Monday, December 22, 2008


Mugabe is out of options, and this is yet another failure for developed nations. This man has, to put it as civilly as I can 'grossly mismanaged' the country of Zimbabwe. Thomas Barnett has outlined ways to "process" failed states in his book "The Pentagon's New Map". If there is a perfect example of a failed state, Zimbabwe is it. It is notable that the G20 is reluctant to act here. Another negative outcome for those who thought that globalization was inevitable and self-sustaining.

Such plans suggest that Mugabe doesn’t plan to bow to calls to step down as the economy collapses and cholera spreads. Yesterday Jendayi Frazer, the top U.S. envoy for Africa, said that Mugabe has “lost it” and “credible power sharing” with him isn’t possible. Zimbabwe is in its tenth year of recession, with an annual inflation rate of more 230 million percent and an unemployment rate more than 80 percent.

Fraying at the edges

People cannot expect representative governments to act decisively during harsh economic way or another, we are seeing a preference for more totalitarian forms of governance. Not good.

"Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licences" to choke off imports.
The Kremlin is alarmed by a 13pc fall in industrial output over the last five months. There have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul. Police crushed "Dissent Marchers" holding copies of Russia's constitution above their heads in Moscow's Triumfalnaya Square.
"Russia has not seen anything like these nationwide protests before," said Boris Kagarlitsky from Moscow's Globalization Institute.
The Duma is widening the treason law to catch most forms of political dissent, and unwelcome forms of journalism. Jury trials for state crimes are to be abolished.
Yevgeny Kiseloyov at the Moscow Times said it feels eerily like December 1 1934 when Stalin unveiled his "Enemies of the People" law, kicking off the Great Terror.
The omens are not good in China either. Taxis are being bugged by state police. The great unknown is how Beijing will respond as its state-directed export strategy hits a brick wall, leaving exposed a vast eyesore of concrete and excess plant."

Wednesday, December 17, 2008

Strange bedfellows...

Russia and OPEC in coordinated production cuts.

Very interesting, and most likely very temporary. With both countries reeling from the collapse in oil prices (and the corresponding collapse in their investment portfolios magnified by greater domestic spending commitments made when oil was well over $100 per barrel), an opening of the cartel to new membership was inevitable.

However look at the incentive to "cheat" here...offering a lower price product to gain market share would be a rational move as well. This "coordination" will not last.

The Kremlin will risk throwing away its membership of the G8 group of leading economies by acting with the cartel in reducing supplies.
Russian leaders have sent strong signals that they will agree the unprecedented move at the same time as Opec convenes an emergency meeting in Algeria on Wednesday.
Russia has been under pressure from Opec to cut as many as 300,000 of the 9.75 million barrels it produces each day to help maintain prices.
Dmitry Medvedev, the Russian president, has even hinted that his country – the world's largest oil producer and second largest exporter – could join Opec despite the potential political fall out.
In an attempt to arrest a 66 per cent slide in the price of oil, the cartel could this week announce a record cut of 2.5 million barrels per day. A barrel of oil was trading at $50 on Monday, nearly $100 off July's record high.
Russia, which has always resisted joint action with Opec in the past, risks incurring the wrath of the United States if it goes ahead. Analysts warn that Congress could lead a campaign to have Russia thrown out of the G8.

Tuesday, December 16, 2008

And the kitchen sink too...

Fed surprises no-one with rate cut, and pledges to throw everything it has at the enemy...

(relevant language from today's Fed commentary)

The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Swiss Re: "Maybe trading is not our core business"

More likely this comes as some sort of a concession to regulatory agencies in exchange for government capital infusions.

Swiss Re outsources some trading, drops life ILS

LONDON, Dec 15 (Reuters) - Swiss Re (RUKN.VX: Quote, Profile, Research, Stock Buzz) is to outsource trading of equities and alternative investments and cease structuring life insurance linked securities for clients, the world's second-largest reinsurer said on Monday.

The moves are part of a continuing reorganisation of Swiss Re's financial markets unit, which creates products to transfer insurance risks to capital markets and manages assets generated by the company's (re)insurance activities.

A new Investment Platform Division within the financial markets unit will manage external mandates in equities and alternative investments. Management of assets used to match the firm's (re)insurance liabilities, including rates, credit and securitised products, will be kept in-house.

Dan Ozizmir will continue to head up insurance-linked securities (ILS) activities, which will be focused on natural catastrophe and weather risk. Swiss Re will no longer structure life securitisations for clients.

"We are very supportive of the life ILS market and will also continue to be an active issuer of life ILS when we think the pricing is attractive to us," a spokesman for the company said.

"We have built up strong skills and talent in the life ILS team which will redeploy to support the transfer of Swiss Re's own life risks to the financial markets. But we have stopped issuing life ILS deals for third parties in their current form."

Monday, December 15, 2008


The Fed and Treasury are getting closer to the only viable solution: support of the housing market via purchase of GSE housing securities.

Now its up to Congress to create some tax holidays on the fiscal side and we will come as close as possible to "fixing" what is capable of mending.

relevant section:

The Fed is already targeting mortgage rates. The central bank believes it can buy Fannie and Freddie securities without any credit risk because the government now stands behind them. Senior Fed officials are enthused by the impact of their announcement about buying Fannie and Freddie paper and see scope for more large-scale intervention.

The central bank has a limitless capacity to buy Fannie and Freddie securities, providing it is willing to expand the money supply – something that helps guard against deflation. Alternatively it could issue debt to fund purchases, although this would require approval from Congress.

The Fed effort and any new Treasury efforts to hammer down loan rates could operate in parallel. But the two initiatives might come together, with the Fed buying the 4.5 per cent loan securities.

Interest is also growing in a much more ambitious version of the low-cost loan plan that would involve offering 4.5 per cent loans to refinance existing mortgages as well.

This would have some extra effect on house prices but its main importance would be as a macroeconomic stimulus: a de facto tax cut for homeowners.

Thursday, December 11, 2008

"Civil Unrest" in the EU's soft spots...

The title of this article says it all...

Greek fighting: the eurozone's weakest link starts to crack
Posted By: Ambrose Evans-Pritchard at Dec 10, 2008 at 07:47:15 [General]
Posted in: Foreign Correspondents , Business
Tags:View More
Economics, EU, Euro, Eurozone, Greece, Greek fighting

The last time I visited Greece, I was caught in the middle of a tear-gas charge by police in Thessaloniki - a remarkably unpleasant experience, if you have not tried it. My eyes were in screaming pain for an hour.

Protesters throw stones at police in the Greek city of Thessaloniki

Protesters smashed up the shops on the main drag, broke the windows of my hotel, and torched a few cars.

So the latest four-day episode in Athens and other Greek cities comes as no great surprise. The Greeks are a feisty people. This is meant as a compliment - broadly speaking - just in case any Greek readers should take it the wrong way. Hitler was so impressed by Greek bravery that he accorded Greek soldiers full military honours, almost the sole example among captive nations in the East - or at least professed to do so at first.

That said, these riots are roughly what eurosceptics expected to see, at some point, at the periphery of the euro-zone as the slow-burn effects (excuse the pun) of Europe's monetary union begin to corrode the democratic legitimacy of governments.

Note two stories in Kathimerini (English Edition)

"Athens riots spin totally out of control"

And an editorial: "Greece has gone up in flames and the concept of democracy and law and order has been eliminated"

Without wanting to rehearse all the pros and cons of euro membership yet again, or debate whether EMU is a "optimal currency area", there is obviously a problem for countries like Greece that were let into EMU for political reasons before their economies had been reformed enough to cope with the rigours of euro life - over the long run.

In the case of Greece, of course, Athens was found guilty by Eurostat of committing "statistical achemy" to get into the system - ie, they lied about their deficits.

Be that as it may. Greece's euro membership has now led to a warped economy. The current account deficit is 15pc of GDP, the eurozone's highest by far. Indeed, the deficit ($53bn) is the sixth biggest in the world in absolute terms -- quite a feat for a country of 11m people.

Wednesday, December 10, 2008

Much more of this to come...

Actuarial expertise with physical systems (cars, lifespans, health, etc.) does not necessarily translate over to expertise in managing the more "convex" (things can go bad...very, very quickly) risks embedded in financial products.

Like Bond Insurance, for instance. This is a much more complicated system, defaults tend to cascade (like we are seeing now), and multiple players require massive capital infusion...simultaneously.

The Insurance industry as a whole face even more difficulty given the current yield curve. It is difficult to fund long-term liabilities when insurance regulations (the individual states regulate insurance companies) require you to hold much of your investable capital in bonds, and much of those in Treasuries and other "safe" investments...which now are yielding...2%.

XL Capital hires Goldman to explore sale: report
Wed Dec 10, 2008 5:35pm EST
NEW YORK (Reuters) - Bermuda-based reinsurer XL Capital Ltd (XL.N: Quote, Profile, Research, Stock Buzz) has hired Goldman Sachs as an adviser to explore a sale of the company, Bloomberg reported on Wednesday, citing unnamed sources.

XL shares fell as much as 51 percent before closing down 32.6 percent, or $1.89, at $3.90 on the New York Stock Exchange. The stock has lost 94 percent of its value over the past year.

XL officials did not return several calls seeking comment, and Goldman Sachs declined to comment.

Last month, the insurer posted a quarterly net loss of $1.65 billion, hurt by charges related to a stake it held in troubled bond insurer Syncora Holdings Ltd (SCA.N: Quote, Profile, Research, Stock Buzz), impairments and investment losses.

Analysts said XL has been able to get rid of the liabilities by making a payment to Syncora, and has strong business prospects. Still, the list of potential buyers are slim.

False beliefs...

There was no commodity "supercycle". Passive commodity investment vehicles, bought commodities because their prices were increasing.

Recall (in a previous post) that a large investment bank proclaimed oil was going to 200 almost immediately prior to the start of the crash.

Investments must be sold in order to book profits. Creating a demand for others to sell into is a wonderful business.

By Ambrose Evans-Pritchard
Last Updated: 7:37PM GMT 10 Dec 2008
Comments 1 | Comment on this article
The bill has now fallen due. Tom Albanese, the chief executive, is cutting 14,000 jobs and slashing investment by $5bn over the next year in a frantic effort to lower debt. " He cited the "unprecedented rapidity and severity of the global economic downturn."
The last straw may have been a push by China to cut iron ore contracts for 2009 by 82pc, although almost every part of Rio's portfolio has been savaged by the metals crash. The trio of copper, lead, and zinc have now fallen by over 60pc since peaking in the summer. They have dropped further – and faster – than they did during the Great Depression from 1929 to 1933.
It has been an article of faith in the markets that the commodity bust would be over quickly, followed by a V-shaped recovery as the Malthusian dearth of oil, metals, and food, reasserts itself – and as the industrial revolutions of China and India trump falling demand in the Old World.
But the "Supercycle" thesis itself is now being called into question. The World Bank's global outlook this week suggested that credit excess had pushed commodity prices far above their sustainable level in this cycle. "Over the longer run, the price of extracted commodities should fall," it said.

Crossroads for China...

While a transition to a Popperesque "Open Society" is unlikely, economic conditions have this amazing ability to cause rapid change in previously ossified political entities.

The main issue for China is one of perspective. While I typically avoid EITHER/OR dichotomies (as social issues are far more varied and complex), it would appear that China can EITHER attempt to transition, piecemeal, into a more open society and accept its place in the world as a valuable economic engine and be subject to the violent gyrations such a position entails...

OR, it can always regress and do what tradition call for: isolate itself from the world, expropriate foreign capital and wait a few hundred years to try this thing called "capitalism" again.

Call sounds for Ch1na democracy
By Kathrin H1lle in Beijing

Published: December 10 2008 02:00 | Last updated: December 10 2008 04:37

More than 300 Chinese intellectuals called yesterday for the creation of a new democracy movement in a sign of growing dissatisfaction with the Chinese Communist party's strategy of encouraging economic reform without meaningful political liberalisation.

The Chinese Human Rights Defenders, a group of lawyers largely organised through the internet, published a document named Charter 08 demanding constitutional reforms, multi-party democracy and the rule of law. The charter has the support of writers, lawyers and university professors from all over China.

Some of the signatories said they were following the spirit of the Charter 77, an appeal issued by intellectuals in Communist Czechoslovakia more than 30 years ago criticizing the government for its failure to respect human rights.

Like its Czech predecessor, Charter 08 does not call for the overthrow of the ruling Communist Party, aiming instead to encourage a broader, more open debate on human rights and democracy.

"We are not a political party and are not seeking to establish one," said Zhang Zuhua, a well known political activist who is a prominent member of Chinese Human Rights Defenders.

"We just feel that the authorities have long talked about democracy but there has been no real change, so we hope to create a broad consensus in society for the universal values of human rights and democracy which would raise the pressure on them," Mr Zhang said.

The fact that several hundred intellectuals are publicly supporting the initiative is certain to be perceived as a challenge by the Communist Party, which is scrambling to deal with a sharp economic slowdown that the leadership has warned could lead to unrest if not managed well.

Tuesday, December 09, 2008

Transparency International's bribery index...

...interesting to compare this index (which has its problems, no doubt) to G20 economic powers list.

and then there is my home state of Illinois, once again demonstrating its commitment to fairness and good policy as our Governor has been arrested for allegedly trying to sell Barack Obama's Senate seat to the highest bidder.

Chicago Tribune reports a source said that Gov. Rod Blagojevich was taken
into federal custody at his North Side home this morning. The U.S.
attorney's office would not confirm the information, and a spokesman for the
governor did not immediately return a phone call for comment. A three-year
federal corruption investigation of pay-to-play politics in Gov. Rod
Blagojevich's administration has expanded to include his impending selection
of a new U.S. senator to succeed President-elect Barack Obama, the Tribune
has learned. Federal authorities got approval from a judge before the
November general election to secretly record the governor, sources told the
Tribune, and among their concerns was whether the selection process might be
tainted. That possibility has become a focus in an intensifying
investigation that has included recordings of the governor and the
cooperation of one of his closest friends. The governor has not been accused
of any wrongdoing. The specific contents of the recent recordings have not
been disclosed. Blagojevich has said the appointment of a Senate successor,
which is his choice alone, could come in a matter of weeks.

Monday, December 08, 2008

Russia and external debt...

While the above chart (sent to me by a friend) is an interesting take on Russia's travails (one can also find just about any equity index depicting a similar relationship), having external foreign currency obligations that cannot be met and a history of devaluation can certainly alter investor behavior.

Capital controls and other distractions will be will continued aggression on energy policy (and perhaps militarily as well). Putin has not "staked his credibility" (with whom?) on a stable ruble. This is a G8 county will sub a G100 view of the world. How he will keep order will be described by future historians as a "draconian lack of due process".

Rouble exodus hits Russia credit rating
By Catherine Belton in Moscow
Published: December 8 2008 19:17 | Last updated: December 8 2008 19:17
Russia on Monday became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s took fright at the recent exodus from the rouble and sharp drop in oil prices.

S&P said it had lowered Russia's foreign currency credit rating by one notch from BBB+ to BBB because of the “rapid depletion” of the country’s foreign exchange reserves and the “difficulty of meeting the country’s external financing needs”. It said the outlook for the rating was negative.

Russia’s reserves have fallen by $128bn since August to $455bn, as the country battles the capital flight that began following the war with Georgia and escalated as the oil price fell and the global crisis worsened.

S&P said Russia could be forced to spend all $200bn now parked in its two sovereign wealth funds on recapitalising the banking system and covering fiscal deficits in 2009 and 2010.

My home state of Illinois...

...becomes the latest example of the themes discussed here (and in many other places). Nationalization and politicization of private capital is one of the more slippery slopes to Hayek's road to Serfdom.

Then again, banks have not had the most stellar record in loan decision making...

By David Mildenberg

Dec. 8 (Bloomberg) -- Illinois Governor Rod Blagojevich said today the state would suspend its business with Bank of America Corp. until the lender restores credit to the shuttered Republic Windows & Doors company in Chicago where workers are staging a sit-in.

Blagojevich commented at a news conference after meeting with employees who have stayed at the factory since Dec. 5, when it closed after the bank canceled its line of credit. Illinois does “hundreds of millions of dollars” in business with the bank, he said.

“We’re hoping negotiations this afternoon with the bank and company are successful and they can make things happen,” Kelly Quinn, a spokeswoman for Blagojevich, said. “The governor believes we should be putting people to work, not sending them to the unemployment line.

The protest by members of the United Electrical, Radio and Machine Workers Union has received support from President-elect Barack Obama, who said at a news conference in Chicago yesterday that the workers are justified in demanding their benefits and pay.

“I think they’re absolutely right,” said Obama, who gave up his U.S. Senate seat from llinois last month. “I think that these workers, if they have earned these benefits and their pay, then these companies need to follow through on those commitments.”

Thursday, December 04, 2008

Shifting of supply.

Diversifying your supply of energy (oil) is always a smart move, and producers who have formerly not heeded the desires of their customers usually end up learning a difficult lesson.

In this case, the gulf, with its implicit policy of targeting price and letting the quantity of oil adjust to that price (and accumulating overplus profits in the process) misjudged the patience of its largest customer.

Service providers (and other businesses further down the ecosystem) for petrodollars are going to feel the pain as well.

The Downturn Hits Dubai

By Stanley Reed
With plummeting oil prices causing the Persian Gulf economy to shrivel, Dubai's push to become a global financial hub is in jeopardy.

For a year or so, the movers and shakers of the small but oil-rich United Arab Emirates have watched the unfolding of the credit crisis in the West with a mixture of dismay and denial. It won't happen here, was their view. And for a long time it didn't. But now it is. The price of oil, the lifeblood of the Persian Gulf economy, has fallen more than 60 percent since its mid-July peak. Real estate, the other mainstay, especially in oil-poor Dubai, has been quick to follow. An industry source in Dubai estimates that prices, which rose about 14.4 percent in the first eight months of this year, have suddenly dropped by 20 percent to 30 percent, with some developments seeing 50 percent declines.

With prices for villas and apartments falling and sales grinding to a halt, big developers such as Nakheel, which is building the iconic palm frond-shaped projects on fill dredged from the sea bottom, are halting construction and laying off staff. Jobs, though on a lesser scale, also are being lost at investment banks such as Morgan Stanley and Goldman Sachs, which have seen the Gulf as one place business was not drying up. They are now trimming staff, to the alarm of the local authorities, who have staked their future on the Gulf's becoming a global financial center.

A chill wind is blowing through the Gulf. Credit has dried up; stock exchanges have crashed; and the region's once-vaunted Sovereign Wealth Funds, set up to save for a future when oil reserves are exhausted, have instead sustained huge losses, potentially in the hundreds of billions of dollars.

War Council

The diciest situation is unfolding in the UAE, where the sheikhs of Dubai -- the second-largest of seven emirates -- are at last realizing that they need to call time on a decade-long, debt-fueled building and acquisition spree. That admission came most explicitly in the recent naming by the ruler of Dubai, Mohammed bin Rashid al Maktoum, of what looks like a war council composed of nine of the top executives of what is known as Dubai Inc. That's the network of companies such as Dubai World, Emirates Airline, and Dubai Holding that are controlled by the ruling family and the government. "Yes, we recognize the new reality," said the Council's Chairman Mohamed Alabbar on Nov. 24. "Make no mistake."

It has long been assumed that if Dubai got into trouble, it would be bailed out by its neighbor, Abu Dhabi, one of the great oil powers and the deep pockets behind the UAE. Already there are signs of a rescue process beginning. It's being handled at the UAE federal level, with Abu Dhabi likely providing whatever funding is needed. Trading in the shares of two publicly traded but partly state-owned mortgage finance companies, Tamweel and Amlak Finance, was suspended on Nov. 20. The two companies, which account for about 50 percent of the mortgage market, with $5.5 billion (€4.3 billion) in assets, are to be merged into a little known federal government entity called the Real Estate Bank of the UAE.

In addition, the UAE has guaranteed all bank deposits for three years and has earmarked about $33 billion for support of the banking system. Nominally, the capital is coming from the central bank and the UAE Ministry of Finance, but, as one analyst put it, "All money in the UAE comes from Abu Dhabi."

Wednesday, December 03, 2008

And here...we...go.

I thoroughly enjoyed the movie "The Dark Knight". There is a memorable scene near the end of the film where the devious antagonist, The Joker, vocalizes his emotional reaction to (what he thinks is) an inevitably explosive situation.

He states "and here...we...go."

In keeping with previous posts (and humbly omitting any references to paper dragons and the like), how does one translate that into Mandarin?

The move follows a Politburo speech by President Hu Jintao warning that China is "losing competitive edge in the world market".
China has allowed a crawling 20pc revaluation over the past three years. Any reversal risks setting off conflict with the incoming team of President-Elect Barack Obama in Washington. Mr Obama called China a "currency manipulator" during the campaign, a term that carries penalties under US trade law.
Outgoing US Treasury Secretary Hank Paulson is viewed as a "friend of China". He called for a stronger yuan this week before embarking on a visit to Beijing, but the plea was couched in friendly terms. This soft-peddling may soon change.
Hans Redeker, currency head at BNP Paribas, said China's policy switch could set off a dangerous chain of events. "If they play this beggar-thy-neighbour game, it will cause a deflationary shock for the whole world," he said.


...of the rule of law and free speech being circumvented for economic expedience. Again, "national interest" is a more expansive concept during times of economic stress.

"Green had embarrassed the Home Office -- which oversees police and immigration matters -- by publicizing confidential documents showing that a recession would lead to a rise in crime and that it had cleared 5,000 illegal immigrants to work as private guards and one to work as a Parliament janitor.
Police held Green, the Conservative Party‘s immigration spokesman, for nine hours. They searched his offices and homes in London and Kent in Southeast England, confiscating his mobile phone, Blackberry and computers. A police statement said they were investigating whether Green was conspiring to “commit misconduct in a public office” by encouraging leaks...
“If there was a threat to national security, it is right for the police to investigate and for them to take action,” George Foulkes, a Labour member of the House of Lords, told BBC Radio 4 earlier. Replying, David Davis, Green’s former boss, said the suggestion was “entirely ludicrous.”


By Aleks TapinshAAPDecember 02, 2008 01:45pm
TALKING about the global financial crisis can land you two years in jail in Latvia, under a new law that has seen a muscian and economist arrested for wondering if their bank deposits are safe.
The Baltic state's new law against spreading false financial information has outraged human rights campaigners.
In one of a string of high-profile cases, musician Valters Fridenbergs faced a police investigation after he urged the audience to withdraw their money from two major banks.
He later claimed it was a joke, but the police launched a probe nonetheless.
Security police also arrested an economics lecturer, for "distributing untrue data or news about the conditions of the finance system of the Republic of Latvia''.

Academic: "The Euro may not survive"

Academics are jumping on the bandwagon. I have been talking about the dangers and the possibility of dissolution on this blog incessantly, but the fact that academics are starting to notice and think similarly probably means I am wrong now...

This probably merits a post regarding academics and the social "sciences", but I will save those thoughts for another day.

November 26, 2008
Author: Martin Feldstein, George F. Baker Professor of Economics at Harvard University

CAMBRIDGE, Massachusetts - The European Economic and Monetary Union (EMU) and the euro are about to celebrate their 10th anniversary. The euro was introduced without serious problems and has since functioned well, with the European Central Bank delivering the low inflation that is its sole mandate.
But the current economic crisis may provide a severe test of the euro's ability to survive in more troubled times. While the crisis could strengthen the institutions provided by the EMU, it could also create multiple risks, of which member countries need to be aware if they want to avoid them.
The primary problem is that conditions in individual EMU members may develop in such different ways that some national political leaders could be tempted to conclude that their countries would be better served by adopting a mix of policies different from that of the other members. The current differences in the interest rates of euro-zone government bonds show that the financial markets regard a breakup as a real possibility. Ten-year government bonds in Greece and Ireland, for example, now pay nearly a full percentage point above the rate on comparable German bonds, and Italy's rate is almost as high.
There have, of course, been many examples in history in which currency unions or single-currency states have broken up. Although there are technical and legal reasons why such a split would be harder for an EMU country, there seems little doubt that a country could withdraw if it really wanted to.
The most obvious reason that a country might choose to withdraw is to escape from the one-size-fits-all monetary policy imposed by the single currency. A country that finds its economy very depressed during the next few years, and fears that this will be chronic, might be tempted to leave the EMU in order to ease monetary conditions and devalue its currency. Although that may or may not be economically sensible, a country in a severe economic downturn might very well take such a policy decision.

Two Trillion dollar question...

How can governmental intervention guarantee lending standards be relaxed? It can provide liquidity, and indeed bolster the balance sheets of banks, but there remains informational asymmetry. Banks know more about their prospects and their customers than governments do. They also understand that this is a wonderful environment to let other make the first mistake...and then buy up foolish banks who heeded the governments call to "lend, lend LEND!". Much of this is basic warfare - keep your ammunition sources in good condition.

Capitalism and private enterprise generally does a much better job of allocating capital than centralized government. But it does have its limits. George Soros wrote about credit inflation/deflation bubbles in "The Alchemy of Finance", first published in 1987. Euphoric markets tend to under and overshoot "reality".

With this much intervention, price identification in credit, currencies, equities, interest rates, indeed every financial asset will take time. Operators find it difficult to deploy capital when the fundamentals are blurred, and thus park their funds in "risk free" instruments. Thus, some new price bubbles (like bonds from "safe" jurisdictions) are appearing.

Tuesday, December 02, 2008

How do you translate "Bush Doctrine" to Hindi?

Doctrinal fashion hits the shores of the Indian subcontinent. Pakistan looking very much like a "failed state" (THE target of choice for preemptive strikes).

and then there is Thailand...

Govt mulls strike on Pak terror bases
BS Reporter / New Delhi December 3, 2008, 1:20 IST

The Manmohan Singh government is weighing various options including a strike on Pakistan to dismantle its terror bases in response to the recent Mumbai terror attack. External Affairs Minister Pranab Mukherjee today hinted about military option when he told a news channel, “As and when it takes place, people will come to know, it’s not publicised. Every sovereign country has the right to protect its territorial integrity and take appropriate action and when it feels necessary to take that appropriate action.”

“What will be done, time will show and you will come to know,” Mukherjee earlier told reporters on the sidelines of a conference today.

Singh convened a Cabinet committee meeting on security today to discuss the issue. Last week, he met the Army, Navy and Air Force chiefs to take stock of the current situation and take their inputs to decide the nature of India’s response to the alleged Pakistan-sponsored terror strike in Mumbai.

US Secretary of State Condoleezza Rice is coming to New Delhi on Wednesday and top government sources suggest the issue of attacking Pakistan will be discussed with her. The US has resorted to unilateral hot pursuit for Taliban terrorists hiding inside Pakistan near its border with Afghanistan.

As a strike on Pakistan will invariably lead to a full-scale war between the two nuclear-armed countries, India is maintaining a cautious approach and wants to gauge every possible ramification of its decision.

“An assessment of the pros and cons of an attack on the terror bases in Pakistan is currently underway. The final decision will be taken only on the considerations of national interest,” said a top government official.

Reclaiming the satellites...

The Russian bear is flexing its commodity muscles to one of its former captive republics. I cannot emphasize enough that we are is an extraordinary environment and this article is yet another demonstration that the shift of perception amongst nations to realpolitik (active competition, exaggerated nationalism to protect incumbent governments, protectionism, etc.) from a more relaxed attitude of cooperation and free trade is extremely dangerous to average citizens of said nations.

Note the timing...just as winter is beginning.

I expect an avalanche of propaganda from nation states emphasizing sovereignity, national pride, and acts to create a feeling of serendipity ("thank goodness you, an average citizen, have your government to protect you from the bandits of the world").

Russia's Gazprom warns Ukraine to clear gas debts

MOSCOW (AFP) — Russian energy giant Gazprom said Sunday that Ukraine
had paid only part of its huge gas debt and threatened Kiev with a
more than double price hike unless all arrears were cleared this year.

"We already have the first payments (but) this is not yet the full sum
we agreed upon," Gazprom's spokesman Sergei Kupryanov told the state
television channel Rossiya.

The Russian firm says that Ukraine, which is severely dependent on
Russian gas, owes 2.4 billion dollars.

"Until the debt is settled, the only price we can speak of is the
European price, 400 dollars per 1,000 cubic meters. We see our task in
settling all problems with our Ukrainian colleagues before the New
Year," Kupryanov said.

Currently Ukraine pays Russia 179.5 dollars for 1,000 cubic metres of
gas, while for other European countries the price is set at around 400

Gazprom has threatened to cut supplies if the debts are not settled,
in a move that would risk a repeat of the interruptions to gas
supplies to Europe in 2006.

Monday, December 01, 2008

Bernanke's testimony

"...[currency] swap arrangements pose essentially no credit risk because our counterparties are the foreign central banks themselves, which take responsibility for the extension of dollar credit within their jurisdictions."

Essentially no credit risk? What "essence" comprises credit risk for these types of derivatives? He completely discounts the (low probability but still possibility) that the ECB dissolves. This is taking a rather myopic view based on post-communist history. I certainly hope he is merely pandering and selling the Fed's decision rather than completely misunderstanding the risks involved.

And, if there were any doubts regarding the continued politicization of the Fed, the following snippet will dissolve them:

"Expanding the provision of liquidity leads also to further expansion of the balance sheet of the Federal Reserve. To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed's balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy."

South America...

...commentators in the article assume Mr. Chavez will not seek to influence (read: "rig") elections.

Another precipitating event for the Obama doctrine. (see previous post)
Chavez seeks indefinite re-election, again

By CHRISTOPHER TOOTHAKER, Associated Press Writer
Sun Nov 30, 9:49 pm ET
CARACAS, Venezuela – President Hugo Chavez asked supporters Sunday to petition for a constitutional amendment that would let him seek indefinite re-election and buy more time to build a socialist economy in Venezuela.
Chavez, who was first elected in 1998, is barred from running again when his current term expires in 2013. He sought to abolish term limits last year, but Venezuelan voters rejected the bid, voting down a package of proposed constitutional changes.
"Last year, when we lost the referendum, I said I should accept the majority's decision," the former paratroop commander told a crowd of red-clad government supporters at a rally in Caracas. But now, he added, "I say you were right: Chavez will not go."
Any new attempt at a reform, which must be approved in a nationwide referendum, would open a new front for tensions between government-backers and their rivals — many of whom warn that Chavez wants to be president for life.
Opposition leader Gerardo Blyde said Chavez's plan to end presidential term limits would be overwhelmingly defeated.
"It's going to be an uphill battle for him," said Blyde, who suggested that many Chavistas are losing faith in "El Comandante" as his government struggles to curb 36 percent annual inflation in Caracas, fight rampant crime and rebuild crumbling infrastructure.
Neighboring Colombian President Alvaro Uribe, meanwhile, recalled his top diplomat in Maracaibo, Venezuela's second largest city, hours after Chavez threatened to expel the official for privately praising the opposition for winning five governoships and two important mayor's office in elections in Venezuela last week.
In a clandestinely record private telephone conversation, Consul Carlos Galvis called the opposition's gains "very good news." The recording was broadcast on state television.


It is somewhat ironic that the Chinese version of dialectical materialism is now fraying at the edges due to geo-political and economic concerns.

Hu Sees China Losing Its Competitive Edge
President Cites Reduced Global Demand
By Maureen Fan
Washington Post Foreign Service
Monday, December 1, 2008; A12

BEIJING, Nov. 30 -- Chinese President Hu Jintao warned at a weekend meeting of the Communist Party's elite Politburo that China is losing its competitive edge as international demand for its products is reduced, according to official state media reports Sunday.

China's growth rate has been forecast to be about 9 percent in 2008, down from 11.9 percent the year before and close to the 8 percent that economists say China must maintain in order to keep the labor market stable.

"China is under growing tension from its large population, limited resources and environment problems, and needs faster reform of its economic growth pattern to achieve sustainable development," Hu said, according to the People's Daily, the official Communist Party newspaper. He did not provide specifics.

"External demand has obviously weakened, and China's traditional competitive advantage is being gradually weakened" as international demand is reduced, Hu told members of the Political Bureau of the party's Central Committee, according to the state-run New China News Agency.

Protectionism has also started to increase in investment and trade, Hu added. China's export growth in October was 19.2 percent, down from 21.5 percent in September.

His comments came as China prepares to celebrate next month the 30-year anniversary of the opening and reform policies begun by Deng Xiaoping, who led the country from the late 1970s to the early 1990s. The anniversary has prompted both hard-liners and reformers to weigh in on the path China must now take, and Hu is striving to strike a balance.

A recent editorial in the People's Daily, for example, urged China to master information technology in order to get its message out and "safeguard the nation's ideological security." The piece, by a general named Xu Tianliang, underscored a deep debate within the party about how to commemorate the anniversary, said David Bandurski, a researcher at Hong Kong University's Journalism and Media Studies Center.

Friday, November 28, 2008

Head towards the light...

...a silly analysis by a Chinese statesman. The Euro imposes "discipline" to the extant its members find it palatable to adhere to its rules (and so long as the "rules" are subject to political interpretation given changing economic and political climates)

The economic climate is changing...and so are the rules.

Its an interesting opinion, and one that marches lock-step with post-modern communist ideology. I care less about the outcomes political thinkers attempt to engineer (as they so often fail miserably to do so)...I care far more about their analytical and emotional processes that categorize these outcomes as "desirable". Utopia has always been an excellent outcome to engineer, but thinkers such as Plato, Thomas More, and Marx each used a different calculus in heading towards the light.

This line of thinking applies to the U.S. as well given the current administration and pending supermajority in congress.

The Recapitulator also sends his condolences to those affected by the actions of terrorists in Mubai. Sushil, be well.

Britain's efforts to hold on to sterling are doomed to failure in a global economy dominated by powerful currency blocs, said Hong Kong's leader Donald Tsang.
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 11:12PM GMT 27 Nov 2008

Mr Tsang, an elder statesman of Asian finance, said open trading states must adapt to the realities of modern finance.

"I do not believe in the sustainability of a small floating currency. Look at the pound, it's being attacked," he said in interview with the Daily Telegraph.

"The euro is a good move. People have to abide by the Maastricht criteria, so it imposes discipline. Other options are less palatable if you really want to become a big strong economic union."

Mr Tsang, the chief Executive of the Hong Kong Special Administrative Region of the People's Republic of China, is a veteran of East Asia's currency crisis of the late 1990s and the SARS epidemic. As a Beijing loyalist, he offers clues into the current thinking of the Chinese leadership. His comments on sterling are a warning sign that China may ultimately prove reluctant to buy large amounts of UK Treasury debt in the future.

Mr Tsang, as always wearing his signature bow tie, said it will be impossible for the Far East to launch its own currency union until China makes the renminbi convertible. This is not yet remotely on the agenda.

Wednesday, November 26, 2008

Signal filters.

People operate with different filtering devices to sort, process and deflect information. In my view elections in this country are sort of a vetting process whereby the electorate votes a preference for a set of signal filters.

A new executive administration brings new "signal filters" that determine policy going forward. This makes markets nervous as new investment decisions must be made in a changing environment.

Mr. Obama continues to demonstrate he knows this, and makes appointment after appointment that solidifies his pragmatic credentials.
Obama Plans to Retain Gates at Defense Department

WASHINGTON — President-elect Barack Obama has decided to keep Defense Secretary Robert M. Gates in his post, a show of bipartisan continuity in a time of war that will be the first time a Pentagon chief has been carried over from a president of a different party, Democrats close to the transition said Tuesday.

Mr. Obama’s advisers were nearing a formal agreement with Mr. Gates to stay on for perhaps a year, the Democrats said, and they expected to announce the decision as early as next week, along with other choices for the national security team. The two sides have been working out details on how Mr. Gates would wield authority in a new administration.

The move will give the new president a defense secretary with support on both sides of the aisle in Congress, as well as experience with foreign leaders around the world and respect among the senior military officer corps. But two years after President Bush picked him to lead the armed forces, Mr. Gates will now have to pivot from serving the commander in chief who started the Iraq war to serving one who has promised to end it.

In deciding to ask Mr. Gates to stay, Mr. Obama put aside concerns that he would send a jarring signal after a political campaign in which he made opposition to the war his signature issue in the early days. Some Democrats who have advised his campaign quietly complained that he was undercutting his own message and risked alienating war critics who formed his initial base of support, especially after tapping his primary rival, Senator Hillary Rodham Clinton, for secretary of state.

Tuesday, November 25, 2008

Flow reversal

Very important anecdotal article (the only kind of article this particular publication uses) regarding incentives of U.S. students. The "brain drain" that flowed from top engineering and mathematics universities is now reversing. Economic incentives create innovation. this is good news.

Engineering: Suddenly Sexy for College Grads
As the financial crisis deepens, science and math grads who once flocked to investment banking are now considering jobs in engineering

By Vivek Wadhwa

Early in his college career, Tyler Bosmeny assumed that after graduating, he would do what hundreds of other self-respecting Harvard University engineering, math, and science students do: take a job on Wall Street. "I had done a summer internship in investment banking, and part of me always figured that I'd be working in finance after Harvard," says Bosmeny, an applied mathematics major. But on graduation in June 2009, Bosmeny will work instead for an Internet startup he founded with five undergraduates from top schools who, like him, were on student newspapers. Called PaperG, the startup sells online advertising to local businesses.

Only three years ago Bosmeny could have written his ticket for an entry-level job in the financial sector with a starting salary north of six figures. Those days are over, at least for now. The global market crash and the contraction of the financial sector has dramatically changed the decision matrix for tens of thousands of promising math, science, and engineering graduates such as Tyler. Students who in years past would have flocked to Wall Street are considering careers in engineering and technology. Suddenly, science is sexy.

Ranjitha Kurra, a student at the Masters of Engineering Management program at Duke University, says she interned as a business analyst at Barclays Capital (BARC) this summer and had an offer for a full-time job. But following Barclays' recent acquisition of Lehman Brothers, Kurra was told she may not have a job when she graduates in December. She worries that even if Barclays were to meet its commitment, she might be laid off within months. She doesn't want to return to her home in India yet, so she is looking for a job in engineering, an area she thinks will be safer than anything in financial services.

Sure, the tech sector is shaky, too. Witness Intel's (INTC) Nov. 12 announcement that fourth-quarter sales will fall short of previous forecasts (, 11/13/08) and Cisco's recent disclosure that sales in the period that ends in January will decline. But few expect Silicon Valley to undergo the carnage suffered by Wall Street.

Monday, November 24, 2008

Fiscal stimulus...

...with the U.S. the next in line. All very interesting in timing and ordinal rank.
I have already commented on the competitive aspects of this. The U.S. is in position to know the fiscal packages its competitors have enacted. A good spot to be in.

-- Provincial government plans will add an additional 10 trillion yuan ($1.464 trillion) to a 4 trillion yuan stimulus package announced by the central government earlier this month, state television said. The central scheme included rail and infrastructure schemes as well as extra social spending to offset the sharp drop in demand for the exports which fuel China's economy.

-- China is also changing value added tax (VAT) to allow companies to deduct the cost of capital equipment, saving them about 120 billion yuan a year.


- An economic stimulus plan to be presented on Nov. 26 will include a significant budgetary expansion, the head of the EU executive said on Friday, as it signalled longer deadlines for countries to slash budget gaps.

-- German Economy Minister Michael Glos has said the plan envisaged, among other things, a 1 percentage point cut in value-added tax across the EU and that the total value of the stimulus was 130 billion euros ($163 billion).


-- The government has announced a package which will generate about 50 billion euros ($64.22 billion) in investment and contracts.

- A new lending programme of up to 15 billion euros will be introduced for German state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW) to strengthen its lending activities. KfW's infrastructure programme for structurally weak local authorities will be raised by 3 billion euros.

-- Urgent investment in transport will be accelerated via a new programme totalling 1 billion euros in both 2009 and 2010.

-- Parliament has approved a rise in government net new borrowing in 2009 to 18.5 billion euros from 10.5 billion.


-- Hungary announced plans for a 1,400 billion forint ($6.88 billion), two-year stimulus package to kick-start economic growth. The package does not involve new spending but a regrouping of existing funds to assist small and medium-sized businesses.

-- 680 billion forints will be allocated to provide lending guarantees primarily to SMEs and 260 billion forints will provide liquidity for lending.


-- The government has announced a "liquidity impulse" of about 6 billion euros ($7.5 billion), including allowing companies to write down investments earlier than usual.

-- Companies will also receive temporary financial support from an unemployment fund to pay employees who will cut down on their working hours.


-- Prime Minister Vladimir Putin on Nov. 20 unveiled a $20 billion economic stimulus package and help for people hurt in the economic slowdown. He offered assurances there would be no repeat of the economic turmoil when the Soviet Union collapsed in 1991 and, 10 years ago, when the state defaulted on its debt.

-- The package will include a cut in profit tax, which accounts for 8.5 percent of budget revenues, to 20 percent from 24 now, and a new depreciation mechanism that will allow firms to reduce the profit tax further.

-- The government has already sanctioned state-run banks to support industry with billions of dollars of soft funding.

Saturday, November 22, 2008

Fleshing out the Obama doctrine...

I have maintained for some time that there is now a modern corollary to the Monroe Doctrine. This "Obama Doctrine" will emphasize the antipodes, and more specifically Latin America and Africa.

Obama's selections thus far for the Treasury (and I am of the opinion that Larry Summers will be Fed Chair) and other cabinet positions reinforce my opinion that this is a pragmatic administration.

Realpolitik is back (if indeed it ever left). The results from the G20 "coordination" meetings will be telling on this account.

Thus this article is corroborative evidence for the above thoughts:
Medvedev faces hard sell in Latin America
By Simon Romero, Michael Schwirtz and Alexei Barrionuevo
Friday, November 21, 2008

When President Dmitri Medvedev planned his forthcoming trip through Latin America, Russia seemed poised to present one of the most visible challenges in years to U.S. influence in the region.

With oil prices high, Russia was flush with cash and planning a range of measures, from helping Venezuela build a nuclear reactor to strengthening military ties with Cuba, a Cold War ally of the Soviet Union.

But when Medvedev reaches the region next week, he will find it drastically altered by events - and in some cases, less receptive to his overtures. Plunging oil prices and the global financial crisis, which have hammered Russia particularly hard, have raised questions about Russia's reliability as an economic partner, while Senator Barack Obama's victory in the presidential race has raised hopes throughout Latin America of a new era of improved relations with the United States.

In this rapidly changing landscape, most Latin American countries are recalibrating their political interests, frustrating Russian efforts to deepen regional ties as China did in the last decade.

"Russia's elites, including President Medvedev, look on China's rising diplomatic and economic successes in Latin America and in Africa with envy," said Stephen Kotkin, the director of Russian studies at Princeton University. "They also perceive an opportunity, much exaggerated, to send the U.S. a message in its supposed backyard."

But throughout the region, Medvedev faces a hard sell. In Cuba there are lingering suspicions about Russian intentions, after the Cuban economy collapsed when the Soviet Union withdrew in the 1990s, as well as a reluctance to alienate the incoming Obama administration that might push to end the trade embargo.

Brazil, Latin America's largest country, which also places a high priority on relations with an Obama administration, wants to engage Russia not as a source of weapons or military assistance but as an equal partner.

Thursday, November 20, 2008

Land grab...

Interesting...even more so in light the "Obama doctrine" that I have written about. That Madagascar (off the coast of mainland Africa) was the choice here by S. Korean operators is also important.

Land leased to secure crops for South Korea
By Javier Blas in London
Published: November 18 2008 18:45 | Last updated: November 18 2008 18:45
Daewoo Logistics of South Korea has secured farmland in Madagascar to grow food crops for Seoul, in a deal that diplomats and consultants said was the largest of its kind.

The company said it had leased 1.3m hectares of farmland – about half the size of Belgium – from Madagascar’s government for 99 years. It plans to ship the maize and palm oil harvests back to South Korea. Terms of the deal were not disclosed.

The pursuit of foreign farm investments is a clear sign of how countries are seeking food security following this year’s crisis – which saw record prices for commodities such as wheat and rice and food riots in countries from Egypt to Haiti.

Prices for agricultural commodities have tumbled by about half from such levels but countries remain concerned about long-term supplies.

The United Nations’ Food and Agriculture Organisation warned this year that the race by some countries to secure farmland overseas risked creating a “neo-colonial” system. Those fears could be increased by the fact that Daewoo’s farm in Madagascar represents about half the African country’s arable land, according to estimates by the US government.

Tuesday, November 18, 2008

More evidence...

...for conclusions listed in previous posts.

Russia to raise import duties
By Alan Beattie in London

Published: November 17 2008 18:14 | Last updated: November 17 2008 18:14

Russia said on Monday that it would push ahead with sharp rises in import duties in the near future in spite of signing the Group of 20 communiqué that promised not to introduce protectionist measures for a year.

Dmitry Pankin, deputy finance minister, said Moscow would increase tariffs on imported cars, a move that had already been planned to protect Russian car producers. Russia has also announced a general review of trade agreements, including commitments made as part of its application to join the World Trade Organisation. The review may result in duties being increased and import quotas for sensitive products being cut.

Nov. 18 (Bloomberg) -- Brazil and Argentina agreed to raise import
taxes on various products from outside the Mercosur trading bloc, O
Globo said.

A proposal for raising the tariffs was adopted at a bilateral trade
commission meeting in Buenos Aires and should be formally approved at
a Mercosur meeting in December, according to O Globo, which didn't say
where it got the information.

The higher taxes will be applied to imports of products including
wine, peaches, canned foods, textiles, pasta and wooden furniture, the

...and Devil take the hindmost.

Countries racing to devalue/bail-out/fiscal stimulus will have competitive advantage against those who are more lethargic or otherwise reluctant to do so. Yet more evidence to be skeptical of any coordination attempt amongst the G20 nations and particularly export dependent emerging and frontier markets.

Singapore May Weaken Currency in Recession, UBS Says (Update1)

By Patricia Lui
Nov. 18 (Bloomberg) -- Singapore, facing a slump in exports
amid a recession, may change its exchange-rate policy to favor a
weakening currency in April or sooner, according to UBS AG.
The Monetary Authority of Singapore, after ending its
policy of encouraging gains in the local dollar last month, may
be open to depreciation to help revive the $161 billion economy,
wrote Ashley Davies and Nizam Idris, currency strategists at the
world's second-biggest foreign-exchange trader. The U.S. Federal
Reserve, the Bank of Japan, the Bank of England and the European
Central Bank have all cut interest rates to combat recessions.
``Following the aggressive policy moves elsewhere, it now
seems unobjectionable for Singapore to ease monetary policy via
a weaker currency,'' Davies and Nizam wrote in a research report
yesterday. ``While our base case is for a change in policy at
the next meeting in April, it could happen earlier should
pressure on reserves mount.''
Singapore's dollar traded at S$1.5243 to the U.S. dollar as
of 9:08 a.m. local time, according to data compiled by Bloomberg.
It earlier touched S$1.5283, the lowest level since September
2007. The currency has declined 7.3 percent in the past three

Monday, November 17, 2008

Perverse Incentives...

and unintended consequences...companies taking shareholder capital to appear more sympathetic when they kiss the ring of the Treasury.

Lincoln, Aegon May Buy S&Ls With `Unsafe' Practices to Get Aid

By Andrew Frye and Linda Shen
Nov. 17 (Bloomberg) -- Four of the world's biggest insurers may acquire small banks that regulators have cited for improper practices to improve their own chances of getting cash from the $700 billion U.S. government bailout fund.
Lincoln National Corp. and Aegon NV, owner of Transamerica Corp., may buy savings and loan companies in Indiana and Maryland whose methods were found to be ``unsafe and unsound'' by the Office of Thrift Supervision. Hartford Financial Services Group Inc. is acquiring a Florida lender that was told by the OTS in May to curb lending. Genworth Financial Inc.'s target got a ``cease-and-desist'' order tied to potentially fraudulent loans.
Purchasing thrifts may allow insurers to qualify as savings- and-loan companies and tap the Treasury's Troubled Asset Relief Program. Hartford's $10 million acquisition of Sanford, Florida- based Federal Trust Corp. may entitle it to $3.4 billion of U.S. capital. Lincoln National in Philadelphia may win access to $3 billion by taking over Newton County Loan & Savings, which has three full-time employees and $7.3 million of assets.
``It's perverse,'' said Jason Arnold, a San Francisco-based analyst at RBC Capital Markets. ``Almost anyone can buy a thrift. At a certain point, regulators will have to put a stop to it.''

Congressional approval and monetary authority

I have written about the Fed's swap line transactions with several foreign banks. The total now exceeds $600 Billion. Again, these swap lines are collateralized by foreign currency. That the massive amounts involved are not subject to Congressional oversight and approval is a travesty and something I am investigating at the moment.

I can only recite the words of James Buchanan at this point in the discussion...

"...This framework role for government also was considered to include the establishment of a monetary standard, and in such fashion as to insure predictability in the value of the designated monetary unit. It is in the monetary responsibility that almost all constitutions have failed, even those that were allegedly motivated originally by classical liberal precepts. Governments, throughout history, have almost always moved beyond constitutionally authorized limits of their monetary authority."

Friday, November 14, 2008

Contagious nationalism

There are some very important risks going forward with regards to the Governments "expanded" role in the private sector. The realization that a team of central planners cannot hope to allocate scare resources efficiently, be they high priest of the FED or otherwise, has been totally lost. The Government must appear to be doing something...there will be plenty of parties to blame and have justice department/attorney general/FBI/SEC, etc. pursue and prosecute once their prescriptions fail.

So, here is a brief list of the "meta" (whatever that means) risks involved:

1. Informational risks - this broad category encapsulates risks involving inefficient transfer of information (which, dear reader, is the reason detre' of prices) which will cause mis-allocation of resources.

2. Expansion of executable authority by Governmental powers. This category includes nationalization of pension funds, both public and private, individual retirement funds, here-to-fore tax free investment accounts, etc. This is extremely dangerous for any republic (see Argentina). This of course need not be so as Government can spend what it wishes without regard to revenue constraints. A large fiscal package is the only remedy that has a chance of working.

3. Emphasis on populist notions of "class warfare" and "protectionism". This list of governments who have resorted to these out-dated notions is not an enviable one.

4. Global competition. I am deeply skeptical of the "cooperation" that G20 powers and have pledged to each other and their corresponding constituents. The volatility will create opportunities for countries to break with the system (either overtly, or more likely than not covertly). Paraphrasing one of my professors (warning, pompous reference ahead) at "Chicago Booth": "if the benefit of cooperation is less than the cost of cooperation, cooperation will be avoided". Countries will break ranks to attract capital.

It is clear the Fed and the Treasury are severely "challenged" by the credit crisis, as the soup-line of institutions lining up for TARP funds grows daily.

Wednesday, November 12, 2008

Government doing what it does best...

...creating more volatility, causing participants to scurry about moving resources in a flurry of activity.

In this case, its the Treasury department and Mr. Paulson. I will repeat: proximity to governmental invervention and regulatory processes is the largest risk factor as well as largest assets companies have. The U.S. government has ensconced themself as by far the most important player in the development of the financial world going forward. The most important, most competitive market in the world right now is access to U.S. officials.

Paulson says troubled assets will not be purchased
Wednesday November 12, 12:40 pm ET
By Martin Crutsinger, AP Economics Writer
Paulson: bailout program won't purchase troubled assets; focus remains on financial markets

WASHINGTON (AP) -- The government has abandoned the original centerpiece of its $700 billion rescue effort for the financial system and will not use the money to purchase troubled bank assets.
Treasury Secretary Henry Paulson said Wednesday that the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans and student loans.

Paulson said 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

On the issue of using the $700 billion bailout package to provide help to ailing auto companies, Paulson said the administration preferred an approach that would accelerate support to that industry from other legislation Congress passed this fall.


"Decoupling" as some sort of meta concept that would magically allow governments and economies to escape the credit crisis and related fallout was doomed from the beginning. This was a concept promulgated by the same consultants who put so many pension funds into long-only commodities indexes with the predictable results.

Merrill chief sees severe global slowdown
By Greg Farrell in New York

Published: November 11 2008 14:42 | Last updated: November 11 2008 20:06

The global economy is entering a slowdown of epic prop­ortions
comparable with the period after the 1929 crash, John Thain, chairman
and chief executive of Merrill Lynch, warned on Tuesday.

Speaking at the company's annual banking and financial services
conference, Mr Thain said while he was cautiously optimistic about the
future of the financial services industry, he lacked optimism about
the near-term prospects of the US economy and global markets.

"Right now, the US economy is contracting very rapidly. We are looking
at a per­iod of global slowdown," he told investors. "This is not like
1987 or 1998 or 2001. The contraction going on is bigger than that. We
will in fact look back to the 1929 period to see the kind of slow­down
we're seeing now."

Mr Thain also said the economic problems afflicting the US, where
housing prices and other asset values were falling, would wreak havoc
across the world.

"There is no such thing as decoupling," he said, referring to the
popular theory that emerging markets could sustain reasonable growth
even while the world's leading economies suffered recessions. "All
equity markets are linked. Each individual economy will be more or
less affected, depending on reliance on global trade and commerce."

Monday, November 10, 2008

The magnanimity...

...of the paper dragon once again "surprises" us.

In an export-driven economy that benefits from currency depreciation, this was certainly not motivated by a desire to help the rest of the world.

Another round of competitive devaluations. This will be fun.

By Joe Mcdonald, AP Business Writer
China's premier says stimulus package `biggest contribution' to world; Asian stocks rise

BEIJING (AP) -- China's massive stimulus package will help contribute to global stability by boosting investment in the world's fourth-largest economy and consumer spending, the nation's top economic official said Monday.
Faced with the prospect of zero export growth, closing factories and mass layoffs, China joined moves by governments around the world to cushion the blow of the global slowdown with the announcement of the $586 billion package.

Stock markets in Japan, Hong Kong and mainland China soared in response.

The plan calls for higher spending on roads, airports and other infrastructure, tax deductions for exporters and more aid to the poor and farmers. Spending on health and education will increase, as well as on environmental protection and high technology.

"We must implement the measures to ensure a fast and stable economic development," Premier Wen Jiabao said at a meeting of government leaders, according to a report read out on the state television. "They are not only the needs of the development of ourselves, but also our biggest contribution to the world."

The announcement comes before Preisdent Hu Jintao attends a meeting this week in Washington of world leaders to discuss a response to the global crisis.

Exporters say orders have fallen sharply, leading to an increase in factory closures and layoffs. Chinese economic growth fell to 9 percent in the latest quarter, its lowest level in five years, and analysts expect export growth to fall as low as zero in coming months as global demand weakens.

Parallels and historical lessons.

Due to recent events, there has been an explosion of interest in incentive structures and management oversight (or the lack thereof). The parallels to recent events are obvious. I tend to pay attention to studies investigating policy, incentives, and subsequent outcomes in similar institutional and political environments. Humans are guided by incentives and disciplined by constraints. "Business cycles" are a misnomer - they are human behavior cycles.

Thus, this paper is making the rounds...

Looting: The Economic Underworld of Bankruptcy for Profit

George A. Akerlof
University of California, Berkeley; National Bureau of Economic Research (NBER)

Paul M. Romer
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

April 1994

NBER Working Paper No. R1869

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent - and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Sunday, November 09, 2008

The Academic vs. The Salesman...

If only we were privy to the full transcripts of their conversations.

By Jon Hilsenrath, Deborah Solomon and Damian Paletta

WASHINGTON -- Federal Reserve Chairman Ben Bernanke reached the end of his
rope on Wednesday afternoon, Sept. 17. Lehman Brothers Holdings Inc. had
collapsed. American International Group Inc. had been effectively nationalized
with $85 billion of Fed money. Investors were stampeding out of money-market
mutual funds. Credit markets were reeling, stocks were wobbling and bank
failures loomed.

Mr. Bernanke called Treasury Secretary Henry Paulson. The Fed chairman, a
Princeton academic with an occasional quaver in his voice, leaned toward the
speakerphone on his office coffee table and spoke unusually bluntly to Mr.
Paulson, a strong-willed former college football player and Wall Street

The Fed had been stretched to its limits and couldn't do it any more, Mr.
Bernanke said. Although Mr. Paulson had been resisting such a move for months,
Mr. Bernanke said it was time for the Treasury secretary to go to Congress to
seek funds and authority for a broader rescue. Mr. Paulson didn't commit, but
by the next morning, he had.

In public, Messrs. Bernanke and Paulson marched in lock step. Behind the
scenes, the two men and their lieutenants sometimes tussled -- over the fate of
Lehman Brothers, how to handle Congress and the limits of the Fed's authority.

At times, each man felt handcuffed by legal limits on his own power, and
consequently pushed the other to move more aggressively. Their differences
helped define the government's approach to the crisis.

The debates helped shape an ad hoc strategy that at times sowed confusion
about Washington's approach, and sparked criticism of the nation's two top
economic physicians at a time when restoring confidence was a top priority.

Thursday, November 06, 2008

Rate Compression

See posts of 2 May and 25 September, and 6 October on this blog for more information. The coordination is interesting as well...increased economic chaos makes for strange bedfellows. Some pundit types are claiming this type of intervention is "without precedent", which is of course foolish.

Examples of economic coordination can be found from the city-states of Greece to colonial Europe.

BOE Leads European Central Banks in Rate Cuts as Economies Slow

By John Fraher

Nov. 6 (Bloomberg) -- The Bank of England led European central banks in reducing borrowing costs to counter the worst financial crisis in almost a century, cutting its key rate by 1.5 percentage points to the lowest level since 1955.

The U.K. central bank reduced its key rate by the most since 1992, taking it to 3 percent. The European Central Bank lowered its benchmark by 50 basis points to 3.25 percent and Swiss policy makers cut their main lending rate by the same margin to 2 percent after an unscheduled meeting.

``It's absolutely staggering and deeply impressive,'' said Brian Hilliard, director of economic research at Societe Generale in London. ``They are clearly grasping the nettle and taking deep action. Boy, this is going to have an impact.''

Wednesday, November 05, 2008

Shot across the bow

Russia trying to guage the reaction of the new administration-elect, while simultaneously determining the qualities of its own allies. This is a time where Russia will be most distrustful of its competitors and its friends.

MOSCOW — In a wide-ranging attack on the United States as it elected a new president, the Russian leader Dmitri A. Medvedev warned on Wednesday that Moscow might deploy short-range missiles in the Baltic enclave of Kaliningrad to counter a perceived threat from a proposed American missile defense shield in eastern Europe.
His remarks, in his first state of the nation address since assuming the presidency in May, coincided with the election of Barack Obama and offered a chill glimpse into the potential issues and tensions confronting the new American leader when he takes office in January.
Mr. Medvedev did not specifically congratulate Mr. Obama on his victory, saying only that he hoped that “our partners — the new U.S. administration — will make a choice in favor of full-fledged relationship with Russia.”
At the same time, however, he spoke of a “new configuration for the military forces of our country” that would include abandoning plans to dismantle some missile regiments.

Monday, November 03, 2008

How will they attempt to form popular opinion?

In times like these, with a communist power (and holder of the world's largest population) experiencing an economic crisis, it helps to understand what their "playbook" may look like in these situations.
"Propaganda" by Jacques Ellul is one of the best books on the subject of fooling the populace, and the following quotation is important today:

"...The more complex, general, and accelerated political and economic phenomenae become, the more do indivduals feel concerned, the more do they want to get involved. In a certain sense this is democracy's gain, but it also leads to more propaganda. And the individual does not want information, only value judgements and preconceived positions...he feels his weakness, his iconsistency, his lack of effectiveness. He realizes that he depends on decisions over which he has no control, and that realization drives him to despair. Man cannot stay in this situation too long. He needs an ideological veil to cover the harsh reality, some consolation. A raison d' etre, a sense of values. And only propaganda offers him a rememdy for a basically intolerable situation."

The answer that the Paper Dragon will provide for its citizens for the current malaise is "its America's fault...the transition from our system to a more open one is a faustian bargain"

Of course, we here in America have been (warning: mixed metaphors coming up) "bombarded" with "massive waves" of "unrelenting" propaganda. Our political "leadership" is listless and unaware of the basic human condition that caused this.

Human beings extrapolate their present condition (be it in plenty or in want) to infinity. Plentiful times cause greed when fear and prudence is justified, and scarce times cause fear when greed and risk-taking is the rule of the day.

The price of citizenship...

...has gone higher.

When there are no viable alternatives (where are you going to move if you are dissatisfied with your present citizenship given the world's economic conditions?), it is natural for monopoly providers to squeeze their customers. Governmental security (law and order) services are no different as it hold monopoly power over violence and imprisonment.

We expect the price to increase given a Democratic victory.

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, November 1, 2008; D01

At the Beverly Hills office of criminal defense lawyer Edward M. Robbins Jr., anxious new clients are showing up with an unexpected problem.
The clients put money in Swiss bank accounts, where it was supposed to stay secret. But now those depositors fear the U.S. Internal Revenue Service and the Justice Department will gain access to their bank records, Robbins said.
"They're coming in from the cold. They're nervous," Robbins said.
And with good reason, the former federal prosecutor said. A lawyer who specializes in tax cases, Robbins thinks the government is gearing up to prosecute large numbers of Americans for failing to disclose foreign accounts on their tax returns and evading taxes on income generated by the accounts.
"If I were one of these guys with 10 to 50 million in my account, I'd be having an aneurysm," Robbins said. "It's an extremely dangerous situation for these guys."
The legendary secrecy of Swiss banks has come under fresh assault lately from U.S. and European authorities who say their citizens have used the privacy to hide assets and dodge taxes.

Thursday, October 30, 2008

The Obama Doctrine

A short essay concerning Mr. Obama and some implications assuming he is elected. (see "papers" section on this blog)


This essay seeks to outline some of likely implications and responses given an election victory by Barack Obama. The main conclusion derived here is an antipodean leaning towards U.S. foreign policy: an “Obama doctrine”, analogous to the Monroe Doctrine of the early 1800s, seeking influence in Africa and Latin America. It seeks to define the broad brush strokes, leaving specific investment strategies to later papers.

(update: the paper is only available via email contact)

Ben on his Hind...

(From an email conversation earlier today)

Back to the swap line problem.

The swap lines world wide are now over 522Bln. This is the ECB (and
now many others, like Brazil and Mexico) borrowing unsecured from the
U.S. in order to stave off deflation. Who knows what the process is
for granting these swap lines.

its the old-fashioned external debt problem and I don't expect some of
these funds to return (especially in ECB dollar funding to Eastern
European countries...plenty of room for outright fraud there as
regional banks give sweetheart loans to their future business

A massive transfer of wealth with no congressional approval, as I have
stated before. Forget lower interest rates, this is Ben Bernanke on a
Hind Helicopter, strafing the world with dollars. And why unlimited
lines for the Euro area alone, which in my mind now has the biggest
incentive to break up the Euro and simply keep the dollar wealth.

If/when, BHO takes office, I expect these types of facilities to be
extended to sub-saharan African banks, not with any "systemic risk to
the financial architecture" argument, but on any grounds the Executive
branch chooses.

Wednesday, October 29, 2008

K-T Boundary Event for Banks.

The "flailing around" by Congress and certain members of the Executive branch (namely, those who chair the Fed and head the Treasury) is producing some serious dislocation in the banking system. The promise of the TARP plan to inject equity in banks is going to produce winners and losers.

This is a K-T boundary type event for the banking ecosystem, and the corresponding meteorite is a wall of cash funded by the U.S. government. These organisms thought they lived on a different planet effected by things called "market forces". Now, the meteor has struck and they must obey "governmental largess". A very large change in ownership basis.

Proximity (and a good relationship) to governmental officials just became one of THE most significant source of profit and risk to all U.S. Banks for the immediate future.

For better or for worse, this is what government does best: destroy and force the organism to re-organize into different ecosystems. I believe that this, somewhat paradoxically, creates value. Anti-trust measures in the Sherman act are another similar event.

G20 goes under the knife once again...

Cut, cut and cut again. This is as much an exercise in placation as it is masterful economic policy.

As the FED has cut yet again, China lowers their own loan rates to a somewhat appropriate number given the proximity to the U.S. Halloween celebrations.

The world is digesting the events and policies of the past six months, and it it apparent that most G20 countries (ex the Anglo-American financial axis, which are executing Keynesian prescriptions at light speed with draconian lack of due process or a scintilla of understanding by our political leaders) have no idea how to stoke domestic demand even with an improving trade gap via the rapidly strengthening dollar.

However, lower rates are not necessarily "expansionary".

BEIJING, Oct 29 (Reuters) - China's central bank cut banks' benchmark lending and deposit rates by 0.27 percentage point on Wednesday, the third cut in six weeks.
The cost of one-year bank loans will fall to 6.66 percent from 6.93 percent, while the benchmark one-year deposit rate falls to 3.60 from 3.87 percent, the People's Bank of China (PBOC) said.
The cut in interest rates takes effect on Thursday, the central bank said on its website (www.
The PBOC gave no reason for the easing.

Friday, October 24, 2008

Populism as problem solving, cont.

This will be an open-ended string of posts. Again, expect all countries to re-trench and revisit old populist and mercantilist arguments to placate a populace faced with the decrease of wealth in nominal and real terms.

The French Version:

By James G. Neuger

Oct. 24 (Bloomberg) -- Since the era of Charles de Gaulle, France has rebelled against the American-style capitalism that put a ``Made in U.S.A.'' stamp on the world economy.

Now, as convulsions on Wall Street shake the global financial system, French President Nicolas Sarkozy is seizing the opportunity to remake the free-enterprise model along more state-managed Gaullist lines.

Emboldened by the U.S. pursuit of a European-style bailout, Sarkozy has packed his wish list for an upcoming international summit with calls for everything from stiffer bank supervision and limits on executive pay to state aid for hand-picked industries. While the moment is in his favor, history is working against him: throughout the postwar era, French attempts to subdue globalization and come up with an exportable economic model have misfired.

``There will be so much opposition against this grand idea of putting in more state control,'' says Paul de Grauwe, a professor at the Catholic University of Leuven in Belgium. Sarkozy is chasing ``a kind of French favorite dream that others do not perceive to be really necessary.''

As the financial crisis spiraled in early October, Sarkozy made a pilgrimage to De Gaulle's onetime country hideaway in eastern France, dedicating a memorial in the shadow of a double- barred Cross of Lorraine honoring the Free French in World War II. A prickly ally during the war, De Gaulle made a postwar reputation for defying the U.S.

`Mysterious Force'

``Gaullism is the spirit of rupture,'' Sarkozy said at the Oct. 11 ceremony attended by German Chancellor Angela Merkel. The general's legacy is a ``mysterious force,'' he said. It breaks with ``habits, routines, conventions,'' demanding ``exertion by all so that France may regain its rank among nations.''

The nominally pro-American Sarkozy, who ran as a pro- business candidate last year against Socialist Segolene Royal, is taking his crusade for a ``re-founding of global capitalism'' to Beijing today, when European leaders meet with the heads of 16 Asian countries including China, India and Japan. His next chance comes at the first in a series of global summits addressing financial markets slated for Nov. 15 in the Washington area.

``Nothing in the global economy will be the same as before,'' Sarkozy said yesterday in Annecy, France, as he announced plans to create a sovereign wealth fund to invest in French companies, protecting them from foreign ``predators'' after the global stock-market rout.