto has just been sent to me by a friend.

So-called "Christian democrats" sometimes get up to strange things. Whether those strange things are "christian" or not, is not for me to say; but they are definitely not democratic.

Here, however, is the clearest political Manifesto that I have seen in a long time.

At least it presents clear policies with which one can agree - or disagree!

Though I don't see much here with which Hindus such as myself will disagree. For that matter, there isn't much here with which Buddhists, Jews, Muslims or Sikhs will disagree. In fact, I can't see why there won't be agreement from agnostics and atheists.

The policies are based on a few key principles:

- Greening the Global Economy

- Trade Justice and Equality

- Respect for the Human Person

- Ending Secrecy and Corruption

- Referendum Now! (Lisbon Treaty).

What avoids these being simply "motherhood and apple pie" is that they present quite specific actions - though on those there may well be disagreement.

In any case, here is the CPA website: www.cpaparty.org.uk Sphere: Related Content

Unpublished Letter to the Editor of Financial Times - on speculation

from Mr. Prabhu S. Guptara

Sir, How interesting that the Center for Public Integrity has now documented what we all knew anyway ("Subprime explosion: who isn't guilty?", May 6).

What is widely overlooked is that the subprime crisis was the result of the inability of a mass of people to pay their mortgage premiums. However, those people had been paying their mortgage premiums regularly till something caused them to start being unable to pay. What was that something? Skyrocketing oil and commomdity prices.

So who is going to stand up to provide an investigation into the role of speculation in driving those prices to the levels they reached? And into the role of lobbying to prevent even the registration of speculative activity?

Prabhu Guptara Sphere: Related Content

Alternative mechanisms for financing development

Readers interested in my posts titled "Should Aid be Unconditional?" and "Should all foreign aid be banned?" may be interested to note that the Danish Institute for International Studies has just published a study titled: "Alternative development financing mechanisms: pre-crisis trends and post-crisis outlook".

In it, Sam Jones points out that it has now become unfashionable to support ‘traditional’ approaches to development finance (official bilateral and multilateral assistance to discrete projects through a combination of loans and credits). Reform of traditional aid and alternative approaches to financing are now being increasingly advocated.

The study includes 1) an examination of the characteristics of the alternative financing mechanisms that have emerged over recent years; 2) an analysis of their (combined) contribution to addressing development financing challenges in the poorest countries; and 3) considerations over the future prospects of alternative financing mechanisms.

The study focuses particularly on sub-Saharan Africa, and is a useful comparative studay of traditional versus some "alternative" funding mechanisms (the study does NOT include the "alternative" mechanism put forward by me).

My own views, indicated for example in the two posts indicated above, are now enriched by the study though fundamentally unchanged. Sphere: Related Content

The European Parliament – more powerful but less legitimate?

The full title of this paper is: "The European Parliament – more powerful, less legitimate? An outlook for the 7th legislature".

It has just been published by the Centre for European Policy Studies (Belgium).

Julia De Clerck-Sachsse and Piotr Maciej KaczyƄski write that "In order to remain efficient in the face of increasing complexity, the EP has had to streamline its working procedures, moving more decisions to parliamentary committees and cutting down time for debate.... measures to increase the efficiency of the EP, most notably the trend towards speeding up agreements with the Council (1st reading agreements) run the risk of undermining the EP’s role as a forum of debate....(undermining) the legitimacy of the EP" and raising the possibility that "voters will become ever more alienated from its work".

http://www.europesworld.org/NewEnglish/Home/PartnerPosts/tabid/671/PostID/451/TheEuropeanParliamentmorepowerfullesslegitimateAnoutlookforthe7thlegislature.aspx Sphere: Related Content

UN Human Rights Council now being manipulated

In view of the task that the UN General Assembly has given the UN Human Rights Council (that of addressing situations of violations of human rights), the European Union yesterday slammed the UN Human Rights Council for failing to agree on an acceptable outcome of the Special Session on Sri Lanka's human rights violations and humanitarian crisis.

"We regret that the proposals presented by the EU to amend the Sri Lankan draft resolution could be neither discussed nor considered by the Council, as a 'closure of debate' rule was invoked by Cuba and supported by a majority of Council Members," said the EU Presidency, currently held by the Czech Republic. "Such motions contradict the very spirit in which the Human Rights Council was conceived" .

The EU had earlier called for an independent investigation of human rights violations in Sri Lanka, but the Geneva-based HRC merely called on Sri Lanka to protect minorities.

This raises questions about how long the UN Human Rights Council will remain credible. Sphere: Related Content

Friday, May 22, 2009

Majority of Americans now "Pro-Life"?

More and more scientific evidence continues to accummulate of the quality of life of those who are alive but still in the womb.

Further, more and more evidence continues to accummulate of the abuse of current legislation and of the messiness (physical and emotional) of abortions.

So it is not surprising Gallup's most recent poll has found that a clear majority of Americans now call themselves "pro-life" (51 percent as compared with only 42 percent who still call themselves "pro-choice").

Gallup said a week ago (May 15) that its latest poll, conducted May 7 to 10, found “51 percent of Americans calling themselves ‘pro-life’ on the issue of abortion and 42 percent ‘pro-choice.’ This is the first time a majority of U.S. adults have identified themselves as pro-life since Gallup began asking this question in 1995.”

“The new results, obtained from Gallup’s annual Values and Beliefs survey, represent a significant shift from a year ago, when 50 percent were pro-choice and 44 percent pro-life. Prior to now, the highest percentage identifying as pro-life was 46 percent, in both August 2001 and May 2002.”

Abortion remains a highly emotional and divisive matter: the poll found that 23 percent of Americans felt abortion should be illegal in all circumstances and 22 percent said it should be legal in all circumstances.

The middle view — that abortion should be legal in certain circumstances - is held by about 53% of Americans. That figure has been steady since 1975. Sphere: Related Content

Can China Save the World?

The currently fashionable view of China, because of its "surplus" money, is that the country is an essential partner for solving the current crisis. This is a view that I have debunked earlier by pointing that even 3 trillion dollars amount to less than $2000 per Chinese – hardly enough for China to cope with its own problems let alone the world's.

I am therefore interested to see a paper just published by Christer Ljungwall, on behalf of the Swedish Institute of International Affairs, which points out that despite sweeping reforms of China’s state-owned dominated financial system significant policy distortions and constraints remain, which "may affect the country’s maneuverability to withstand and recover from external and internal shocks".

He describes the financial system as being in a "weak condition" and says that it has distorted domestic demand; the prevailing pattern of investment financing could lead to a surge in new non-performing loans. Excess capacity in certain sectors could also create "deflationary risk in the medium-term".

In Ljungwall's view, China's government will continue to dominate the country's banking and financial systems, and this basic weakness will limit economic growth through its adverse effect on the supply of savings and efficiency of resource allocation: The magnitude and implications of potential risks suggest that further financial market reform and development is a key priority for China.

"The current situation is grim", writes Ljungwall, "and the outcome over the next three years is difficult to predict". However, he argues, this situation also presents China with an opportunity to "analyze its problems, reflect on its weaknesses, and identify areas they should concentrate their efforts". Building a broader-based, well functioning financial market would also help to rebalance China’s economy by shifting domestic demand away from heavy reliance on investment toward consumption.

That matter is of course tied to the question of further opening the Chinese system and therefore relaxing the control of the Party. That is why, the question of whether China will make use of that opportunity remains, at present, an open question.

The paper, from the Swedish Institute of International Affairs, titled "Perspectives on Economic Growth and Stability in China", is available at:
http://www.europesworld.org/NewEnglish/Home/PartnerPosts/tabid/671/PostID/415/PerspectivesonEconomicGrowthandStabilityinChina.aspx Sphere: Related Content

Thursday, May 21, 2009

How "Multi" should "Stakeholder Meetings" be? Should corrupt elites be sanctioned and endorsed by being included?

There is a bubble in "multi-stakeholder meetings".

It has suddenly become fashionable to be totally inclusive in discussions - for example at the UN, and at the Bretton Woods institutions.

However, in such dialogues, when democratic countries accept, as equal participants, countries that are non-democratic, the results are bound to be skewed.

Usually to the advantage of the corrupt elites that control non-democratic countries.

Naturally, everyone should be consulted. But decisions need to be based on universal values not on the basis of what is in the interest of corrupt elites.

The dilemma is well summed up in the remarks of the President of the UN General Assembly, Miguel d’Escoto Brock¬mann of Nicaragua, who said recently that the final outcome of the forthcoming UN Conference on the World Financial and Economic Crisis and its Impact on Development, which is to be held in New York from 1-3 June
2009, “must reflect the call of many nations for new paradigms for building a sustainable economic life, one that integrates the values and the ethical imperatives that should guide our development. It must reflect the call for greater justice and inclusiveness in our global economic life, and it must reflect the passionate call for promoting the common good over the obsessive impulse to consume more and more, and to dominate others at any cost.”

It is fine to criticise the US for wanting political domination. However, that is a dead horse anyway.

The criticism of "obsessive consumption" needs to be supplemented with a criticism of "obsessive accummulation".

And the question that needs to be put in the forefront is: how to build "new paradigms" in such a way that corrupt elites are not reinforced, how to have "greater inclusiveness" without defining that as meaning corrupt governments that actually harm the common good, and how to extend the benefits to the masses rather than to elites.

To that dilemma, bodies such as the UN and the Bretton Woods institutions, that are by definition multi-governmental (and therefore by definition including corrupt elites as equals), naturally have only very limited solutions, specially if they exclude appropriate conditionalities and the right values by which to evaluate initiatives, mechanisms and solutions. Sphere: Related Content

Should Aid be Unconditional?

The UN's Economic and Social Council held a special high-level meeting with the Bretton Woods institutions, the World Trade Organization and the United Nations Conference on Trade and Development, in New York last month (on 27 April 2009).

The President issued a Summary of the proceedings, which includes the following sentence: "The World Bank expects to triple its annual level of disbursement during the next three years at the same time that it is exerting extra effort to simplify
procedures, reduce the transactions costs of lending and eliminate outdated conditionalities".

I am of course pleased that the Bank will triple its disbursements (though where the money has come from, and with what consequences, is a different matter that I have discussed here earlier).

However, I have been concerned for some time about this matter of eliminating "outdated conditionalities". What exactly is it that has made the Bank's former conditionalities "outdated"?

Some of the "structural reforms" on which the Bank used to insist have been criticised for being too strong and too deep, with undesirable consequences.

But in the rush to get rid of such undesirable conditionalities, I wonder whether some DESIRABLE conditionalities are not also being eliminated.

If the international community is giving money to any country, then the international community has the duty to insist that the money is well and wisely used, and it is right for the international community to insist that the money is used to enable genuine political openness in recipient countries - in line with international norms.

Otherwise, the Bank's activities will amount to nothing more than handing money over to corrupt elites and endorsing their running away with the money.

It would be better to refuse to give the money to governments and to the financial systems controlled by them as that would simply entrench corrupt elites in power.

Much better to give the money to properly managed and audited NGOs which can better guarantee that the money reaches and poorest and most disadvantaged in such countries. Sphere: Related Content

Is the economy being stimulated?

The average total of loans held at the top 21 US banks fell for four of the past five months, according to a US Treasury Department report last week (on Friday, 15 May). The banks included in the survey account for more than half of loans held by U.S. depository institutions.

In spite of the US government's $700 billion financial rescue fund, average loan balances at the largest bailout recipients dropped to $4.38 trillion, down 0.9 percent from February. The average total of loans had fallen 0.4 percent in February, though new originations had increased marginally in March (partly due to the 3 more working days).

This demonstrates that the so-called "stimulus" spending is, at best, "stability" spending and that it is failing to stabilise lending - as expected, because "stimulus" spending tries to dodge the real issue, which is leveraged speculation and the resulting "toxic assets".

Most worryingly, the report showed ALL categories of CONSUMER loans increased in March.

The existing level of consumption in the US is being still bolstered by loans rather than on the basis of money earned - even though savings are up, many US consumers are still spending more than they are earning. Sphere: Related Content

Should firms receiving governemnt aid be banned from using lobbyinsts?

“Top recipients of federal bailout money spent more than $10 million on political lobbying in the first three months of this year, including aggressive efforts aimed at blocking executive pay limits and tougher financial regulations,” according to the Washington Post. "In all, major bailout recipients have spent more than $22 million on lobbying in the six months since the government began doling out rescue funds, Senate disclosure records show".

Well, the Post's calculations are, no doubt, made on the basis of publicly available information, and I doubt that they could guarantee that that is all that was spent for the purpose: the actual total may well be marginally or greatly higher.

The heart of the problem is well put by Simon Johnson, a former IMF chief economist, in a May 2009 Atlantic Monthly article, “The Quiet Coup”, in which he shows the similarities between the financial crisis in the United States and those that the IMF routinely deals with in emerging economies and “banana republics": the problem is “almost invariably the politics of the countries in crisis. Typically, these countries are in a desperate economic situation for one simple reason — the powerful elites within them overreached in good times and took too many risks.”

Johnson says that the United States has “the world’s most advanced oligarchy” and argues that the Obama Administration's latest plan will be far less favorable to taxpayers and much more favourable to investors and banks.

Why has such a biased plan emerged? In Johnson view, because the US faces not merely “a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate” but more importantly “a political balance of power that gives the financial sector a veto over public policy.”

Johnson thinks the FDIC should be beefed up to take control of sick banks, clean them up, and sell them back to the private sector (he does not like to characterise this as “nationalization” on the basis nationalisation implies permanent control, whereas he would enshrine temporary control with a specific object in view).

The key thing, however, is to "break the oligarchy.” He is not very persuasive on exactly how to do so. He seems to believe that simple reduction in size of the biggest financial institutions in the USA will do the job. I am not so sanguine. I think that, as financial institutions benefit, among other things, from an implicit (and now explicit) state guarantee, they should also be forbidden from spending any money or offering any incentives or rewards to lobbying firms.

In fact, breaking up or even banning lobbying firms may be the single most important step (apart from reforming its election funding system) that the US can take in order to return itself to being a democracy.

Clearly, companies and industrial associations should be free to express their opinion to lawmakers. But they should be able to do so only on the basis of staff they employ rather than on the basis of fees paid or benefits offered to outside bodies.

This raises all kinds of issues about not merely lobbying firms, but also payments made to academics in order to get them to do specific bits of research, or to enable them to express certain opinions.

It also raises questions about the funding of Think Tanks in the USA.

But banning lobbying firms would not be a bad first step before these other, somewhat more complicated, matters are examined. Sphere: Related Content

Tuesday, May 19, 2009

Posner on the Failure of Capitalism

Richard A. Posner, who lectures at the University of Chicago Law School, and has developed a reputation for systematically courting controversy, has a new book: A Failure of Capitalism: The Crisis of ‘08 and the Descent Into Depression, Harvard University Press, 346 pages, £17.95.

As befits a law professor, he seems constitutionally resistant to the notion of moral blame and resolutely finds some plausible explanation or justification for the actions of governments, financial institutions, and even the public.

Sometimes, he is simply wrong. For example, when he writes: “the critical role of government in the crisis was one of permission rather than of encouragement.” This is patently untrue. As I have documented elsewhere, governments (egged on by the elite and endorsed by the public, leaving people such as me in good company in the middle) initiated and promoted not merely the theory of self- correcting markets to create the spectre of deregulated and highly-leveraged finance, but also many of the specific mechanisms that increased leverage - e.g. securitisation of mortgages.

Posner considers Greenspan’s low interest rates a key part of the plot: “Especially when interest rates are low, riding a bubble can be rational even though you know it’s a bubble”. True, but low interest rates were contributory not central.

What was central? Apart from obeisance to self-correcting markets, it was the encouragement of unregistered leverage, combined with manipulation of currency values by governments as diverse as the USA and China.

Posner acknowledges that “each flood of money into the economy set the stage for the next bubble." Given the flood of money which has been pouring in ever greater volume since the start of this crisis, that should be frightening reading for everyone – even those who disagree with his other views.

As with Greenspan, Posner has apparently only now learned “that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.” That, I thought, was the lesson of the First Great Depression (I mean 1873, which did not get resolved till after the Second World War, though the 1930s were the lowest point).

We certainly have more active governments around the world, now. Whether they are more intelligent remains to be seen. On current performance (e.g. the so-called “stress tests”, which I call the "relaxation tests"), the score card is decidedly mixed. Sphere: Related Content

Business Travellers Against Human Trafficking

Recently, someone recommended to me the website of “Business Travellers Against Human Trafficking” (BTAHT).

In case you wonder what "Human Trafficking" is, it is modern form of slavery.

According to BTAHT, more than 700,000 women, children and men are trafficked across borders every year into forced labor and sex slavery.

Thousands of these women and children are trafficked for travelers to use as prostitutes.

For the Bulgarian mafia alone, the annual profit from human trafficking and prostitution is over one billion euros, according to a RiskMonitor report.

Some companies in Canada, US, UK, Germany and Switzerland are beginning to watch the activities of employees who travel very frequently to Asia, if they suspect them of engaging in child sex tourism.

England – A report from the Border and Immigration Agency shows that at least 77 Chinese children have gone missing from a home under local authority control near Heathrow Airport. It is suspected that organized criminal groups are trafficking these children into prostitution and forced labor around Britain.

Scotland – A series of raids has broken up a Chinese gang run human trafficking ring in Scotland. Authorities say they seek to track down the customers of the brothels the trafficked women lived in as well.

Each of us can make a difference, specially if we travel internationally.

If you think or know that you have encountered situations of human trafficking (forced prostitution, forced labor), please report this incident on the website of Business Travellers. On this website you also learn how to find indications of Human Trafficking.

More: www.businesstravellers.org Sphere: Related Content

Anti-Monopoly Regulation

Dominick Armentano, a Research Fellow at The Independent Institute in the USA, in its latest issue of its newsletter, The Lighthouse, takes on the announcement by the US Assistant Attorney General Christine Varney last week that the Obama Justice Department plans to conduct "vigorous antitrust enforcement" actions against market leaders engaged in what it called "improper business practices."

Armentano's view is that in the 119 years since federal antitrust statutes have been on the books, they have not been empirically proven to have promoted consumers' interests.

"Indeed, antitrust history is riddled with silly theories and absurd cases that themselves have restricted and restrained free-market competition and hampered an efficient allocation of resources," Armentano is quoted as saying.

Choosing for examination the antitrust cases against Standard Oil of New Jersey, American Tobacco, Alcoa, United Shoe Machinery, and Microsoft, his view is that nothing about those prosecutions indicates that antitrust regulators can improve competitive markets for the sake of consumers. Competitive markets, he continues, "are legally open markets where all firms, including dominant firms, are rivalrous on their merits and where consumers--and not government or judges--decide winners and losers. Free markets may need protection from fraud (think Bernard Madoff), but they don't need antitrust intervention."

Armentano seems to forget that the natural state of "free markets" is monopoly, or duopoly or oligopoly. That is why anti-monopoly legislation was introduced in the first place.

It is easy to agree with Armentano's analysis that anti-monopoly watchdogs have not always been objective or efficient.

Picking the worst examples of abuse and inefficiency (if these cases qualify) does not, however justify Armentano's conclusion.

The right conclusion is to make anti-trust or anti-monopoly implementation more rigorous, objective and efficient.

To do otherwise is to place too much faith in the customer. For the customer is often short-sighted, and too often short-term-oriented.

The whole point of the theory of the division of power is that freedom needs a devolution of authority, different centres of regulation and self-regulation, so that if one fails the others can attempt to pick up the slack.

Abolishing one such centre of regulation (anti-monopoly authorities) will do nothing to reinforce freedom, and do a lot for reinforcing the hold of collusive oligopolies or even monopolies. Sphere: Related Content

Sunday, May 17, 2009

The 12 discarded myths of our times

1. Systemic risk disappears if capital markets are sufficiently large and efficient

2. Leveraged betting and other financial innovations are uniformly good and create no systemic disadvantages or vulnerabilities

3. Most countries can continue to manipulate their currencies; the consequence may be minor advantages/ disadvantages relative to other countries, but there are no systemic consequences

4. Sub-prime housing is a marginal issue and, in any case, losses will be limited

5. In any case, interest rate cuts will certainly deal with any possible resulting system-wide issues

6. Central banks are on top of inflation and there is no foreseeable reason to imagine that they will not be able to continue doing so

7. Growing stability in emerging markets will make the IMF more and more marginal, or even redundant

8. Even if there is a problem in emerging markets at any time, these are tiny and the global system can cope without any problem

9. The less regulatory supervision there is, the better - we don't even need to register deals worth billions

10. There is no reason for the public, governments or any other authorities to interfere with the structure, process and results regarding incentives by companies

11. Company-level risk-management is all that we need; if we look after this level, then global or systemic risk will look after itself.

12. Large bubbles (e.g. in commodities, oil or housing) or large borrowing flows (current account deficits, term mismatches) are not indicators of systemic risk – and, in any case, we can’t do anything about them. Sphere: Related Content

The Bubble in Optimism extends beyond Finance/ Shares/ Bonds/ Commodities

I hate to dampen anyone's spirits, but there is a huge amount of optimism doing the rounds at present. And that applies not only to shares, bonds, commodities and markets.

Here is how one colleague, who would also like to see a reform of the world financial system, describes the situation today: "As the financial meltdown continues to take its toll on real economies, it is leading to a much-needed world wide re-think of market fundamentalism."

I wish the financial meltdown was indeed leading to a re-think of market fundamentalism - and perhaps such a re-think might yet take place.

But to describe the financial meltdown as already leading to a fundamental re-think is, simply, premature.

Naturally, I agree that market fundamentalism is creaking a little around the edges. For example, there is at least some talk of counter-cyclical provisioning for financial institutions, and the necessity of regulating any institution (whatever it might be called) that behaves like a financial institution.

But these sorts of things hardly amount to a fundamental re-think.

In fact, all the ACTIONS that we have seen (printing more and more money, for instance) reinforce market fundamentalism.

The little that remains is simply TALK so far - though even talk is of course better than nothing.

We should always be optimistic that we CAN bring about change. However that must be combined with realism. We must not fool ourselves into thinking that change has already started.

There is a danger in counting one's chickens before they are hatched. And one must not be over-optimistic, even after they are hatched.

For doesn't another proverb say that there is many a slip between the cup and the lip? Sphere: Related Content

Friday, May 15, 2009

The present bubble in optimism

On March 9, the S&P was at a 12-year closing low of 676 points, since when it rebound by nearly 40 percent. Forty percent in just over 2 months! Based on what? Just on lies being told to us by people in authority!

These sorts of “rallies” are caused by the existence of too much money around the globe - because governments have printed too much money over the last few years.

The S&P Index fell 5% yesterday.

Look for it to fall further.

Such bubble-like rallies will happen, and not just in the S&P.

These rallies are not sustainable, because they are not based on fundamentals.

Great for momentum-oriented day-traders to make money short-term, but forget about such “rallies” if you are not a day-trader.

In spite of such rallies, all markets will head lower in real terms till we have some real solution to the "toxic assets" issue.

At present, no government seems to be pursuing any sensible solution. Sphere: Related Content

How Fares the Middle East (or West Asia)?

The IMF's Regional Economic Outlook (REO) for the Middle East and North African (MENA) region was published on 10 May.

At least two things stand out.

First, the region’s economic growth will slow down to 2.6 per cent this year from 5.7 per cent in 2008 (according to present indications, it may recover to about 3.6 per cent in 2010, the REO said – but, who knows?)

Second, banks and other financial institutions need to conduct their own “stress tests” to identify the extent to which financial sector risks increase the need to strengthen financial supervision and risk management. Specifically, any stress scenario should factor in that so-called “Islamic banks” are greatly exposed to the ongoing property sector downturn. At least another 40% drop in property prices is to be expected in Dubai. Other areas may not be as badly hit but should be prepared for “considerable drops”.

The region has been affected by lower commodity prices, lower export earnings, less FDI, fewer tourists, slower investment flows, and reduced remittances from abroad. However, prudent financial and economic management can help augment high levels of reserves and government “stimulus” spending.

All of the region’s oil-exporting countries – Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the UAE, and Yemen – are feeling the pinch. Regional economies did benefit from less toxic assets, from good domestic markets, and from conservative regulators who have prevented a move into the sorts of sub-prime products that were highly profitable while the economy was booming, but were exposed to huge risks if the economy fell as it did. However, the high crude oil prices and strong investor interest which led to GDP growth of nearly 6 per cent per year between 2004 and 2008 has disappeared, so growth rates are now forecast to decline to 2.3 percent in 2009.

There are also countries which have even less fiscal space – Iran, Sudan, and Yemen –whose governments will have a tough time prioritising their expenditures. Sphere: Related Content

The Economist Magazine's latest view of the current solutions and future prospects

As usual, The Economist Magazine this week (9th - 15th May 2009) is disarmingly accurate in at least parts of its analysis.

For example, it says: "Governments are endorsing high leverage and guaranteeing huge parts of the financial system, so (it gets) to keep the profits and palm off the losses on the taxpayer."

In other words, governments are looting taxpayers to enrich financial institutions.

That is the single reason the "threat of nationalisation has receded, reinvigorating the banks’ share prices. Money is cheap, deposits plentiful and borrowers desperate, so new lending promises handsome margins. Back before the crash, banks’ profits just looked big; today they might even be real."

The Economist goes on to say that "promises to leave finance to fail tomorrow are undermined by today’s vast rescue. Because the market has seen the state step in when the worst happens, it will again let financiers take on too much risk. Because taxpayers will be subsidising banks’ funding costs, they will also be subsidising the dividends of their shareholders and the bonuses of their staff". This is of course an entirely unfair subsidising of one sector of the economy, which had grown too big, and will once again grow too big unless checked.

How can it be checked? The Economist Magazine rejects simple structural solutions, such as banning any company (not simply any financial services company) from being more than say 0.5% of GNP. That sort of simple solution is labelled "Luddite" by The Economist, on the grounds that it would be a "horribly complex and lengthy task".

One must ask: has the current crisis been any less "complex and lengthy" than the disentanglement of large companies would be?

If the "complex and lengthy" task of disentangling "too large" companies will save taxpayers the cost of rescuing these companies again, why is that too much for The Economist?

Instead, The Economist pins its faith on "two more fiddly things that could produce fairly radical results: regulation and capital".

However, after jabbering for three paragraphs, first on one side and then on another, it eventually concedes: "The more a financial system depends on the wisdom of regulators, the more likely it is to fail catastrophically."

In other words, The Economist does not have two solutions. It only has one solution: "Banks should be forced to fund themselves with a lot more equity and other risk capital — possibly using bonds that automatically convert to equity when trouble strikes. Higher capital requirements would put more of the shareholders’ money at risk and, crucially, enable banks to absorb more losses in bad times. Think of it as a margin for regulatory error".

So, at least The Economist has one answer: more capital. But it demurs from answering the question: how much more?

If the so-called "stress tests" (which are better described as "relaxation tests") of the US government are any clue, not very much more capital.

So The Economist (and governments) don't want to face the messy job of really cleaning up the system, but want to continue to fool us into thinking that the system has been cleaned up.

How many years to the next big rescue: anyone? Sphere: Related Content

How big will be Germany's "toxic asset dump" or "bad bank"?

On the 13th of May, the German Cabinet apparently agreed on a plan to establish "bad banks", in order to remove so called " toxic assets" (that is, liabilities that may get very much worse!) from the balance sheets of German banks.

While Berlin hopes the plan will not "further burden German taxpayers", the size of the current burden is not clear. Most people are quoting a figure of €200 billion ($274 billion), but some are quoting $800 billion. Not an insignificant difference!

Part of the problem with such "assets" or "questionable bets" is that no one really knows which company or institutions holds how much of them. Some have not revealed the true size of their holdings in the hope that if the economy returns to growth, some or even most of their presently-sick bets will turn positive.

The officially-sanctioned guess is that the world has something like €3 trillion in toxic assets. Unofficial estimates range beyond $1,400 Trillion.

According to the new German plan, banks will set up their own subsidiaries in which to park these liabilities. The new subsidiaries would then refinance the "bad" assets by the issue of state-backed bonds to the mother bank. That would remove the risk of further write-downs from the balance sheets of banks, and put an end to the quarterly announcements by banks of huge write-downs as the "assets" move from potentially negative value to real negative value. Such movements naturally have consequences for banks' reserve capital holdings, and have led many to the brink of collapse.

The funding for the plan would come from the €500 billion bailout fund, known as Soffin, which was passed last autumn, and apparently still has some €260 billion left in it.

The problem is that if any bank's "bad subsidiary" makes losses greater than the bonds issued, it would of course be again in trouble – and threaten again the value of shareholders' capital in the bank.

Though the above-mentioned German scheme applies only to privately-owned banks, Germany is also full of state-owned banks, many of which are in trouble - but there is a similar scheme being planned for them.

Is all this good or bad? It is good for "confidence" or "faith" in the system. It is bad because of the excessive cost that is being paid to "rescue" ALL "toxic assets".

In my view, only those "toxic assets" should be rescued that were entered into as a necessary part of insuring one's real business. There is no need to rescue people who made it their business to gamble.

Howver, this scheme (like those of many other governments) guarantees the losses of the gamblers, while giving governments no share of the winnings of the gamblers.

Very nice for the gamblers. Very bad for tax-payers who will have to foot the bill. Sphere: Related Content

Should all foreign aid be banned?

EuAsiaNews reported recently that, in 2008, while the European Union officially claimed that it allocated 0.40% of its gross national income (GNI) to aid, the "real" figure might be much lower. At least that was the argument of a report by the European confederation of Relief and Development NGOs (CONCORD), which claims that, out of almost 50 billion euros provided as aid in 2008, close to 5bn euro went to debt cancellation, 2bn euro to hosting foreign students and close to 1bn euro to hosting and repatriating refugees. "Real" European aid amounted to only 0.34% of collective GNI. Javier Pereira, a spokesperson for CONCORD opined that European governments are therefore falling short by nearly 40bn euro on their aid promises.

Well, what should be counted as aid, and what should not be counted as aid, is a fine theoretical argument.

From my point of view, what really matters is: how much of whatever money is given by governments actually reaches the poor.

By all accounts, the proportion is rather small, much (or most) of it ending up in the pockets of corrupt rulers, politicians and officials.

The question therefore is: should one of the rules of the new global framework be to ban all aid that goes from donor governments to recipient governments?

Donor governments should only be allowed to give through NGOs or through their own channels in such a way that the money bypasses inept governments and their corrupt cronies in order to reach the poor themselves. Sphere: Related Content

Wednesday, May 13, 2009

So should we believe the propaganda about "green shoots"?

The correct answer is: No.

However, let's be balanced or nuanced or generous - or something like that:

There are undoubtedly some "green shoots" ... but a few green shoots don't equate to a healthy garden!

If we are really near a recovery, the housing market (for example) would indicate that clearly. But the housing market shows no sign of that anywhere except in the Middle East - and that is hardly a typical market.

Moreover, if global savings are of the order of $100 trillion, then consider that the twelve most industrialized countries in the world will have to issue at least about $10 trillion worth of new bonds to cover the cost of the current crisis.

Ten per cent is not impractical and may not be too much.

However, at least one estimate puts the true (and therefore the likely) cost at $15 trillion in the best scenario.

In the worst scenario, they estimate that the cost could be $33 trillion.

In the median scenario, we should expect that bonds worth around 24 billion will need to be issued to cover the cost of the crisis.

If that won't qualify as a bubble in bonds, what will? To put it differently, how many green shoots are needed to cover a garden of that size? Sphere: Related Content

Monday, May 11, 2009

The Parallels between the Web 3.0 and the Financial Crisis 3.0

William Pesek has a witty piece on this subject, titled: "Irrational Exuberance 3.0 Is Oozing Into Markets"

Here is an excerpt:

"What Web 3.0 has in common with the financial crisis is that its future is in the eye of the beholder. Just as some look at U.S. bank stress tests and rejoice, others are losing sleep over balance sheets. Just as some see Web 3.0 as a vast wilderness of untapped business opportunities, others are concerned that cyberspace’s next generation will erase all privacy and copyrights."

The full piece is at: http://www.bloomberg.com/apps/news?pid=20601039&sid=axNZNGYnYnt8&refer=home (accessed at 0858 GMT today) Sphere: Related Content

Are Pension Funds going to help companies become more sustainable and responsible?

Colin Melvin, the Chief Executive of Hermes Equity Ownership Services, argues in a piece published on the BBC website a fortnight ago that pension funds are now going to be more active in ensuring good governance, a more long-term view, sustainability and responsibility. If he is right, that would be most welcome ("Pension funds tackle short-termism",
http://news.bbc.co.uk/2/hi/business/8003099.stm at 1302 GMT on 11May09) Sphere: Related Content

Wednesday, May 06, 2009

Does the USA need a Systemic Risk Council?

YES, argued FDIC Chairman Sheila Bair said in testimony prepared for delivery to the Senate Banking Committee today.

She believes that there is a need to set up a Council or Committee to keep an eye on system-wide risks. To be effective, the Committee or Council should bring together the expertise of the U.S. Treasury, the Fed, the FDIC and the Securities and Exchange Commission.

Lots of us have been arguing for some time that there needs to be co-ordinated financial oversight instead of the overlapping patchwork the US has at present.

However, any such Committee or Council will only be effective if at least the following conditions are met:

1. The Council is appointed by the President of the USA.

2. It consists of either 5 or 7 individuals, appointed for 7 years.

3. No renewals of the term of Councillors are possible.

4. The Council has its own budget - and a sufficient one at that.

5. The Council can undertake or commission independent studies into the question of systemic risk.

6. The Council has the power to summon the heads of the Treasury, the Fed, the FDIC and the Securities and Exchange Commission - as well as any lesser officials in these and other relevant organisations (e.g. all companies, NGOs, consultancies, academics).

7. The Council is required to issue a quarterly "Systemic Risk Report" directly to the public (not to the President or to the legislature), covering at least the following: asset price bubbles, commodity price bubbles, gold price bubbles, stock price bubbles, credit bubbles, money supply bubbles, speculative bubbles and government debt bubbles.

However, as I have often pointed out in these columns, we are in the middle of a systemic crisis in spite of the fact that we have plenty of foreknowledge about it (and I have documented the many and varied authorities who were warning about the issue).

So the other measures that I recommended in my Open Letter to President Obama (measures which people in authority, I am pleased to see, are slowly coming around to) will remain equally necessary. Sphere: Related Content

The FT finally agrees to the need for a tax framework that is global, not merely national

See the lead editorial in today's FT: "Level the field for tax competition", page 10. Sphere: Related Content

Are the EU's proposed regulations for hedge funds et al too strict or too lax?

As might be expected, the proposals are a mixture of the too-lax and the too-strict.

For example, the Commission has proposed mandatory registration of managers of alternative investment funds selling to professional investors in the EU, but with exemptions for managers of very small portfolios. This makes sense, provided the registration is possible on any one of several competing exchanges: registration provides transparency and the possibility of checking on reliability; competing exchanges provide the possibility of efficiency, innovation and value-for-money.

On the other hand, consider the propositiong that financial institutions retain only 5 per cent of the securitised products they originate and sell. How much profit does one need to make on the 95% that one can sell, in order to be incentivised to sell absolute crap? Given industry practices, any requirement to hold less than 25% is an open invitation to continue with the kinds of activities that have led to the present crisis. Sphere: Related Content

Tuesday, May 05, 2009

A comment regarding my post on The Two Futures Project

I do not usually post anonymous mails, but I did so in relation to this post because the author rang me and revealed his identity.

He wrote "It is illogical and embarrassing to maintain inflated military spending in this economic environment. The USA has a budget for 2009 of 651 billion dollars. That's twice the military budget of EU, and almost 10 times the military budget of China. The US military budget has risen by over $100bn from $530bn in 2007."

The writer's concern is legitimate but ill founded. We do live in a world where lust, greed, fear and other emotions drive people to do terrible things. A balance of power keeps the worst things in check.

Were it not for the military umbrella provided by the USA, most countries in the "free world" (e.g. in Europe) would have had to spend that much from their own budgets in order to maintain their sovereignty.

Now that US power is declining, we can see not only the Iranians and North Koreans posturing, but even pirates....

The lesson of history is tht when any dominant world power declines, the stage is set for struggles for global and/ or regional domination. Expect, therefore, for example, a struggle for power between Russia and the EU, and between China and other Asian powers.

The US military budget, like the military budget of some other countries contains some matters that are not exclusively military (R&D for example) which produce some civilian benefits. However, I would like all weapons to be abolished and all war to cease. But as long as we do have weapons and war, I would rather that the US (or similar countries) kept as high a military budget as necessary to keep in check powers such as China which are undemocratic and do not respect human rights.

So how do I reconcile that position with my cheering the Two Futures Project? The latter is about a common worldwide agreement to abolish nuclear weapons, just as we have had various other global treaties.

If it were possible to abolish war entirely by means of a global treaty, I would welcome that too. However, I fear that that will be beyond the bounds of possibility, this side of Heaven. Meanwhile, we must get on with what we can. Sphere: Related Content

Instead of government bailouts, why not insure the largest financial services institutions?

Good idea, but probably impractical.

That is the only conclusion that can be reached from a study conducted by the
Basel Committee on Banking Supervision, whose new paper proposes a framework
for measuring and stress testing the systemic risk posed by a group of major financial institutions.

I will spare you the details of the methodology (which you can easily look up on the Basel Committee's website: http://www.bis.org/publ/work281.htm)

The theoretical insurance premium suggested by the framework that would be charged to protect against losses that equal or exceed 15% of total liabilities of 12 major US financial firms was $110 billion in March 2008, up to a possible high of $250 billion in July 2008.

In other words, if the sort of insurance scheme proposed by the Basel Committee had been in existence, it would have cost the 12 companies $110 billion to buy such insurance in March 2008, but $250 billion in July 2008.

Even $110 billion is a heck of a lot of money to pay out for insurance!

And how would you like your insurance premium swinging by more than 100% in 3 months?

Finally, would such an insurance scheme not be pro-cyclical rather than anti-cyclical? Sphere: Related Content

A key announcement which will affect the future of the financial crisis

My readers will know that I have urged them to ignore all the other "noise" that is generated regarding the financial crisis, and to focus exclusively on what is happening or is likely to happen regarding toxic assets.

Speaking a few days ago at an accounting conference at Baruch College in New York City, Robert Herz, (Chairman of the Financial Accounting Standards Board or FASB, which sets U.S. accounting rules), is "pretty close" to issuing a new standard on securitization accounting that will affect off-balance sheet assets.

We should expect the new standard "in the next few months", he said, and it is intended to take effect next year.

The change, to two accounting rules known as FAS 140 and FIN 46R, will impact the treatment of the trillions of dollars in off-balance-sheet assets. The FASB already voted last year to eliminate the concept of the "qualifying special-purpose entity," or QSPE. Banks used these to keep "assets" like mortgage-backed securities off their books.

Earlier standards on off-balance sheet accounting had been "stretched, abused and
violated" in the run-up to the credit crisis, he said.

I wait to see if the new standard will actually create transparency - it is possible to create transparency by several different means.

The reaction of the investment industrym to the proposed EU rules regarding the matter, is not a good omen. It seems that the investment industry is scared stiff of transparency and does not want any of it. Clearly, the investment industry prefers to try to keep its activities unhampered, even it that means that the whole of the rest of the world suffers. Sphere: Related Content

The US and China now equally unreliable on financial information

A few days ago, China announced new rules for foreign providers of financial information.

According to these, such companies as Bloomberg, Dow Jones and Thomson Reuters, must avoid furnishing domestic clients with information that could destabilize markets or stir up social tension.

As it is nowadays impossible to provide any information to non-Chinese clients without at least taking the risk of some of that information "leaking" to Chinese clients, this means that ALL information coming out of such informaiton providers will be self-censored if they wish to do any business in China. That, in turn, means that all information coming from any such organisation is, in principle, unreliable as far as that regards China.

Not that it was, even at the best of times, possible to be comprehensive and reliable regarding financial information regarding China! But we could have been at least somewhat confident, earlier, that providers of financial information were trying their best to be comprehensive and reliable. Now even that confidence is taken away. We have to simply accept Chinese propaganda wholesale - or ignore China completely when it comes to thinking about any investments or the impact of any investments.

Under the new rules, which come into effect on June 1, foreign providers of financial information must not distribute data that "contravenes the basic principles of the constitution of the People's Republic of China" - in other words, they cannot report any demonstrations or news regarding any dissidents; indeed, anything that questions the control of the Communist Party or its ideas, rules and policies. Equally banned is anything that threatens state security or national unity, and information that "damages the economy, finances, the capital markets or social stability".

The rules will be overseen by the State Council Information Centre, which is to replace Xinhua as the regulator.

China used to jail reporters who had the temerity to disclose financial data. It seems that the bad old days are back.

So much for woolly-brained people who believe that "engagement" with exploitative elites inevitability leads to "increasing openness". At least in China's case, after some hesitant openness over the last 20 years or so, the gates seem to be shutting fast and returning the country to Mao's days as far as press freedom is concerned.

Economic decline is bound to follow - sooner or later.

Meanwhile, what about the USA? Is it any better? Not really. Companies used to be forced to "mark to market" - that is, they were required to put their assets and liabilities at market value, according to more or less established and internationally accepted models for calculating their value. That is no longer the case. According to the new US rules, companies can now put the value of their assets and liabilities down in their books at whatever they like.

Beware therefore of new figures coming out of US companies indicating that they are returning to health.

Now you simply don't know. They may actually be starting to become healthy. Or they may simply be fooling you.

Investors now have less and less reliable information on which to make their decisions, whether from China or from the USA.

What can be done about such developments? I hope that everyone with any intelligence will use their influence to get the USA back on track regarding "mark to Market" (valuation models can always be improved and are always being improved by academics and theorists working on them, but inefficient valuation models are not a sufficient basis for throwing them out entirely; and to the argument that "mark to market" is pro-cyclical, the proper reply is: in that case, we need all kinds of other measures to actually stabilise markets across cycles, not open the possibility of fooling most of the people most of the time by enabling companies to put a false gloss on the information they make available).

And what can be done about China? I hope that all foreign publishers of financial information will band together and simply boycott Chinese financial information (which is the same now as "Chinese financial disinformation"). More, that foreign investors will also now boycott China as long as there is policy-induced decrease in information accuracy and transparency. Sphere: Related Content

Monday, May 04, 2009

What has been the cost in the US alone of saving the losers by "financial stimulus packages"? Why not ask the "winners" to contribute?

According to one estimate published a few days ago, the value of all the direct spending, loans and guarantees provided so far (including those of the Federal Deposit Insurance Corporation (FDIC) as well as Treasury and the Federal Reserve Board) now exceeds $4 trillion.

That needs to be seen in the context of the USA's GDP which is roughly 14 Trillion and falling.

And that needs to be seen also in the context of the fact that my plan to deal with the crisis would have cost much less (this was put forward in my Open Letter to President Obama, which was then published on the Internet; it suggested paying only for the insurance-component of global deals which had gone sour, and to let the global gamblers suffer the results of their gambling).

Instead, as the average taxpayer is now paying for the FULL losses of the gamblers, it is not surprising that the OTC gambling has actually increased - with the result that the value of derivatives, hedge funds et al, has arisen from 1.1 quadrillion in the Autumn to over 1.4 quadrillion now.

In any gambling, there must be losers as well as winners. So, while we are busy bailing out the losers, here are the questions that are not being asked:
- Who has been winning?
- Why are the winners not being asked to contribute to addressing the global financial crisis by being made to pay extra taxes on their windfall profits? Sphere: Related Content

Friday, May 01, 2009

The Two-Futures Project

Most of my readers know that I am anti-Christian and anti-relgious because I am a follower of Jesus the Lord. However, whenever people do what is right (including christians and other religious people), then I try to recognise that.

So I am pleased to see American Evangelicals finally waking up to their global public policy responsibilities regarding the imperative of abolishing nuclear weapons.

Coming on top of the Evangelical declaration on the environment a few years ago, this is very positive. However, it is a pity that they, even today, see this as an "American" movement - as if Evangelicals from other parts of the world are irrelevant (at a time when there are more Evangelicals in other parts of the world than in the USA!). This is particularly ironic when at least one of the people listed on their Endorsements site is English.

For information on the Two-Futures Project: http://twofuturesproject.org/?page_id=130 Sphere: Related Content

Signs of the End of the Crisis? House prices vs. toxic assets

At a lecture that I was asked to give last week, someone asked (again!) how long I expect the crisis to continue.

The answer depends on the criteria one uses.

If one takes the restoration of speculation as the sign that the crisis is over (after all it was speculation which lifted oil to $140 and commodity prices to a high with them - and that is what caused poor people to be unable to meet their mortgage payments, a phenomenon now known as the "sub-prime crisis") then I hope that the economy never recovers. At least, I hope that that particular feature of the economy never comes back. Who wants speculation to push oil and commodity prices to those levels again?

If you take equity prices as your criterion of recovery, then by the sorts of stock price movements we are seeing you could say that the crisis is at least nearing the end of the fall (a fool's position).

But if you use house prices as your simple criterion of when the economy will recover (after all the sub-prime crisis consisted of the consequences of the fall in house prices), then it is worth noting that by February this year, average home prices were at similar levels to what they were in the third quarter of 2003. How far will house prices fall? Well, the house price cycle in the USA is roughly 12 years...in "normal" times, and we are not in normal times!

Let me not depress you further: the crisis can be easily resolved if society and politicians have the guts to take the right actions (such as those outlined in my Open Letter to President Obama). Fortunately, many people ARE now beginning to at least contemplate taking those sorts of actions (as my Blogs have been documenting).

However, as long as those sorts of actions are not actually taken, Chancellor Merkel and President Obama will continue to be false prophets. A broad-based recovery can be expected, not within 18-24 months from now anyway, as most pundits opine, but in something like half a year of the right sorts of actions being taken.

The most important of such actions relate to toxic assets. So if you want to know how long the crisis will last, ignore all the noise about everything else (including so-called “stimulus packages”) that is coming from politicians, economists or businesspeople. Instead, focus on whatever is being discussed (and done!) in terms of the clearing up of toxic assets. Sphere: Related Content

The Nature and Future of the Current Economic Crisis

The headlines in the last couple of days are about economic gloom abating and business confidence rising.

Don't be fooled. The disease is much more fundamental.

Professor Simon Johnson of MIT (who used to be the IMF's Chief Economist in 2007 adn 2008) has published an article that does not so much echo my position as it puts the position much more thoroughly and elegantly.

The piece, entitled "The Quiet Coup" is at http://www.theatlantic.com/doc/200905/imf-advice

I occasionally follow Professor Johnson's blog but I am not a subsciber to The Atlantic: many thanks, therefore, to my friend Friedrich Christian Haas for drawing my attention to this article. Sphere: Related Content