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.