In the Christmas spirit...

Someone (I have yet to find out the provenance behind this event) has left a very nice Christmas cake in our lunchroom.

Normally, a cake might hang around for a day or so and quietly disappear. This one is being eaten - at some speed.

It is very very nice. It is moist, fruity and has pecans and cherries on top.

The tin in which it came says "Collins Street Bakery - Never Sold In Stores".

TF, I believe it comes from down your way someplace? Very, very noice. I recommend...

:D

NZ has TERRORISTS!!! - 9

Is this becoming a Christmas thing? Last year it was the Urewera raids in Ruatoria.

This year, the targets have been some of the more fringe animal rights groups, and Greenpeace.

POLICE TEAMS set up to identify terrorism threats and risks to national security are spying on protest and community groups, including Greenpeace, animal rights and climate change campaigners, and Iraq war protesters.


Police officers from the Special Investigation Group (SIG) have carried out surveillance and used a paid informer to gather information not just about planned protests but the personal lives and sexual relationships of group members.

Now you could accuse Hager of having an ulterior motive for his part in this article. Potentially, he could be a one man terrorism movement all on his own - at least in the eyes of those in charge of such organisations as GCSB otherwise better known as "Waihopai". That aside, there is quite a familiar ring to the story from Sunday Star Times.

That has been followed by this morning's news in the Herald

The Police Minister will meet the Police Commissioner today before deciding if an investigation is needed into police spying on protest groups.

The Special Investigation Group, set up in 2004 to focus on terrorism threats to national security, has been reportedly paying informants to spy on groups such as Greenpeace, animal rights and climate change campaigners and Iraq war protesters.

Police Minister Judith Collins said she would decide whether to launch an inquiry after her meeting with the Police Commissioner, Howard Broad, today.

"I want to find out more information before I say anything more," Ms Collins said.

"I have not been briefed on this issue at all yet and I am also keen to find out what, or how much, former Police Minister Annette King knew about this."

Now that last part is especially interesting. If you look back through the "NZ has TERRORISTS" posts you should find my hints at the possibility of political direction, and the requirement on Police to be the frontline of the anti-terrorism action. Not, you must understand, that I would want that responsibility to fall anywhere else. There are political and judicial controls on the Police force that would easily be hidden from examination if SIS or some other similar bureaucracy were to take it up. The existance of that possibility (SIS and GCSB involvement) is just a little too scary. It raises the paranoia of activities like "disappearances" even in commonfolk like the old probligo.

But tying this particular little event into the larger Urewera debacle does give more credence to the possibilities of either personal paranoia high in the ranks of our police, or (and I suspect this is more likely) there has been political meddling at the highest possible levels. Go back a year and Hager is in print again on a very similar topic to this, again directly connected to Urewera but at the same time giving a potted history of the whole police approach to the "terrorism threat".

On October 2, 2003 World Farm Animal Day a group of young Aucklanders held a protest at the Tegel Foods offices about treatment of chickens. They scattered some hay on the floor of the reception area and 23-year-old school teacher Jesse Duffield delivered a protest letter. Police documents estimate the cost of cleaning up the hay was $111 plus GST.

However, early the next morning, detectives raided Duffield's home. He was arrested roughly and charged with home invasion (maximum 10 years' prison) and intentional damage (maximum seven years' prison). Police opposed him getting bail and later imposed a 9pm-6am curfew. Meanwhile his car was impounded for a week and his house searched by detectives. They seized his computer and mobile phone, plus 100 floppy disks, posters off the walls and a T-shirt saying "GE, you are what you eat." These possessions were not returned for nine months.

The only rational explanation for their actions was intelligence collecting. The police eventually dropped their absurd charges but they'd got hundreds of thousands of emails and texts to build a profile of the animal rights groups. The detective who led the raid, Mike Paki, was not a normal CIB officer, but a police intelligence officer from the Auckland Threat Assessment Unit who was surprise, surprise studying animal rights and other protest groups. It appears police were working their way through activist groups looking for security threats. It's not hard to see where such ideas would come from.

Then yesterday Herald reports the outcome of the meeting between Police Chief and Minister.

Police Minister Judith Collins yesterday said she had been given an assurance by Police Commissioner Howard Broad that police were "meeting their responsibilities" after it was reported that Christchurch man Rob Gilchrist had been paid to supply information from various groups to police over several years.

Police will not confirm or deny Mr Gilchrist's activities, but say they are not targeting peaceful protesters. Mr Gilchrist told the Herald he would like to comment but could not "for all sorts of reasons".
...
Police national crime manager Detective Superintendent Win van der Velde told the Herald police had no interest in lawful protesters, but focused on individuals where criminal behaviour was suspected.

Last night Ms Rees [the partner of the "spy"] issued details of questionnaires emailed to Mr Gilchrist by the police.

They included questions on climate change groups, animal rights activists, and planned anti-American demonstrations.

Green MP Keith Locke said his party's own emails may have been forwarded to police by Mr Gilchrist, and they would be asking the police whether they encouraged this practice.

That last point was taken up on Morning Report this morning, with Locke being interviewed. (Don't know how long that might stay there but it is worth a listen.)

In the meantime, I suggest that the NZ Police Force should consider a new name -

STASI.

Well, it was a fairly quiet weekend so y.t. sat down with an idea which came from a radio interview heard late Friday.

The question behind the interview was "Which nationality pilot would you prefer to have in command when you fly?"

The basis for the question was the "Critical Distance Index". A bit of google shows that this comes in part from one Richard Hofstadter, and that name gives another link to the past - Douglas Hofstadter. Any relation? No idea.

The idea behind the Critical Distance Index is the relationship between authority and the cultural ability to criticise those with more or greater authority. So, if for example you were flying Korea or JAL or Emirates, the CDI in the cockpit would be large as Korea, Japan and UAE are all nations with great respect for authority; their culture does not allow for subordinates to communicate freely with their superiors.

So, why the connection to airline pilots? Very simple really. The command and successful flying of a modern aircraft requires communication between at least three people on the flightdeck, as well as the ability to communicate and receive the information coming from aircraft systems.

If the CDI is large, that ability to communicate is curtailed and the risk to aircraft increases.

So that was the general context of the interview. I missed who was being interviewed, which is a shame. But it did have the outcome of putting me on the trail of the idea. It seems that it originally came from Hofstedter's study of the relationships between electorate and politicians, and the stability of the political system in place. The higher the CDI, the less the criticism of government action, the greater the acceptance of those in power, and the lower the available freedom of the electorate.

It appears that the whole idea is in a book Hofstadter has just published. I think that I know what I will be reading on those long warm summer evenings in Opo over the next couple weeks.

Oh, and of specific mention; the two nations with the lowest CDI are (apparently Australia and NZ. Does that say something? Like fly Air New Zealand or QANTAS? Mebbe. It also shows up in our national disrespect for authority and especially unreasonable authority.

EYES FROM ETHIOPIA

This I must bring to your attention.

Earlier this year a New Zealand photographer took some small digital cameras to Addis Ababa. She gave them to 16 homeless children and asked them to record their lives. They were given some tuition, some guidance, but the images are entirely the work of the 6 to 9 year olds.

Most highly recommended.

(Link in header)

A Wind-up from Foreign Policy...

of the year, that is.

Out of my mail box, from "Foreign Policy" is their list of "The Worst 10 Predictions For 2008".

1. Bill Kristol
“If [Hillary Clinton] gets a race against John Edwards and Barack Obama, she’s going to be the nominee. Gore is the only threat to her, then. … Barack Obama is not going to beat Hillary Clinton in a single Democratic primary. I’ll predict that right now.” —William Kristol, Fox News Sunday, Dec. 17, 2006

2. Bill Kramer
"“Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008

3. Dennis Blair and Kenneth Lieberthal
“[In] reality the risks to maritime flows of oil are far smaller than is commonly assumed. First, tankers are much less vulnerable than conventional wisdom holds. Second, limited regional conflicts would be unlikely to seriously upset traffic, and terrorist attacks against shipping would have even less of an economic effect. Third, only a naval power of the United States’ strength could seriously disrupt oil shipments.” —Dennis Blair and Kenneth Lieberthal, Foreign Affairs, May/June 2007

4. Donald Luskin
“[A]nyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of ‘recession.’” —Donald Luskin, The Washington Post, Sept. 14, 2008

5. The Economist
“For all its flaws, an example to others.” —The Economist on Kenya’s presidential election, Dec. 19, 2007

6. BusinessWeek
“New York Mayor Michael Bloomberg will enter the Presidential race in February, after it becomes clear which nominees will get the nod from the major parties. His multiple billions and organization will impress voters—and stun rivals. He’ll look like the most viable third-party candidate since Teddy Roosevelt. But Bloomberg will come up short, as he comes in for withering attacks from both Democrats and Republicans. He and Clinton will split more than 50% of the votes, but Arizona’s maverick senator, John McCain, will end up the country’s next President.” –BusinessWeek, Jan. 2, 2008

7. Walter Wagner
“There is a real possibility of creating destructive theoretical anomalies such as miniature black holes, strangelets and deSitter space transitions. These events have the potential to fundamentally alter matter and destroy our planet.” —Walter Wagner, LHCDefense.org

8. Arjun Murti
“The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.” —Arjun Murti, Goldman Sachs oil analyst, in a May 5, 2008, report

9. Charles Krauthammer
“It starts with the taking over of South Ossetia and Abkhazia, which has already happened. It goes on to the destruction of the Georgian armed forces, which is now happening. The third [development] will probably be the replacement of the elected government, which is pro-Western, with a puppet government, which will probably follow in a week or two.” —Charles Krauthammer, Fox News, Aug. 11, 2008

10. Henry Paulson
“I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it.” —Henry Paulson on National Public Radio, Nov. 13, 2008

LOL.

Mind you, don't ever look at the prognostications made by yours truly. :D

Person of the Year - 2008

It being close to the end of the year, there is the annual crop of “… of the Year” awards. First out of the blocks (that I have read) is Granny Herald, who gave their (four or five) lists on Saturday.



And, I must say, I fully support their choice for this year for “Person of the Year”. (Read the first three pages at least). It is this time a joint award to two men. Both were involved in actions of the greatest bravery and courage.



Both of the two men did what they thought was right. Both of the two men achieved (at least in part) the objective that they set, which was the preservation of the lives of others.



Regrettably, both men lost their lives in their efforts; one stabbed to death in a public place at 5 pm. as he left his office, the other drowned in a flooded river with a disabled teenage lad strapped to his chest.



And, I have to say, these men epitomise (for me at least) the sacrifice and dedication that is true Christianity. That is not because they lost their lives. It is because (as one relative said it) they are the true Good Samaritans. There are few enough in this world. There are two (pun absolutely intended) fewer today.



How many others who call themselves “true Christians” would have the courage to do the same as these two.



I know that I could not say “I would”.



From the article I have linked above, I want to include just one quote, a letter written by one of the deceased’s sister to his wife. It is actually a quote from Martin Luther King –

And so the first question that the priest asked -- the first question that the Levite asked was, "If I stop to help this man, what will happen to me?" But then the Good Samaritan came by. And he reversed the question: "If I do not stop to help this man, what will happen to him?"

Futures...

Y’know, it is strange sometimes how things work out. I went away for an extended weekend – I have eight days leave due to me and another 20 at the ened of the month – so SWMBO and I invited some very good friends to come and share a few days along with some good wine, good food and good conversation at the beachside in Opononi. Now the forecast was not promising, with 25 plus knots of nor-easter and rainy bits as well. But we managed, and our friends left well-satisifed as did we. But that is not what I want to talk about.

In one of the papers between Friday and Sunday was a small article that gave a somewhat different paradigm to the “current financial meltdown”. I made a mental note to look it up on the net when we got back to the big smoke. Could I find it? Not even au!!

But I did turn up two other articles, both ex Granny Herald, that have a quite curious connection apart from their appearance in consecutive editions.

The first of the two is by-lined Pamela Hess, a lady I do not recall having read previously. She has flicked out a report from the National Intelligence Council titled "Global Trends 2025: A Transformed World”

Some of our preliminary assessments are highlighted below:
 The whole international system—as constructed following WWII—will be revolutionized. Not only will new players—Brazil, Russia, India and China— have a seat at the international high table, they will bring new stakes and rules of the game.
 The unprecedented transfer of wealth roughly from West to East now under way will continue for the foreseeable future.
 Unprecedented economic growth, coupled with 1.5 billion more people, will put pressure on resources—particularly energy, food, and water—raising the specter of scarcities emerging as demand outstrips supply.
 The potential for conflict will increase owing partly to political turbulence in parts of the greater Middle East.

Hess tempts with others –

It also says the warming earth will extend Russia and Canada's growing season and ease their access to northern oil fields, which will strengthen their economies. But Russia's potential emergence as a world power may be clouded by lagging investment in its energy sector, persistent crime and government corruption, the report says.

Analysts also warn that the same kind of organized crime plaguing Russia could eventually take over the government of an Eastern or Central European country. The report is silent on which one.

It also says countries in Africa and South Asia may find themselves unstable and ungoverned, as state regimes collapse or wither away under security problems and water and food shortages brought about by climate change and a population increase of 1.4 billion.

The potential for conflict will be greater in 2025 than it is now, as the world's population competes for declining and shifting food, water and energy resources.

Despite a more precarious world situation, the report also says al-Qaida's terrorist franchise could decay "sooner than people think". It cites its growing unpopularity in the Muslim world, where it kills most of its victims.

"The prospect that al-Qaida will be among the small number of groups able to transcend the generational timeline is not high, given its harsh ideology, unachievable strategic objectives and inability to become a mass movement," the report states.

The report forecasts a geopolitical rise in non-Arab Muslim states outside of the Middle East, including Turkey and Indonesia, and says Iran could also be a central player in a new world order if it sheds its theocracy.

... suggests the world may complete its move away from its dependence on oil, ...

...that the US dollar, while remaining important, will decline to "first among equals" among other national currencies.

US global power will likely decline, as Americans' concerns about putting resources into solving domestic problems may cause the United States to withdraw some resources from foreign and global problems.

The second contrasts quite nicely. It flows like a gentle stream from the keyboard of Gwynne Dyer – a regular if not subscribed “international correspondant”. He kicks off with –

Barack Obama will inherit the in-box from hell when he becomes President. But an all-points crisis like the present one also creates opportunities for radical change that do not exist in normal times.

As Rahm Emanuel, his newly appointed chief of staff, put it: "Never waste a crisis."

Is Obama clever enough and radical enough to seize those opportunities?

From there he runs into promises to close Guantanamo, GWB’s exective veto on measures that put emission controls in place in California, and how about this for a Dyering gem

The recession will feel like a crisis for only a few more months. People eventually get used to almost anything.

Ah, there is a saying, Gwynne, widely used in a beer advertisement round these parts; “Yeah, right!”

It gets worser though.

The century-long pre-eminence of the US as the economic superpower was bound to decline gradually as the Asian giants industrialised, but the financial collapse risks turning that into a steep and irreversible fall. Even the US dollar could lose its place as the global reserve currency.

To limit the damage, Obama has to play a poor hand very well. He has implicit permission from the financial gurus to run even bigger deficits over the next couple of years than the Bush Administration did.

That will let him do some repair work on the American social fabric as well as just bailing out failing businesses and jobless people. But rebuilding America's reputation abroad will take more than money.

This is getting close to populist and simplistic nonsense. Like so many others, Dyer is promoting the messianic level of Obama’s campaign. It loses sight of the truth; that POTUS is an administrator, a bureaucrat. He is not a dictator, benign or otherwise. For a commentator or mere journalist of his stature to forget that fundamental is unforgiveable.

So, I will have to return to what I can remember of the article I failed to find. It would have appealed immensely to Lucy. It was a thoughtful and practicle analysis of the similarities between personal and national finance, the need for thrift and economy not in times of hardship but at all times. It castigated the profligacy and waste of both money and resources by western society. It promoted, indirectly, the stupidity of the continual pressure to spend and consume in pursuit of the good life. It had its sweet little homilies, that TF might also have enjoyed. For instance the story of Mrs Wheelbarrow and the fridge. Mrs Wheelbarrow needs a new refridgerator. Why? The old one is still working. Well, her neighbours have a brand new one with a brushed stainless steel finish and it looks beautiful. So, Mrs Wheelbarrow deserves one as well.

It was well written and a joy to read, if you were prepared to take on board the hard lessons. It might have fitted in well with the NIC report as a means of the west's survival in the long term.

What a shame it was “lost”. I can’t find it. I can not remember the author. It has gone.

North Korea 2 - United States of America 1

OK, so it was "only" the final of the World Soccer Cup.

OK OK so it was only U17 Women.

...or should that be "girls".

But North Korea did win.

American politics...

...at the worst.

Well, no, that is a bit harsh. But it says little for the nation that holds itself out as the last bastion of Democracy.

From the Herald this morning

since the November 4 election, law enforcement officials have seen more potentially threatening writings, internet postings and other activity directed at Obama than has been seen with any past president-elect, said officials aware of the situation, who spoke on condition of anonymity because the issue of a president's security is so sensitive.

Earlier this week, the Secret Service looked into the case of a sign posted on a tree in Vay, Idaho, with Obama's name and the offer of a "free public hanging". In North Carolina, civil rights officials complained of threatening racist graffiti targeting Obama found in a tunnel near the North Carolina State University campus.

And in a Maine convenience store, an Associated Press reporter saw a sign inviting customers to join a betting pool on when Obama might fall victim to an assassin.

The sign solicited US$1 (NZ$1.79) entries into "The Osama Obama Shotgun Pool," saying the money would go to the person picking the date closest to when Obama was attacked. "Let's hope we have a winner," said the sign, since taken down.

...

One of the most popular white supremacist websites, stormfront.org, got more than 2000 new members the day after the election, compared with 91 new members on election day, according to an AP count.

On Saturday, one Stormfront poster, identified as Dalderian Germanicus, of North Las Vegas, said, "I want the SOB laid out in a box to see how `messiahs' come to rest. God has abandoned us, this country is doomed."

How sad.

Vale Miriam Makeba

One of those singers of traditional music that never has had the international recognition deserved.

Most will remember her for just one song - known colloquially as "The Click Song".

She has been one of the bastions of presenting the Xkosa culture; intimately, accurately and excellently.

The world is a slightly darker place.

What I did yesterday...

Well, first and most important we had our daughter staying with us for part of the weekend. Good to see her. We don't see her all that often these days what with her living in New Plymouth and all. Now she is 7 months hapu she can no longer fly so we will not see her again until after the bub is born in mid January. Mum will be taken down to be the good grandmother for a couple weeks.

The non-event of the weekend was spending 10 minutes to whizz around to the local school to cast my vote in the General Election.

Pansy Wong for the local representative. I have a fair respect for the work she does despite her political affiliation.

Maori Party for the party vote.

Say, WHAT!!!??!!!

My rationale goes as follows -

1. They are probably the most honest of the rat-bags that occupy the Beehive.
2. They have a unique process of consultation with their electorate. I could, if I wished, join in that process by attending at a local marae at the right time; and if I put the effort into becoming more fluent in Maori.

It goes without saying that the Jonkey is now "Our Noble Leader".

Winnie the Pooh is no longer a representative of anything. He lost his electorate by a dozen streets. Ron Mark (one of the few rational beings in the Beehive) was also turfed out. The NZF party polled only 4.3% (the minimum for representation by right is 5%) so no list seats either.

Auntie Helen has announced her retirement as leader of the Labour Party. That was about the only surprise of the night. I thought it would have been before the Party's next conference, rather than on the night.

Krystallnacht - 11/10/1938

Next Monday night - 10 November - is the 70th anniversary of that horrendous night in Germany's history and the start of the Jewish exclusion and Hitler's eventual attempts at extermination of the Jewish race in Euorope.

I shall remember them.

But that is not all.

There millions of others killed since then - in the furtherance of political ideals and the personal lust for power - who should also be remembered;

Cambodia
Rwanda
Congo
Zimbabwe
South Africa
Russia
China
Chile
Argentina
Palestine
Lebanon
Israel
Somalia
Sudan
Mozambique

And let us also remember those who performed these atrocities.

Most importantly, let us all remember that we did little and nothing to prevent or stop them. In some instances we have been guilty of actively assisting those who kill.

Commend the innocent to your Gods.

Deja vue?

Listed at ALD...

With those who yearn for "the old days" and the freedom of open markets is this little piece of history.

Fueled by easy credit, the real-estate market had been rising swiftly for some years. Members of Congress were determined to assure the continuation of that easy credit. Suddenly, the party came to a devastating halt. Defaults multiplied, banks began to fail. Soon the economic troubles spread beyond real estate. Depression stalked the land.

The year was 1836.

The nexus of excess speculation, political mischief, and financial disaster—the same tangle that led to our present economic crisis—has been long and deep. Its nature has changed over the years as Americans have endeavored, with varying success, to learn from the mistakes of the past. But it has always been there, and the commonalities from era to era are stark and stunning. Given the recurrence of these themes over the course of three centuries, there is every reason to believe that similar calamities will beset the system as long as human nature and human action play a role in the workings of markets.

Yes, Al, much of the cause can be sheeted home to "government interference". That as much as anything is my point.

The result was a credit crunch. Interest rates that had been at 7 percent a year rose to 2 and even 3 percent a month. Weaker, overextended banks began to fail. Bankruptcies spread. Even several state governments found they could not roll over their debts, forcing them into default. By April 1837, a month after Jackson left the presidency, the great New York diarist Philip Hone noted that “the immense fortunes which we heard so much about in the days of speculation have melted like the snows before an April sun.”

The longest depression in American history had set in. Recovery would not begin until 1843. In Charles Dickens’s A Christmas Carol, published that same year, Ebenezer Scrooge worries that a note payable to him in three days might be as worthless as “a mere United States security.”

All manner of good quotes -

Many people, especially liberal politicians, have blamed the disaster on the deregulation of the last 30 years. But they do so in order to avoid the blame’s falling where it should—squarely on their own shoulders. For the same politicians now loudly proclaiming that deregulation caused the problem are the ones who fought tooth and nail to prevent increased regulation of Fannie and Freddie—the source of so much political money, their mother’s milk.

and

Herbert Hoover famously remarked that “the trouble with capitalism is capitalists. They’re too greedy.” That is true. But another and equal trouble with capitalism is politicians. Like the rest of us, they are made of all-too-human clay and can be easily blinded to reality by naked self-interest, at a cost we are only now beginning to fathom.

Libertarianism R.I.P.

An interesting little debate between Jacob Weisberg in Slate and
Richard Epstein in Forbes on the “Death of Libertarianism”, HT to my mates at ALD.

Each has their own little hobby-horses which to trot around the stage and play at jousting in the lists.

On the subject of the causes of the “current” collapse of the financial and banking systems, there is as might be expected considerable difference of opinion.

Epstein, predictably, blames government involvement and interference –

Alas, the financial rot started in the underlying home-mortgage market, with the government decision to subsidize home mortgages generally through low interest rates, and compounds the problem by offering special Fannie and Freddie guarantees at the low end of the market.
These foolish decisions prompted market actors to react just as libertarians fear: to profit privately from public foolishness. Savvy lenders looked less to the creditworthiness of their borrowers and more to unwise government guarantees that insulated them from risk. A high-risk loan of $1,000, without that guarantee, could be worth half that sum before the ink was dry. But who cares, if a government agency will pick up the slack?
Similarly, self-interested borrowers eagerly grasped at cheap-money loans, thereby driving up the price of underlying assets. But once these subsidies became too expensive to sustain, the capital markets raised the price of interest, which killed off refinancing for persons living beyond their means.

All of that is quite true, and quite logical. I am not going to argue against it.

Weisberg lays his “cause” like this –

Perhaps the most alarming moment was the failure of a giant, superleveraged hedge fund called Long-Term Capital Management, which threatened the solvency of financial institutions that served as counter-parties to its derivative contracts, much in the manner of Bear Stearns and Lehman Bros. this year. After LTCM's collapse, it became abundantly clear to anyone paying attention to this unfortunately esoteric issue that unregulated credit market derivatives posed risks to the global financial system, and that supervision and limits of some kind were advisable. This was a very scary problem and a very boring one, a hazardous combination.

Those with memories might dredge out the graphic I stole from Herald back in September; the inverted pyramid of the “money supply”. Weisberg I think could well have included that to illustrate his point.

I have to say that my views are no more valid than either of these august gentlemen. I balance that by admitting that in terms of erudition and learning they probably stand a few miles ahead of me.

I think that both these jousters are correct – in the small and very specific parts of the overall train of events that they have presented to support their respective views. That, I submit, is the danger of taking both of these gentlemen at face value and in isolation.

So, when Epstein says

” At this point, securitization, which diversified some risks, accentuated others by spreading the bad paper throughout the entire system. Now the high default rates on mortgages introduced massive uncertainty for valuing these financial instruments, which triggered government mark-to-market re-evaluations--which in turn forced a premature liquidation of assets. And presto, the failure of the Wall Street investment banks mushroomed into a larger financial crisis.”

...he is right on that thin edge of untruth. It is a matter of regulation in most markets – regulation set by the markets themselves and by the participants – that many different contract forms must be regularly, and as regularly as daily, revalued (mark to market) and the difference if negative lodged with the market. That is practice, and not something that “the government” suddenly undertook, and which he implies caused the collapse. Yes, it is likely that mark to market pressures were a major partial cause. But that was likely as a result of traders not being able to obtain the readies to lodge with the market as practice and convention required.

In my view the reality is that there was little that any government could have done to prevent the collapse of the banking and credit systems. So much of the system is based upon the fundamentals of fair dealing, of personal and commercial trust, of open and honest trading that regulation was (and still will be) an impossibility.

For that very same reason, the future control and regulation of the credit supply will continue to be at the hand of commercial practices and market convention rather than by government control.

Despite that midpoint conclusion, and to balance the number of times I quote the two protagonists, I do like Weisberg’s conclusion

The worst thing you can say about libertarians is that they are intellectually immature, frozen in the worldview many of them absorbed from reading Ayn Rand novels in high school. Like other ideologues, libertarians react to the world's failing to conform to their model by asking where the world went wrong. Their heroic view of capitalism makes it difficult for them to accept that markets can be irrational, misunderstand risk, and misallocate resources or that financial systems without vigorous government oversight and the capacity for pragmatic intervention constitute a recipe for disaster.

As I have said before – the perfect system will fail, because humans are involved in its operation.

Forwards, futures, onwards...

I am not going to argue Dave Justus’ remark on whether the trading of futures and other commodity wagering “stabilises markets” or not. He can do that if he wishes.

There is one small part where he is right. There is much where I think he is quite wrong.

The derivative trading and arbitrage processes do have “beneficial” effects between markets. If a price difference for a tradable commodity exists between two markets (NY and London for example) then traders will buy in the cheap market to sell on the higher priced market. That small part of the process is as DJ says.

I must point out that in the whole process of derivative trading, arbitrage and cross trading is just a very small part of the whole process.

Other than that, Dave’s extrapolation and Mises in particular are long on propaganda and short on true analysis.

If one takes the trouble to view commodity markets objectively, and forward/futures trading in particular from the wider POV, a different picture emerges. It is, regretfully, not what the like of Dave, or Al, or Mises want you to hear. Well, not quite as baldly as I state it, though it is hinted at.

I will try to work down through the levels of complexity as simply as I can.

The process of wagering, sorry, forward or future derivatives –

1. For a specified standard commodity,
2. for a standard quantity
3. At a specified future date
4. Deliver and settle for an agreed price.

Now as far as I am concerned, and while Mises does cover the point briefly, and Wikipedia and other sources give emphasis to the “discounting” process, those last two words are the most critical of all.

When that future matures, there will be one winner (either buyer or seller) and one loser. Who wins and loses is not critical to the debate. The important fact, inescapable fact, is that the price on that derivative becomes the cost to the buyer.

Six months out from the Hurricane Season, traders are betting the probabilities of a stormy or not season, and the likelihood of supply interruption. When, six months later a Cat 5 hurricane does start advancing toward the Gulf of Mexico all of the traders factor into their wagers the likely (possible) impact that storm might have on oil supplies. A lot of damage is going to mean higher prices until repairs are made, facilities reopened and production is restored. If the damage does not occur, then someone is going to take a bath. The dickering over probabilities and pricing is the fundamental of forwards and futures trading.

Lying under that comparatively simple strata we start getting into the darker realms of hedging, and short selling.

If a trader is prudent, he will self-insure (carry the potential liability for losses) in part, and will seek to pass on the rest of that risk to other (willing) traders. This hedging process is rather like sticking a large sum on the nose of a horse with one bookie, then going around the corner and placing smaller bets against that horse with other bookies. Yeah it costs a bit, but this is the secret of derivative trading. It is the process of sharing risk across the market, while preserving as much as possible of potential profits on one’s own book.

Hedging is not a difficulty at this level, but short selling can be. That takes us to the next level of this Dantean Inferno.

Short selling is not difficult to understand. The trader sells commodity that he has borrowed from another trader. Not difficult; there is documentation, principal in the form of commodity, interest paid on the value of that principle. The security for the “loan” is paper written by the trader.

Now, consider that a “good” trader is not likely to enter a forward or future contract without having first lined up a few other ducks. The cost of the interest on the hedge, the commissions incurred, the risk factors all have been well set out and considered.

Together, the sum of all of those constitutes the Margin that the trader hopes to gain through his top level wager.

But wait, there’s MORE!!!

Let’s peek into the murk on the next level of this Inferno.

Remember that “short selling” is in effect using someone else’s commodity to secure the hedge or the basic forward contract.

But what to do if the product can not be bought at a price giving a suitable margin, or is simply not being sold at the price you are offering?

Look out for the streakers folks, ‘cos here comes the “naked short selling”.

The trader is now selling “non-existent commodity”. Well it does exist, but not on his books. He just has to get it together before settlement date, or he has to sell his forward contract, or he has to suck his very burnt fingers or combinations of all three.

Of course, if the market price does not exceed the future price of his contract he could do quite well out of his bet / wager / contract, thank you!

There is one winner and one loser in this whole process. If the trader is the loser, he can attempt to recover his losses on one contract with winnings on others. If the buyer is the loser, then his recovery comes from passing the higher price on to the people who buy the commodity from him. Eventually, and this is “trickle-down economics” at its best, the poor little guy at the bottom of the heap pays the price – whatever it might be.

That price does include the original production (well-head if it is oil) cost, plus the producer’s margin, plus the margins for all of the speculators and traders between there and the refinery, plus the refinery’s costs and margin, plus the refined product can be traded in the same way as the crude with all the margins added in there ad nauseum.

What do you buy for your gallon of gas?

The retailer’s margin – in NZ it is said to be about 2c/litre.
Government taxes. In NZ said to be about 45% of the total price.
The transport cost from supply storage to retailer.
The cost of storage.
The cost of transport from refinery to storage.
The refiners costs.
Cost of transport from wellhead to refinery
Production costs at wellhead.
Extraction royalties and duties
Research, prospecting, drilling, and extraction costs

Plus, in the midst of all that, is the profit (or losses) taken by the people who trade little pieces of paper with “O I L” written on them. Mind you, you can buy little pieces of paper with “R W C” on them. You will even find futures contracts based on the value of the DOW at the end of a day’s trading, or to buy and sell a currency.

If you own a piece of paper that says “BRENT LIGHT CRUDE, 1 Barrel” then six months or so ago it could have been worth about USD130. That would be about 65 cents per gallon. That “market price” is quoted on the London Exchange (ICE) and represents the forward price for the “current” block of that commodity. As I understand it, there is a standard monthly maturity for settlement and delivery. Now the market is quoting USD60.29 or 30 cents per gallon.

All of the costs I have listed above are predominantly unchanged. So, where does the difference go?

This is the point that I contend. It is the point that the likes of Mises, the “free-marketers” and the rest would prefer not to talk about.

That difference might end up with reduced profits along that chain. But in my opinion, that possibility is minimal because the long-term loss of profitability leads to only one thing – extinction. If you look at the oil industry that is something that is not likely to happen (to the whole industry, not individual players) any time soon.

But by far the greatest part of that fall in cost content is the direct result of the fall in the volume of forward and futures trading. With the withdrawal of credit, the speculators are unable to back their wagers with your money and mine. The true value of short sale commodity scrip is being critically examined. Trades are being done far more directly from well-head to refinery to wholesaler to retailer.

And that, dear reader, is the basis for my contention that the argument put up by Dave the Justus is counter-intuitive, even just plain wrong!

Happy 70th birthday!!!

... to Orson Welle's radio version of War of the Worlds.

Yeah, OK I am a day early. I just wanted to get in first!! :P

A fantastic piece of radio theatre which chills my spine every time I hear it. It also is an impeachable illustration of the power of the broadcast media.

The way bloggers think -

It is interesting - no, make that frustrating - trying to engage some people in a discussion. Dave the Justus is just such a one, as instanced by this question and response...

Comment by probligo

October 28, 2008 @ 9:37 am

“They also perform a valuable service for the economy by providing stability and certitude that wouldn’t otherwise exist, making commodies less volatile.

How so, Dave? “…stability and certitude…” from speculation and market wagers?

How does buying 250,000 tanker load of crude, then having it sail in circles somewhere south of Africa constitute a “stabilisation” of a market?

Why is it neccessary for there to be “profit makers” or “profit takers” sitting between producer and consumer. They add nothing to the value of the product, other than their profit for taking a bet on the price increasing.

Explanation required because that statement is entirely contra-intuitive. It makes no sense. It is water running uphill.


Comment by Dave Justus

October 28, 2008 @ 10:07 am

“How does buying 250,000 tanker load of crude, then having it sail in circles somewhere south of Africa constitute a “stabilisation” of a market?”

I’ve never heard of such a thing. If that is what you think commodoties speculators do, then I can see why the subject confuses you.

I can accept that Dave does not like me using simile to make a point, but it is his outright refusal to answer that point that is the major difficulty.

I challenged his statement that middle traders, future traders, commodity traders "providing stability and certitude that wouldn’t otherwise exist" and his only response was to indulge in petty denigration and avoidance of the question.

Well Dave, I guess that from now onward you are going to have to write your own comments to your pieces. Oh, yeah, forgot there are a couple others who float through from time to time. Some are interesting, others seem somewhat pornographic.

Yeah, it is your blog. You can censor what is said. So, I don't care all that much. Been nice meeting you.

Tis sad really.

The Morning News -

To all those who might be interested, the heading links to (what I consider) NZ's premiere news programme (from any medium).

For the next week, one of the presenters (Geoff Robinson) is based in Washington DC and through the technology of Skype, VOIP, and Internet you too will be able to listen to the same news as the probligo gets from 6 a.m. every weekday morning (NZ time).

Very highly recommended.

Take a listen or three... oh, and an occasional report back of reactions would be appreciated.

Thoughts on elections...

The election campaign trundles along. There have been some “interesting” bits. There have been a lot of uninteresting bits. Include in the latter the attempts to get together an entertainment programme for tv (whichever channel) with the leaders of each of the represented parties “debating” various issues. RadioNZ has a winner with Kim Hill conducting public debates – at least it might be if you can get past the prepared rhetoric and party buzz-lines.

The interesting bits are led by two.

The first is Auntie Helen’s pamphlet. Watch for this one to get big in the next few days. RadioNZ had Shane Jones (L) and Gerry (Can) Brownlee (N) on Morning Report today. Interesting discussion. It seems that Jim (Iron Man) Anderton had this fantastic idea of putting out a booklet to his electorate “grey brigade”. All manner of helpful tips about how to cross the road, how to lock your door properly, that kind of thing. Someone in PartLy HQ got a hold of it and has a similar one printed for every sitting member of the present government. Labour, that is. From the Parliamentary Services vote. Jones said that his had been distributed “by party helpers and volunteers”. Question, very rightly, is “Is this electioneering material or not?”

Yes, that one is likely to get interesting.

The most interesting is illustrated by yesterday afternoon's(RadioNZ and Checkpoint this time) interview of the JonKey. “My old mate” Morrie (Minor) Williamson has opened his mouth once more and uttered the “T” word. That little faux is not the interesting bit. What is becoming increasingly apparent is that (if the polls are right) our next government is in fact going to be a dictatorship.

“Say what?!!?”

Yep, I will hang my hat on this one. Listening to the JonKey dealing with the fallout from Morrie (Minor) Williamson’s banana-skin tongue on my way home through the (un-tolled) traffic last night, he came up with the statement that “nothing will happen without my signature on the bottom of it.” He repeated it in the form “Nothing will come out from Cabinet until I am satisfied with it, and sign off on it.” I don’t know that anyone else has picked up on this as yet, but if it is true then he is going to be a mightily busy man over the next three years. After all, there will (on the strength of that statement) be no individual ministerial responsibility. Nothing is going to happen unless signed off by “the man”.

Think for a moment about how this election has progressed to date. The only voice heard with surety is the JonKey. Even Honest Bill English is given a list of catches to pop to the media, probably even the sequence. You can hear the echo of the JonKey’s voice. But that is a small and (becoming endearing) exception. Nothing, but nothing, leaves the Nats without the man, the JonKey’s, approval. He is the only man permitted to say anything.

Mind you, add the likes of Dr Lockwood Mastermind Smith to the mix and he does have a real problem to deal with.

Hello Dictatorship!!!

"Sideswipe" is a back page commentary of little bits and pieces...
The JonKey on the left... On the right?

Thoughts on economics...

Y’know, I just can not help wondering whether the current banking/financial meltdown/crisis and the attempts to rectify the problem are in fact treating symptoms to a far more serious disease.

I am now beginning to have considerable concern about the quantity of money various governments have been releasing to the existing structures in an attempt to “keep the Titanic, errr ooopps sorry, global economy afloat”. If I can keep the Titanic here for a moment it would be a little like loading icebergs onto the decks because they are lighter than water and hence should keep the boat afloat for a bit longer.

The second concern is that at some point someone is going to point to the Breton Woods accords and say that they need to be reversed; that we should return to a global gold standard. That, I fear would be akin to using cyanide as a chemotherapy to cure psoriasis.

The point here is that the real underlying cause of the current “crisis” has been the increasing availability and use of credit funding of consumption.

This is one of these “cycle” processes and I have to break into the ring at some (arbitrary) point..

Step 1 - As the global economy has grown (I have to take a global viewpoint as it is in fact a global problem) that has increased the amount of money in circulation (I use Samuelson’s models which is going to upset the Friedmanites in particular).

Step 2 – The increased money supply is split between investment and consumption. The increase in consumption drives the need for increased investment.

Step 3 – The increased funds now held within the banking system reduce interest rates; a factor that encourages borrowing to fund further productive investment (a good thing) and further consumption (also a good thing).

That completes the first cycle as the productive investment increases the activity and wealth of the global economy.

Step 4 - The marginal return of investment in production reduces as the process continues. Demand becomes inelastic – falling prices do not increase demand but reduce returns.

Step 5 - The decrease in marginal investment return from productive investment encourages an increase in “non-productive” investment. Those non-productive investments produce the “bubbles” such as the dot-com market, real estate, and “financial instruments”.

Step 6 – The profits gained from the speculative activities of these markets feed back into the initial cycle at Step 2.

That completes the second cycle. We now have a system that looks like a figure 8 (in one sense) but I prefer to think of it as a Mobius Strip. The two cycles are related, rather like taking a Mobius Strip and cutting it in half along its circumference.

There are several other smaller cycles involved in those two primaries – the impact of taxation and government spending for example. Those smaller cycles (when viewed on a global scale) generally have little influence on the primary money wheel.

The two critical elements of these cycles are –
 The feedback loop of consumption into the demand for credit to fund higher consumption.
 The process by which the available money supply has been increased in order to make further credit available.

The second of these two used to be known as “The Multiplier Effect” – may well still be.

The cycles that I have outlined apply as much to nations within the global economy as they do to your household and mine. Follow the Mobius Strip around your own actions as a consumer, your own attitudes and actions as an investor and you should see what I mean. In fact it might even help to write “consumption” on the edge of your Mobius Strip, turn it over and write “attitude” on the other.

Now take a pair of scissors and cut that Mobius Strip in half around its circumference. Look at the result (no go do it for yourself!!!) because that is where we go next.

We now need to think about the psychology of the market. I know very little about this so I am winging it (I am honest about that). No doubt there will be someone out there who can shoot my argument down, but I like it…

Step 1 – As individuals increase their “wealth” (the consequence of the growing global economy) the production investment needs to encourage the spending of that continuing increase in available income in order to maintain both profit growth and market share.

Step 2 –Individuals are encouraged to change behaviour toward consumption in preference to saving and investment. Encouraging others to spend rather than invest directly is also a protective device as it limits the development of competition. Those who save rather than consume are feeding the first cycle at step 3.

Step 3 – The enjoyment of increased consumption encourages increased spending in the continuing pursuit of “the good things in life”.

Step 4 – The feedback of enjoyment and encouragement to increasing spending requires the use of credit. This is no more than the spending of future income for current consumption.

Step 5 – The easy availability of credit is used to further fund the investment in non-productive investments. Think of 100% mortgages, the 3x3x3 HP agreements, “free credit”, multiple credit cards…

Step 6 – The market adds to its litany of “increase consumption”, the need for “maintaining confidence” in the market. That “confidence” requires further enjoyment of even higher levels of consumption.

Now the critical thing here is Step 4. Please remember when I am talking of “nations” here, I am NOT talking of government, government spending or taxes. “Nation” and “National” is the agglomeration of individuals, their actions, their intentions.

I have quoted Mr Micawber several times in relation to where this is all heading –

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

As individuals and as nations we have all, to greater and lesser extent, been spending “twenty pounds ought and six”. The extent of that overspend? Well, Germany believes that a total bailout of their banking system (in the form of the government liability for guaranteed savings) is equivalent to eight years of the current GDP. The country (unlike NZ) probably owes very little abroad. NZ faces a double whammy as a very large proportion of that credit has been spent on enjoyable consumption imported from outside. That being the case, and taking the German lead at 8 years GDP, NZ could owe that amount to the ROW. It is not that we are insolvent, you understand. It is just that we have spent the readies, sold the silver service (several times now), put the car on Ebay (Trade-me in NZ) and mortgaged the kids earnings for the next 20 years if you believe the Good Doctor.

Remember that Mobius strip that we cut in half? Pick it up, and with a pair of scissors cut around the circumference.

That is what an economic system looks like…

To quote Mr Micawber again, only not I suspect in relation to the economy but his own circumstances –

Welcome poverty!..Welcome misery, welcome houselessness, welcome hunger, rags, tempest, and beggary! Mutual confidence will sustain us to the end!

Very a propos to the economy at large.

I had to laugh

David Farrar fills the odd idle minute - I don't usually enjoy his "right-wing mouthpiece" speak.

But this one (linked in the header) is just too good!

Thanks David, for a small light among the gloom.

"If you don't have it, then you can't lose it..."

at least that is how I read Benedict XVI.

The global financial crisis is proof that the pursuit of money and success is pointless, Pope Benedict XVI has told a meeting of bishops in Rome.

The head of the Roman Catholic Church said that the disappearance of money as banks collapsed showed that wealth meant "nothing".

The Pope said that people should instead base their lives on God's word.

Those who think that "concrete things we can touch are the surest reality" are deceiving themselves, he said.

Now I can not agree with his alternative. You are not going to find the ol progligo going that far.

But this is interesting -

When he opened the Synod on Sunday, the Pope attacked modern culture, saying that "nations once rich in faith and vocations are losing their own identity under the harmful and destructive influence of a certain modern culture".

I wonder who that refers to?

History repeats -

I admit that the parallel of the current financial crisis with the 1929 crash was too strong for me to ignore.

Thanks (once again) to my friends at ALD, this has turned out . Scott Reynolds Nelson concludes -

In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India.

An idea that I suggested to Dave the Just Us a whiles back.

Have we found an honest politician?

From the Herald website news -

"We're all worried about losing our jobs," Rep. Paul Ryan, a Republican, declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it - not me.' "

Mr Ryan, thank you for your honesty!

Miscellaneous thought for the day...

Is there any whole number with last digit = "7" which is a square of a whole number.

I.e.

aaaaaaa^2 = nnnnnnnn7

:)

Politicising stupidity -

Well, TF didn't seem to like my idea but since I am pig-headed I'll repeat it here.

It stems from TF's "How do I become an illegal alien?" post, a reprint of one of "those" letters that react with me the same way as the crumbs the Djinn of All Deserts sprinkled onto the rhinoscerous' skin while said rather grumpy beastie was taking a dip in the wadi.

I am not going to repeat Mr Ruppert's letter here (mainly for that reason).

This is what I wrote for TF -

There are times when I just can do no more than wonder at how some people's heads work.

Don't worry, TF, we have this kind in NZ as well.

OK, so the premise is -

Pay $2,000 fine.

Pay three years taxes.

Collect free citizenship card.
______________________________

I think that if I were this jolly roger's political representative I might reply in the following terms...

_____________________________

First, Mr Ruppert, you might like to refund to your employer the difference between what you actually earned in the past 5 years as a presumably legal US citizen, and what might be paid to an illegal immigrant.

Right, got that?

Now sell your home, donate the proceeds to charity (along with any tax credits that might be due), and live in low income rental housing for the two years that you want tax free.

Still feeling keen?

Now remember that for the past five years you have been an illegal. You know the stress that you feel when you see that policeman shake his finger at you for exceeding the speed limit? Live like that for the whole 5 years, 24/7, the next police is going to stop you with intent and ask for your cards...

Finally, bear in mind that you could, in that 5 years, be one of the 5% that are caught and deported (in NZ it is closer to 50%). Like in snakes and ladders or monopoly - return to go, do not collect anything, and miss your next 5 turns...

Still want to join in?

Yours truly...

Perhaps too, Mr Ruppert might like to take employment in one of those (unwanted) jobs that are more often than not performed by the (unwanted) illegals. You know the kind of thing - fruit-picking, sewer fixing, house cleaning, gardening... And, Mr Ruppert, don't start getting on your high "taking jobs from the poor" horse with me either because even here in NZ we have to import labour to do some of these tasks. Admittedly, the unemployment level is currently still under 4% so the "legal" people can to some extent afford to pick and choose what they want to do for a crust.

The truth, Mr Ruppert, is that whatever way you measure it those "illegals" have been allowed to stay in America simply because America needs them as much as they want to escape Mexico or Vietnam or China or where-ever they might have come from.

And it is because of where they might have come from that I get mighty suspicious of the true motives behind these letters. Words like "red-neck" start to float to the top of the word-cloud, justified or not. The fact that they seem to surface when-ever there are elections in the offing does not give me any consolation either.

Having said all of that, America does have a problem. There are a great number of people who want to live there. Some are more "desirable" than others.

I do not fall into either camp.

The "Global Financial Meltdown" explained...

Full credit to yesterday's Business section of the Herald. They have given one of the most cogent, and hence rational, explanations of the liquidity crisis within the global (not just American) banking systems.

Included in the main article was this graphic which I have had to scan as it does not seem to appear anywhere on the digital version of the articles...


To fully understand, and to make it clear -

75% of global liquidity is made up of "Derivatives". The value of this portion of the pyramid is over 8 times the global GDP. The importance of this "top of the pyramid" will become apparent when we look at what it is made from.

13% is "Securitised Debt". The value of these "securitised debts" is just under 1.5 times the global GDP.

11% is made up of "Broad Money". The value of this part is just short of 1.25 times global GDP.

1% is in the form of "Power Money" - what you and I carry in our pockets.

So we can say, with a little simple addition, that the total global liquidity is somewhere in the vicinity of 10.8 times the total world income. How much of a worry should that be? At this stage I am far more worried about the top end of the pyramid.

What is that "top end"? The Herald graphic defines it was "Futures, options, swaps etc". Putting into my own words, this is the world of "financial products"; of units and risk and literally gambling with other people's (read thine and mine) money. I quoted Liam Dann at some length a whiles back here and concluded (my words) -

we are seeing what happens when the economy is run by snake-oil medicine men and itinerant side-show freaks.

So, 8 times the global income has been sunk into what is little more than betting slips that are owned and traded between the snake-oil medicine men. They end up back in the open market in forms such as the "Unit Share" of a superannuation fund. They are funded (as far as it is deemed neccessary) from the term deposits and savings accounts of the simple minded people who believe (in their naivete) that bank money is secure.

Read through Brian Gaynor's analysis in full. I want to quote just this piece -

Forty years ago there were almost no investment banks, securitised debt or derivatives. The huge increase in global liquidity and credit since the early 1980s has been almost exclusively driven by investment banks through the creation of securitised debt and derivatives, which now represent nearly 90 per cent of total liquidity.

At the beginning of the year there were five major US investment banks - Goldman Sachs, with assets of US$1061 billion (or US$1.06 trillion), Morgan Stanley US$1045 billion, Merrill Lynch US$1020 billion, Lehman Brothers US$689 billion and Bear Stearns US$424 billion.

Bear Stearns and Lehman Brothers have disappeared and Merrill Lynch is being taken over by Bank of America. These companies created a huge amount of toxic securitised debt and derivatives that have plunged in value.

The conversion of the two remaining investment banks, Goldman Sachs and Morgan Stanley, into bank holding companies is significant for a number of reasons:

* As commercial banks they will be subject to regulation whereas they were almost totally unregulated as investment banks

* Their lending capabilities will be severely restricted because commercial banks have strict capital adequacy requirements. Morgan Stanley's debt to equity ratio is 30:1 and Goldman Sachs 22:1 whereas banks are generally restricted to no more than 15:1.

Now that kind of difference is the stuff that makes my blood run cold. Morgan Stanley (to take that example) has borrowed 30 times its owner equity to fund financial market operations that are no more than betting slips that they hope to validate by winning the battle to influence the value of currencies, the value of future contracts.

This is not Capitalism 101, nor is it Capitalism 201.

This is Master Degree stuff; the kind of Capitalism that was never dreamed of by the likes of Friedman, or the early designers of the principles. It is Capitalism as was never dreamed of by the politicians of the US, or any other country.

___________________________________________________

In another article, the Herald records the demise of WaMu - Washigton Mutual - in "the largest failure ever of an American bank".

The Government measures bank failures by an institution's assets; Seattle-based WaMu has roughly US$310 billion in assets.

The previous record was the failure of Continental Illinois National Bank in 1984, with US$40 billion in assets when it closed. IndyMac, seized in July, had US$32 billion.

WaMu was searching for a lifeline after piling up billions of dollars in losses because of failed mortgages. WaMu has seen its stock price plummet by 87 per cent this year, and it suffered a ratings downgrade by Standard & Poor's earlier this week that put it in danger of collapse.

The Bush Administration's proposal for a US$700 billion bailout for distressed financial institutions was believed to have given fresh impetus to a buyout and new allure to Washington Mutual. Besides JPMorgan Chase, Wells Fargo, Citigroup, HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were all mentioned as possible suitors. WaMu was also believed to be talking to private equity firms.

The FDIC was seeking a buyer willing to bear a large burden of WaMu's losses, to lessen the impact on the insurance fund.

In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.

JPMorgan Chase's chief executive, Jamie Dimon said in a conference call, the "only negative" related to the deal was "how to handle some of these bad assets". He did not elaborate.

WaMu had "$310 billion in assets". Right. What kind of "assets"? The article says "billions of dollars in losses because of failed mortgages". Well there goes some of the assets. How much was "owned" and recorded as "assets" in derivatives? My guess somewhat more than the thus far "failed mortgages". If I were a betting man, I would accept even odds that WaMu has 6 times the value of its total mortgage portfolio in the form of derivatives. If 50% of the mortgages failed, that means that likely 16 times that value is held in derivatives.

Little wonder that JP Morgan Chase is quoted as saying -

In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.

JPMorgan Chase's chief executive, Jamie Dimon said in a conference call, the "only negative" related to the deal was "how to handle some of these bad assets". He did not elaborate.

Good Grief!!!

Just how sensitive can you be -

SOUTH CHARLESTON - A West Virginia man who police said passed gas and fanned it toward a patrolman has been charged with battery on a police officer.

Jose A. Cruz, 34, of Clarksburg, was pulled over for driving without headlights, police said. According to the criminal complaint, Cruz smelled of alcohol, had slurred speech and failed three field sobriety tests before he was handcuffed and taken to a police station for a breathalyser test.

As Patrolman T.E. Parsons prepared the machine, Cruz scooted his chair toward Parsons, lifted his leg and "passed gas loudly," the complaint said.

Cruz, according to complaint, then fanned the gas toward the officer.

"The gas was very odorous and created contact of an insulting or provoking nature with Patrolman Parsons," the complaint alleged.

He was also charged with driving under the influence, driving without headlights and two counts of obstruction.

Cruz acknowledged passing gas, but said he didn't move his chair toward the officer nor aim gas at the patrolman. He said he had an upset stomach at the time, but police denied his request to go to the bathroom when he first arrived at the station.

Perhaps Patrolman T.E. Parsons might like to come share lunch with the factory workers here. A good feed of taro the night before does wonders for the digestive tract, but can make one somewhat unpopular. A few days might be enough to get him sufficiently desensitised...

It sounds more to me like Patrolman T.E. Parsons had gotten himself up on the wrong side of the bed, or perhaps his liver was acting up again... Whatever the cause, there would be a simple solution - shut the guy in an unventilated cell for a few hours then give him a cigarette and a lighter and shut the door... :)

It strikes me too, how the good old Anglo Saxon word "fart" has been euphemised to "passing gas" and similar. Come on, a fart is a fart, always has been, always will.

Get Rich Quick Scheme No.673...

I opined several times during the past few days that the only failing of any economic system is the people in it.

As an illustration (linked through header) -

Wellington City Council staff were not required to remove a large, unidentified lump of greasy substance from a south coast beach today -- locals did it for them.
The lump apparently washed up at Breaker Bay during the weekend and once word got out that it could be valuable ambergris -- an excretion from whales that is used to make perfume -- locals started pillaging it.

...

"We went out there this morning and there were people sort of lunging at it with spades and sharp implements trying to chop pieces off so they could make off with it and make their fortunes," he said.

"Whether people are now going to try and pass it off on TradeMe as highly valuable ambergris remains to be seen."

However, the lump was cylinder shaped as if it had been manufactured and the general consensus was that it was in fact lard or cooking fat.

'Nuff said...

A weekend roundup...

The weekend started with Herald running a series of articles on the probablility of a "dirty election". Not that the election might be won fraudulently (in the direct sense) but the emergence of the "dirty trick brigades". Think, if you are American, of the SWIFT boat saga in the last elections or Richard Nixon and Watergate for extreme parallels.

Rochelle Rees' background with the Labour Party was revealed by bloggers yesterday after news stories she was behind a ploy to ensure Mr Key's website link was the first to appear when people searched for "clueless" on Google.

Yesterday, National leader John Key said it was another example of petty attacks on him by Labour.

Link to the Labour Party or not is not the issue here. The real issue is the denigration of the electoral process.

The second theme was run by the business pages of Sunday Star Times. The headline "Gluttons Table Set by Central Banks" was a good hook to a Gareth Morgan analysis of the weeks' crises in the international finance markets.

If you think that global financial "crises" seem to be happening with increasing frequency, congratulations - you're right.
...
It was back in 1996 that Fed chairman Alan Greenspan, who was really at the centre of the liquidity flood, declared the sharemarket was suffering from "irrational exuberance".

The market ignored his warning and it wasn't till two years later, in 1998, that it suffered its first setback. When hedge fund manager Long Term Capital made some wrong bets and was staring down the barrel at bankruptcy, the US central bank decided this institution was too big to fail and organised a consortium of investment banks to absorb its assets.

The Long Term Capital episode was the first big indication that the financial system was getting sick. If a single institution that was only four years old was too big to fail without bringing the US financial system down, then something was wrong with the system. But it would get worse.

Nice to have the 20/20 now, but let's follow a bit further...

Oh oh! Here's the problem. Central banks, and the Fed in particular, have become so addicted to the need for economic growth each year that they have sacrificed a tenet of sound central banking. It seems they no longer care whether lending by banking is within prudential bounds.

Indeed, it is their effective prudential supervision that they have sacrificed at the altar of this newfound, but ultimately false, belief - that you can have continual economic growth and low inflation. This shows a surreal confidence in the private sector's ability to constantly deliver sufficient productivity gains so that inflation isn't an issue, plus deliver more income to everyone in the economy year after year.

Not covered here, but a strong echo of the 1929 crash - which was fuelled in part by the fervor for stock - any stock - as long as it earned more than the money borrowed to buy it.
Also in the same section this morning was this news item.

Now I spoke of "derivative trading" in my last bit on the subject.

In the past two weeks billions of dollars have vanished as the shares in Australia's Macquarie Group have fallen 45 percent, America's Morgan Stanley 47%, Goldman Sachs, 35 percent.

Their plummeting stocks appear to be following other financial giants into the abyss, as Bear Stearns, Lehman Brothers, Merrill Lynch and HBOS suffered such meltdowns they were forced to sell to rivals.

Bear, which hit trouble in March, was acquired by JP Morgan Chase in May. Lehman filed for bankruptcy protection on Monday and its core businesses were acquired by British bank Barclays the following day. Merrill Lynch is now owned by Bank of America after watching its shares dive 38% in less than a week. HBOS went to fellow British bank Lloyds TSB on Thursday after its shares fell 40% in a matter of days.

The screaming headlines say these institutions were victims of a financial meltdown as their dangerous punts on speculative debts turned septic.

There's another story and it's not pretty either.

Sydney-based Macquarie Group believes it is the victim of a concerted campaign to manipulate its share price and Australia's market regulator has started an inquiry into allegations that short-sellers who profit from falling shares are spreading false rumours.

Now hang on a sec!! What's this? Spreading false rumours to create loss in value on specific stocks?

An inquiry immediately announced by the Australian Securities & Investments Commission was echoed by New York attorney-general Mario Cuomo, who announced on Thursday a probe into possible illegal short selling in financial stocks.

"This investigation will not only encompass short-selling of Lehman Brothers and AIG but also short-selling in other companies that may be occurring, like Morgan Stanley and Goldman Sachs," he said.

In Australia, short-sellers are required to report their positions to the stock exchange daily. "Clearly some haven't been doing that," said one market source.

OK, so what is "short selling"?

TO "short sell" you first borrow someone else's stock. You sell it on the open market. You then wait for the value of that stock to fall. Then you buy back the same stock - at hopefully a considerable gain. The apparent risk is that the stock does not fall - which is where the dirty tricks brigade come in to play.

But, it gets worse -

In practice, in Australia only "naked" short sales are being reported to the exchange - these are deals where the short seller has not yet borrowed stock. A legal ambiguity means "covered" shorting, where the seller has borrowed shares, is not reported to the ASX. As a result, no one knows how big those positions are.

Say WHAT? Selling stock you don't own, or haven't even borrowed yet?

Executives at Bear Stearns believe they were the victims of just such a calculated attack by short sellers. In a detailed exploration of the fall of Bear published last month, Vanity Fair journalist Bryan Burrough uncovered signs of deliberate efforts to undermine confidence in the firm.

He quotes a senior executive at a rival firm: "If I had to pick the biggest financial crime ever perpetuated, I would say, Bear Stearns."

Proving someone was behind the Bear collapse, or any other share price death spiral, is tough. The firms that are targeted are vulnerable precisely because they are highly leveraged and it may be easy for a short seller to point to evidence supporting their negative view of a stock.

You betcha it would be. Super tough.

The article concludes -

CRACKDOWN

UNITED STATES: September 18 - New York attorney-general Mario Cuomo announces probe into alleged illegal short selling of shares in giant investment banks Lehman Brothers, Goldman Sachs, Morgan Stanley and insurer AIG. Short selling is a share trading strategy where a trader borrows shares and sells them on market in the hope they can be bought back more cheaply later. September 17 - Securities & Exchange Commission bans "naked" short selling, in which traders sell stock without first arranging to borrow it.

UNITED KINGDOM: September 18 - The Financial Services Authority bans all short selling in financial companies until January 16. It said anyone creating a net short position in a financial sector company is "engaging in behaviour that is market abuse [misleading behaviour]."

AUSTRALIA: September 17 - Australian Securities & Investments Commission announces extension of inquiry into market manipulation and false rumours, citing specific alleged false rumours against Macquarie Group.

Anyone hearing stable doors being slammed on empty stalls?

And Roundup? Very popular here in the agricultural community for some years. There was a bit I caught during the the week on the use of glyphosphate on roses imported from India to stop their propagation in this country, and just how easy it was to do just that.

Inflating thoughts on economy...

I posted this on Dave Justus' thoughts on McCain and the economy -

… and as yet not one commentator (that I have heard or read) has pointed out the long term effect of these multi-billion bail-outs.

Not that anyone wants to know, but until those funds are retrieved the rate of inflation is going to increase. How do I define inflation? It is the decline in the buying power of the dollar; my dollar, US dollar, Aus dollar, British pound whatever.

How can the handouts be retrieved? Well economically it is quite simple, but politically it is very difficult.

You can regain the hand-outs from the direct beneficiaries in exactly the same way as any other loan. The difficulty is that this will impact directly the amount of money available for lending - ostensibly to businesses to make new business but just as likely to the worker down the road so that he can buy that $5000 flat screen tv… The effect is a slow burn on the fuse that the handouts tried to extinguish.

You can regain repayment of the handouts (let’s be honest, that is what they are) by balancing the government’s fiscal budget. To achieve that requires two very bitter political pills - either a cut in government expenditure, or an increase in taxes.

Now, where do Mr McCain and Mr Obama stand on those two matters? I doubt that either will ever say the truth - it would be political suicide.

I have repeated it here because there are thoughts in that which do not apply solely to the McCain (or Obama for that matter) political approach.

Dave and I had a good discussion on the line of thought here with Dave concluding that I was "talking of micro-economic effects".

I did, and still, disagree with him on that point.

In any capitalist (no, make that ANY) economy, the fundamental drivers are the people; he tangata, he tangata, he tangata! Without people to buy goods, what would the economy comprise? Robot driven factories producing very cheap widgets with no one to buy them?

The point is, anything that impacts upon the disposable income of the ordinary Joe has an immediate effect on the economy. That, for one reason, should give great favour to tax cuts from the political wing. There are other counter-vailing impacts from that direction which are not politically acceptable - and so it goes.

What makes me so hot about the likes of these political bailouts is not the use of tax-payers money, or the cause of the bailout.

Effectively, there has been some $180 billion (globally, so I am not nit-picking America here) injected into the money markets. We could rattle off all of the immediate impacts that justify the move. We could prattle all of the political rationale from here to the bank and back.

I have already lived through a period where the international monetary system got itself out of whack. It led to the agreement to drop the gold standard. Most importantly it created an international climate of inflation that ran for some eight or ten years from about 1972. In NZ, we had inflation then "stagflation" (which had nothing to do with the genesis of the deer farming industry) of up to 18% p.a., averaging about 10.5% over the period as I recall the numbers.

What did that mean to me?

Well, my income increase by about 300%. Prices for everything increased by 300%. I was no worse off, right?

WRONG!!!

The $1,000 I had in savings is now worth something like $300 in "old money".

That is the effect of these "rescue packages" that the politicans are not going to tell you.

Someone is going to pay.

That someone is you and me.

An educated NZ view...

Liam Dann is Business Editor to Granny Herald.

As an indication of the kind of report that he produces, take a look at today's editorial -

He starts -

It is an age old question. As budding economists we all ask it of our parents some time around the age of 7 or 8. Why don't they just print some more money?

We are quickly told why that doesn't work. Money is worthless unless backed by something of real value.

Unfortunately this childhood lesson is one that Wall Street seems to forget every few years.

He then takes on the "greed" aspect, with the idea that speculation in "bubbles" can earn considerable profit but at the same time the dangers imposed by the bubble can be isolated and controlled.

The difference this time around is, as he expresses it -

When the product which is the focus of the speculative bubble is cash itself - as it is in this case - then the problem is far more serious.

Ironically it is the fallout from the collapse of the tech sector at the start of the decade that contained the seeds of the current meltdown.

As a response to the dot.com bust - and the additional panic caused by the World Trade Centre attacks of 2001 - the US and other central banks around the world slashed interest rates.

The aim was to give the wobbly economy a boost.

But as time wore on the cost of borrowing cash remained low. A global property boom created demand which was happily met by all manner of lenders.

As one astute commentator put it - they started lending to people like the characters from the TV show My Name is Earl

So he follows that trail to its logical end -

As debt was increasingly transferred and sold around financial institutions it became a commodity.

Then some smart cookie investment bankers took it a step further.

They packaged up a parcels of debt that were supposed to have a fixed rate of return and traded them as products in their own right.

Because these were new, they were unregulated. And despite the risks everyone and their grandmother's dog got in on them - including banks like ANZ in New Zealand who sold them to unsuspecting mum and dad investors as sensible investment products.

And it is at that point that, regrettably, he stops and follows the banking and business line -

Banks began facing up to that reality by writing down the value of the debt products they owned. In other words they admitted these products weren't worth what they thought.

Billions disappeared from their balance sheets. Every time one bank wrote down the value it affected the value for other banks.

Suddenly the investment banks that were in trouble because of the amount of worthless debt product they owned started running out of cash. They had been spending more than they had - because they thought they had a lot more than it turned out they really did.

Banks like Bear Stearns and Lehman Bros needed to borrow more just to survive.

But as the crisis grew those who still had cash to lend became risk averse. The cost of borrowing sky rocketed.

And so on...

The final accounting in this has yet to come.

The Fed has "rescued" AIG in much the same way as the NZ Government bailed out BNZ some years back. The interesting connections between the two are very direct -

First, both were "too big to be allowed to fail".

Second, both succumbed to the same disease; chasing high risk products for the purpose of gaining increased profit. AIG through providing an insurance instrument against the future failure of high risk debt and BNZ through enthusiastically lending on high geared property ventures that in the the short term at least failed to show the required security backing.

But, as I say, the final accounting has yet to come.

Let's just go back a moment or three to the "mum and dad investors"; those simple people who want to protect their life savings - small as that might be - while at the same time earning a reasonable return from them. A reasonable return? Recognition of the use of that money by another "person", to recognise the potential risk, and enough to cover the ravages of current and future inflation.

Now there is an "inescapable fact" that drops out here - we are not talking about people who are financial wizards, nor would they understand the true nature of a "derivative product". They would not appreciate the need to understand the backing investment, the nature and size of the risk, and assessing the adequacy of the return in the light of those facts would be an impossibility. Well, let's face it; that is why there is a market for "investment analysts" and "investment advisers" and "investment brokers".

When the last trump sounds, they are the people to whom the bankers, and all, will have to answer.

In a healthy system confidence and reasonably priced credit is vital to keep business humming.

Business needs credit to grow, to develop new and exciting products which in turn boost economic output and create jobs and wealth for ordinary people.

Well, there is one section of the community that has benefitted from that wealth. It is not the mum and dad investors, the ordinary people. It is the community that has earned multi-million dollar bonuses and stock options; the hangers-on who pimp worthless product to an unsuspecting and ignorant market.

In other words, we are seeing what happens when the economy is run by snake-oil medicine men and itinerant side-show freaks.

It just gets sadder and sadder...

This actually appeared as a small para side-page in Granny Herald on Saturday. This is the first mention I have found on the net...

U.S. to Sell Bunker-Busting Bombs to Israel

by Nissan Ratzlav-Katz


(IsraelNN.com) The U.S. government has agreed to sell 1,000 satellite-guided "mini-bunker-buster" bombs to Israel. Meanwhile, a U.S. Defense Department official on Friday hinted at informal nuclear defense arrangements with Israel.

Boeing's Guided Bomb Unit (GBU)-39 bomb, weighing in at just 113 kilograms (250 pounds), was developed for penetrating fortified targets located underground. The U.S. decision to sell the munitions to Israel was somewhat of a retreat from a refusal last week to supply the IDF with the more powerful two-ton GBU-29 bunker-busters, despite earlier commitments to do so. In 2005, the Bush administration authorized the sale of 100 GBU-29s to Israel in a proposed deal worth around $30 million. The currently approved deal will be worth a total of $77 million.

Hey, now let's just measure these two deals up.

Deal 1 - 100 2000lb bombs for $30M = $150 per lb
Deal 2 - 1000 250lb bombs for $77M = $308 per lb

Hey, Israel!!!! You is getting done! Like a dinner!!

And let us not forget the reason for the sale either...

"On Wall Street..."

(Sung to the tune of "On Broadway"...
From Dave the Justus

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
Adam Smith

Extreme valuation of ’service’ and a denigration of the private sector is something that bothers me about both McCain and Obama.
The is, of course, nothing wrong with charitable acts and serving one’s fellow man. It is extremely laudatory and certainly we should encourage it. However, it is capitalism and the free market, not public charity that it the engine for generating growth, raising living standards and yes, increasing equality. Both McCain and Obama lack experience in the private sector, which isn’t necessarily disqualifing, but when it contributes to the distain of the private sector that I have seen from both camps this campaign season it is troubling.
I wish that both McCain and Obama would take a little time to read Adam Smith and Milton Friedman.

The problem of social organization is how to set up an arrangement under which greed will do the least harm, capitalism is that kind of a system.
Milton Friedman

Dave the Justus posted this up Monday. His extremely efficient spam filter has been “fixed” yet again or so he informs another making comment on a different post.

But, given the impossibilities, I shall post here (what I can remember) of my comment made Tuesday perhaps brought up to date in the light of the events of Tuesday on Wall St.

I have little time for Friedman. His purity of Capitalism has no consideration of the fact that to operate the system must have human participation, and that that brings with it the weaknesses that saw the failure of so many economic, and political, systems in the past (going right back here to the Greeks, the Romans and beyond.).

So, Tuesday’s comment ran along these lines –

Let us just suppose for the moment that Friedman is right.

If the current “meltdown” of the US economy is the result of greed, what was capitalism doing to countervail?

If the current “meltdown” of the US economy is the failure of capitalism, what might replace it?

There was a bit more, but my recall does not do the original words justus.

What is becoming apparent, in the commentaries coming out of NY and Washington over the news down this way at least (and it seems the FT and others read it the same way) is that “greed is good” as the foundation for the global economy is about as sustainable as the war in Iraq. It might sputter on for another twenty years without really solving the problem. Then like the old worn-out Vespa, it will have to be pushed to the top of the hill so that it can be given a suitable farewell as it is pushed off the cliff.

Now, before you get in to me for being “anti-capitalist” consider this. I am not proposing any solutions. As I intimated when I responded to Al’s “greed is good” post some months back there is some truth to that sentiment. It does not, any more than Rand or like true communism (not the American hate word but the actual system), make a sound basis for an honest and fruitful economic system. So I can not promote either of those as a replacement. As I have said, the fundamental capitalist system is sound. It is in the nature of humans to exploit systemic weaknesses and opportunities to maximise their individual wealth – and that can only happen at the expense of others.

That of itself creates a conflict between those who promote American Capitalism as the global economic wonderland, and those who do not believe it to be the “God-given freedom”. For some, that is their justification for protesting (in some cases violently) at meetings of G8, WTO, and other fora.

But can I leave you with this thought -

Is there any difference between the failure of Enron, Globaldotcom, and the rest when compared with the strife of Freddie Mac, Fannie Mae, Lehman, Merrill Lynch, and all...