This is what the 1% argument is about in the US...

From Sydney Morning Herald -

Mitt Romney, one of the richest men to run for president, says he "probably" pays an effective federal income tax rate of about 15 per cent - little more than most American workers struggling to make ends meet in the toughest economic conditions for 70 years.
...
Capital gains in the US are taxed generally at 15 per cent; likewise earnings from investments, such as dividends. Individuals earning up to $US34,500 a year fall in the 15 per cent federal income tax bracket, then pay 25 per cent to $US83,000. The top income tax rate is 35 per cent. (Americans also pay state and municipal taxes.)

Unlike investment earnings, wages are subject to Social Security and Medicare payroll taxes.

Tax breaks reduce the effective rate for most people. According to the Tax Policy Centre, in Washington, the average US household would pay 9.3 per cent in federal income tax in 2011 - but 19.7 per cent in all federal taxes once imposts were included.

Even this old bugger can see the point here.

Harking back to the 1% debate in this country, the difference in income taxation depends not on the type of income but on the ability to employ a good tax accountant.

TPPs and all that again...

My previous post (June 18) has been echoed several times since, not by (known) reference by other commenters but by actual events. Readers might like to return and refresh their memories, but essentially I spoke of three factors –
. The US approach to “Free Trade” agreements;
. The role of Minister Tim Groser;
. The desire of US negotiators to make NZ’s Pharmac a key obstacle to achieving a FTA between NZ and US.

I have been slowly catching up with events since early June. Hey!! I is getting older and the enthusiasm and energy resources are very limited; most at this stage directed toward photography rather than current events. Then there was a very enjoyable week that recharged most of the batteries – the ones with remaining functional cells anyway… Hoosoever!

It started – in part – with this article in Granny Herald on June 15

And in reference to United States concerns over the state drug-buying agency Pharmac, which the US sees as anti-competitive, Mr Groser said the New Zealand was not about to negotiate away its public health system.
He said Pharmac was not perfect "and we are always open to suggestions of change, but we are not about to adopt a health system, via a trade negotiation, that allocates resources according to capacity to pay."

Come forward to 4 July and the wording has already started to morph –

Trade Minister Tim Groser has heaped praise on the Government's drug-buying agency, Pharmac, but still refuses to rule out possible changes to the agency as part of future free trade deals.
…
Green Party co-leader Russel Norman said the free trade agreement between Australia and the US had crippled Australia's Pharmaceutical Benefit Scheme, its equivalent of Pharmac.
"They didn't abolish it or its fundamentals ... but they made changes to the way it operates."
The overall effect, he said, was higher costs that were either passed on to consumers or picked up by the Government.

The question is not “What was the effect?”, but “Why was it changed?” The answer has to be that the Aus government decided it was more important to have an FTA with the US and to disregard any cost that might be incurred as a consequence of the changes. Rather than just take Russel Norman’s word for it, a quick hunt around the SMH turns up this op-ed piece from last March –

Last year the Rudd government proudly announced it had cut a new and tougher deal with the drug companies, represented by Medicines Australia, which would save the taxpayer $1.9 billion over five years.

…
…a health economist at the University of Sydney, associate professor Philip Clarke, and his colleague Edmund Fitzgerald, argue the deal still leaves our off-patent and generic drug prices much higher than they are in most developed countries. They quote the example of statins, the cholesterol-lowering drugs, where the patents of the various types have expired or soon will. Statins account for about 16 per cent of the total cost of the pharmaceutical benefits scheme.
They surveyed the wholesale price of Simvastatin 40mg in 10 developed countries and found our price was the highest: 50 per cent more than the next highest country and more than four times greater than the average price.
The lowest price was in New Zealand, which stages competitive tenders between the drug companies. Its price is just a fraction of our wholesale price of $1 a tablet. And even in the US, chains such as Kmart Pharmacy sell that statin for $15 for 90 tablets.
Clarke and Fitzgerald estimate that, compared with prices in England and Canada, the Rudd government's deal with the industry lobby will cost taxpayers and consumers $1.7 billion more over its five-year term. And that's just for the statin group of drugs.

It bears repeating; given the results that Pharmac are achieving why should NZ “fix” something that is working? That question is especially a propos when the drug barons are pushing the US on the other side of the table.
And, from that too, comes the biggest of all –
Will Groser, and eventually the Jonkey himself, be able to put political reality before ideology?

Experience tells me not. The poodle, sorry Jonkey had his tummy well and truly scritched last week in his visit to the Oval Room. Now watch him return home and find all of the things that are "wrong" with Pharmac.

What is "Right" in politics?

There is a strange flavour to NZ politics, and it is one which could cause considerable confusion to those from outside looking in and it certainly makes (in the ol probligo’s case at the very least) looking outward over the border difficult as well.

Using the American categorisation as a guide, one would get the impression that the right wing – the far right of the Republicans as example – would be pushing for less government and greater freedoms both personal and market.

If I bring that to NZ and look at what is going on at present – remembering that NZ is only 4 months out from a general election – it is something of a shock to find the youngest (ignore the grey hairs and balding pate) and brightest of the far right from ACT promoting consumer protection legislation.

The incredulity rises when some of the content of that proposed law comes to light in the news –

Mr Boscawen today said he would introduce a Consumer Law Reform Bill to Parliament before the middle of the year, which he hoped would be passed before the year's end.
The bill, the result of a recently completed review of consumer law, will amend and consolidate several pieces of legislation, one of which - the Sale of Goods Act - is more than a century old.
Consumer protections contained in four acts which are to be repealed will be incorporated into the Fair Trading Act along with some enhancements, Mr Boscawen said.
"The Bill will also strengthen the enforcement powers of Government agencies, allowing faster and more effective action to remove unsafe products from the market."
Under the changes, unsafe good notices and compulsory recalls may be issued "where reasonably foreseeable use of misuse of a product will may or cause injury".
An example of the type of goods being targeted is laser pointers - which police reported have been used in 108 "attacks" on planes, ships and cars over a two-year period.

In those six short paras we find government protection of the consumer, increased powers of enforcement for government agencies, and government limitation of the products that NZ consumers are allowed to purchase.

One of the current batch of Ministers (ad-Ministers?) for whom the ol probligo can easily express a fair measure of respect is the Minister for Trade Tim Groser. He is a List MP (the ones everyone wants to be rid of…) and in my book is certainly worth his salt as Minister. He is very much hands-on in the Trans Pacific Partnership (TPP) negotiations, that belated and largely benighted attempt by the US to re-establish its influence and contact with our part of the world. As such it also gives a marvellous cameo of the political differences between lion and mouse. (Remember “The Mouse That Roared” anyone?)

Trade Minister Tim Groser took a swipe at the protected United States dairy industry last night saying it was time they stopped "looking in the rear vision mirror."

He said the US "must have a trade policy that is more than purely defensive."
Mr Groser made his comments in a speech in Wellington on the Trans Pacific Partnership agreement being negotiated at present among nine countries including the United States.

He also said New Zealand would ditch the TPP if there was any "sniff" that it was turning into an anti-China vehicle.

He had said so recently at a think-tank in Washington, and so had his Australian counterpart Craig Emerson.

To have the minor players making their stance very clear in this way must be anathema to the likes of Kurt Campbell and Janet Napolitano, both of whom found reasons for being late to the opening of the current round back in February.

Mr Groser said the TPP negotiations would not be completed by the time President Barack Obama hosted Apec in Honolulu in November but "solid progress" would be made.

The degree of progress would depend on what happened in Washington on the US' existing trade agenda, specifically whether Congress approved the free trade agreements already negotiated with Korea, Panama, and Colombia.

"The political oil" to facilitate their passing were the payments known as Trade Adjustment Assistance to affected sectors.

"No TAA, no deal.."

Americans reading this might recognise the “political oil” as euphemism for their term “pork”; but I confess that to be a stray shot.

The point here is coming back to a phrase that I heard some years back as a justification for any and most of the less digestible actions taken by the US on the international scene – “in America’s interests”.

The TPP is where “American interests” meets the real world of a strong-willed and somewhat sceptical southwest Pacific. There is no question that NZ and Aus stand together in the TPP negotiations and I doubt very much that stance would be altered in any way if either government were to change.

It should be well known to readers that Australia (as a “reward” for its services in Iraq and Afghanistan) already has a FTA with the US. NZ already has a FTA with China on which the ink has barely dried. The Australian FTA I have discussed in the past, expressing reservations on the long-term benefit ever compensating for the short term advantages taken by the US. That Australia is taking the opportunity of the TPP to voice opinions that run contrary to those of their partner in the FTA speaks some volumes about the medium to long term benefit of their (previously much-vaunted) FTA. And that too is where the ol probligo pulls up. It is (or has been in the past) a matter of FTA dogma that the agreement will run to the favour of the stronger party; and accepted wisdom says that is the US.

What the US is finding in trying to negotiate their TPP (and it was the idea of the US, not the Pacific) is that the minnows have grown some fairly sharp teeth. The composition and structure of those teeth has come from the influence over a long period of years from the US itself, and its various international allies (children?) such as World Bank, IMF, and OECD. A goodly dose of true capitalism in the mix has been of immense benefit as well, no question or debate.

A very primary example, one that is to the forefront in this country is a statement made in the past week or three to the effect that the US did not recognise the validity of centralised pharmaceutical purchasing organisations; that these organisations are considered anti-competitive; and their existence could represent a barrier to progress in negotiations. The diplomatic wording is very careful and somewhat guarded but there can be no doubt that some very heavy barons in the background are pulling one or three strings in the US administration. Essentially the only candidate that fits the statements is NZ’s government operated Pharmac. This is the organisation that handles licensing of medicines for use in NZ, and negotiates the purchase of those drugs for the whole of the public health system.

The criticism centres upon a “lack of transparency” and equally on the inability of the drug companies “to make submissions” to Pharmac – the “closed shop” accusation. Like so many of these things, there is another side to the impression. “Lack of transparency” implies a level of secrecy, something that a losing tenderer would want to penetrate to find out the prices being accepted for specific or even classes of product.

The “closed shop” is a well resourced and independent scientific and medical analysis system, empowered by the government to freely choose the source oand types of medications being used in this country. Locking out the salesmen (which seems to be at the heart of the outrage) not only maintains that independence from direct and indirect influence (called “corruption” in some quarters), it also allows for the hopefully objective appraisal of needs against supply cost. That in itself is a whole topic worthy of future thought.

The incongruity of the US objections is that Pharmac is very closely modelled on an American predecessor - MedicAid.

On numbers. BIG numbers and perspective.

It is amusing - in that disquietly unsettling way - to read the kind of invective the the "new uber right" of the US uses in its opposition to "new" government policies.

There are few, a small number, expressing concern at the impact some of these changes are having, will have, on the US economy.

The BIG number I want to draw attention to - I don't know the exact value - is the cost of keeping two US Army divisions in Iraq for one year. I am informed (that is all) that the number, the cost is more than the total annual GDP of New Zealand.

That, in global terms is still a (comparatively) small number. But as a matter of personal perspective, it is still a BIG number.

On taking quotations out of context -

How many times have these words of Adam Smith been quoted in support of the neo-capitilist ideals of disaffected Americans -

"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. We address ourselves, not to their humanity but to their self-love."

Me old mates at ALD tagged a commentary at New Statesman that picks up this point and correctly places it in the context of his earlier "The Theory of Moral Sentiments".

Read the article for the detail. I recommend it.

What does deserve quotation is another (equally out of context) relating to the "political economy" from Adam Smith -

..."first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and second, to supply the state or commonwealth with a revenue sufficient for the public services".

Next thing will be members of the American right quoting the likes of Karl Marx's economic theories in support of their neo-neo-capitalism. The driver behind such a move might well come from this thoughtful article from Der Spiegel -

Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.
...
A Huge Bubble

The world was saved, temporarily at least, but since then it has accumulated more debt than ever before in peacetime. The national deficits of the 30 members of the Organization for Economic Cooperation and Development (OECD) have grown almost sevenfold since 2007, to about $3.4 trillion today. Their total debt burden has also grown dramatically, to a record-setting $43 trillion. In the euro zone, national deficits have even grown 12-fold in the same time period, with the euro-zone countries accumulating $7.7 trillion in debt.

The current government debt bubble is the last of all possible bubbles. Either governments manage to slowly let out the air, or the bubble will burst. If that happens, the world will truly be on the brink of disaster.

When Greece faces a possible bankruptcy, the euro-zone countries and the IMF come to its aid. But what happens if the entire euro group bites off more than it can chew? What if the United States can no longer service its debt because, say, China is no longer willing to buy American treasury bonds? And what if Japan, which is running into more and more problems, falters in its attempts to pay for its now-chronic deficits?

The conditions that prevail in Greece exist in many countries, which is why governments around the world are paying such close attention to how -- and if -- the Europeans gain control over the crisis.

Now that is frighteningly close to some of the ol' probligo's worst fears. Galahs like MK should, but won't, listen.

Time to go play Gorillaz...

How a Stern response works - 1

Probligo, There is no simple answer; however, the numbers you show include all the free passes given to illegal aliens [1] and moochers living off those who actually do pay their fair share[2]. That having been said, another reason for high costs have to do with greedy lawyers making a fat living off civil court cases filed simply to make money rather than to correct some fault which may or may not have caused injury to their client. Regardless of the outcome, doctors have to protect against such suits, hospitals raise their prices and so on and so on [3].

Having watched our government screw up almost everything they get their hands on, what is to keep them from destroying the health care system far below any standard we now have? Nothing! [4]


This isn't about government providing health care so much as it has to do with government taking control of health care which in turn turns citizens into subjects. Subjects are much easier to control when you have their health controlled.[5]

Aside from the cost of doing business, there's another detail, that of Agency, the right of individuals to act on their own without having to bow and scrape to anyone.[6] Our system, as inefficient as it is, mostly due to government intervention I might add, does work to supply the best medical service anywhere in the world [7] as proven by the fact that world leaders come to the USA for treatment when the going gets ugly [8].

No, you can have your government health care doled out [9] and may you always enjoy good health; I'd have preferred the socialists we have here to have moved to a country which would more suit their desires and to have left the best form of government alone [10].

[1] Valid point number one. Do those illegals have green cards, TF? Alternatively, you have agreed that you would not find carrying a photo-id as being an insult to your freedoms (despite the fact that two of your most notorious enemies in Hitler's Germany and Soviet Russia had the same government controls). Why should the health system not ask "green card, please". Or perhaps you could have your number tattooed on your forearm! That would be even better, never leave it at home!

There is the first grouch here as well. It is the practice of using politically correct generalisations such as " all the free passes", "illegal aliens" and " those who actually do pay their fair share".

Now I do understand the category you think of as "illegal aliens". It is a very extensive group that ranges from Mexican wetbacks who pick fruit in California all the way through to ET himself. But in truth, what proportion of the total population would they represent. Here in NZ (yes, people do try very hard to immigrate here illegally) they might number in their hundreds. A "clean out" of illegal Polynesians(in the late 1970's), most Samoans and Tongans, in what became known as "The Dawn Raids" resulted in about 800 people being sent home and about 2000 being granted permanent residence eventually; in the main justified by the fact that they were employed in jobs no one else wanted.

Perhaps, just for me, you could explain your concept of "their fair share"? Is that just a politically correct code name for "only for themselves"? or perhaps "no more than I absolutely have to"? Or is it more a convenient way of dropping out of an unsupportable position?

[2] I have already dealt with the politically correct generalisation here. Still, valid point number two. NZ has its share of "free-loaders and moochers" too. It is probably as big a problem here as it is in the US.

Our current government (it is Conservative to the extent of being "right of centre) is arguing that that number includes women whose men have walked out (to Australia) to avoid paying family support, those teenage girls who get pregnant and whose families refuse to support them, and other instances of one parent families. There are some 40,000 on the DPB at present, about 1% of the total population.

Do you include unemployed in that total? Yep, they are freeloaders too.

How is about youngsters no longer covered by their parents insurance, but who are not able to afford their own insurance?

How about those aged over 55 whose insurers have told them "you are too much of a risk - insurance declined".

When did you last look at an insurance proposal form? Ever seen that question "Have you ever had a proposal or policy of insurance declined or cancelled? If yes, please provide full details." You automatically write or tick off "No" and pass on to the next. How much do you really know of insurance law? The principle of a "fiducial relationship"? The duty you have of full and relevant disclosure, and the consequences if the insurer gets the slightest whiff that you "forgot" something relevant.

[3]Valid point three. How to overcome the litigious nature of American life? Why does anyone in the US become a doctor? I certainly would not want to... By all means expect professional standards of health care.

But what you are getting is truly what you want - an unregulated society. After all, if locksmiths do not need to be registered, why should you expect doctors to be the same? It impinges on their God-given right to work as and how they please. Caveat emptor prevails. Pick the wrong one and you might be able to get yourself rich. Sue someone just because he cut your fingernails instead of curing your in-grown toenail. Who cares?

[4] You mean you are happy with the way things are? I'll repeat my previous question, TF. What will you do when you can no longer afford your health insurance? Go on Medicaid?

If it is broken, what have your political champions ever done to try and fix it? Anything? Ever? Why did their solutions not work?

[5] Political claptrap number three. If a Democrat government ever changed the system so it applied only to members of their party, what would be your solution? Mine would be armed insurrection.

[6] Political claptrap number four. I had heart surgery two years back. In what way did I have to "bow and scrape" in order to have that (life-saving to me) done? It was two spits better than my private insurance that refused to fix it "because it is a pre-existing condition". OK, I could have sued them, but there is no way I could afford to... That would have cost more than the surgery.

[7] ...providing US citizens with the 46th highest life expectancy in the world. If that is what the best can do, give me our second-rate health system any day.

[8] Yep, state leaders from places such as Israel, Iraq, Zimbabwe and Russia. Name one world leader from the EU, or any of the members of OECD, who has gone to the US for health care. There are none. They use the health system in their own country.

[9] Political claptrap five. Doled out? No. Sufficient resources to meet demand? Yes.

[10] Political claptrap six. You have the government and system that you deserve.

What is becoming apparent, TF, is that for reasons you can not explain - other than the fact that he is a Democrat - you do not agree with what Obama is doing. It becomes a matter of opposing simply because he is "one of them" and not "one of us". The important thing is to sling around as much shit as you can in the hope - vain hope I believe - that more of it will stick to others than does to yourself.

Your simplistic response that "the money does not matter - I leave that to my wife and my accountant" is clear evidence of that.

Holiday occupations... Animal Spirits 1

I made mention (if I recollect in a comment to ATOW) that the Christmas break was going to include the absorption of "Animal Spirits", a comparatively short summary of "human psychology and the economy and why it matters for global capitalism", written by George Akerlof and Robert Schiller.

The title originally comes from "spiritus animalis" which in its old (mediaeval) useage meant "of the mind" or "animating force"; the fundamental life force of man. In its modern use it has attached to economics - blame Keynes for that - as a reference to a restless or inconsistent element in the economy.

A & S summarise those animal spirits as -

Confidence. A&S use that specific term as it directly and intentionally connects with Keynes' "multiplier effect". I personally think that given some of the twists used by A&S to mould "confidence" to their extension of Keynes' useage it might have been better to use "belief" rather than "confidence". The essence is the propensity for humans to follow a persistent line of thought irrespective of its truth and irrespective of positive (optimistic or growth) or negative (pessimistic or recession) trend.

Fairness. In NZ the last statutory attempts (by Auntie Helen) at resolving relationships between employers and employees required of both sides that they engage in negotiations in "good faith". As a legal codification it agrees fairly well with A&S's thoughts on the setting of wages. Essentially it leads to the discussion of the relationship between unemployment, wage levels, and inflation.

Corruption. Actually A&S include "and anti-social behaviour". I do not think that is neccessary; it is a redundancy. That it is very quickly reduced to the single word might indicate that they thought so as well. I occurs to me that the meaning of "corruption" can also be extended. There is the neo-classic meaning of "bad dealings" connecting to the "antisocial" idea. There is a second, older, and perhaps even a more appropriate meaning as well; in terms of "corruption of the flesh". Those with older heads will make the direct connection to death, but there is also the "corruptions" that are self-inflicted - the moral corruptions of the flesh.

Money illusion. This is an interesting one. It is the ability of humans to relate "value" to monetary numeration, but at the same time being unable to comprehend the impacts of inflation and deflation on the value of the monetary unit. So, the quantum of $1 million can be understood, but the impact of monetary inflation (or deflation) at 3% per annum for 5 years on that sum is not. (As it happens, that would make the "value" of the monetary unit reduce by about 17% or prices would have increased by some 20% over the five years).

Stories. The one word term is used by A&S as a shorthand for "sense of reality, who we are and what we are doing". Personally I think it is a very powerful and concise term and especially since it links with the first of "belief". Also in that context it gives rise to an extension into many other (than economics) facets of human existence that warrant further examination; at the very least by this old and somewhat rejuvenated probligo brain.

Interesting things discussed along the way -

The multiplier effect originally proposed by Keynes became the "Hick's multiplier" and as a result of the latter's (further) analysis became attached almost exclusively to monetary and GDP effects within the economy rather than Keynes' intended "confidence multiplier".

Samuelson thought that Keynes (in some instances) went too far and in others not far enough. That the two were "opposed" is not as significant as how much they were actually in agreement.

The classical Adam Smith view of the invisible hand creates a useful mechanism for examining the fundamentals. However it is only useful in the explanation of those fundamentals. Samuelson I recall wound his way through this minefield by using the "reasonable man acting in a reasonable manner" as an essential of the prim misses required to reach a delusion. That any man acts reasonably at all times may be so, but reason is not always perfectly logical. "Reason" is not part of the definition; instead "reasonable" is the mean of human behaviour.

The main discussion in the book centres on the reasons why "conservative" economics does not accurately predict either the occurence or the progress of "bubbles"; primarily because the impact of the spiritus animalis on the real economy is ignored.

All in all it is a thought-provoking read. Worth the effort and providing a somewhat different light on recent macro-economic events.



UPDATE - to add after-thoughts under the heading of "corruption"; to add the closing paragraph.

On entitlement mentality...

I started writing last Saturday in response to a recent post by TF, in which he used (in the usual derogatory context) the tag-term “entitlement mentality”. I got myself horrendously bogged down with the balance between my line of thought and the kind of connotations the term has and to which I was objecting.



Then, last night was one of those few tv programmes that I really enjoy. A child psychologist, Nigel Latta, is in the middle of a series of programmes on the subject of “child-rearing” or parenting.



OK, ok I can hearing the scoffing already. No, the probligo has not lost his tree. It is a very interesting take on children, parenting and how best to achieve kids with the right attitudes. It is also, at the very least in terms of the debate at hand very a propos.



A brief wander through the chatboards and “reviews” that google brings to the surface in response to “latta parenting” will show everything from the “liberal” pain and outrage (at topics like poo in the bath or breastpumps) to the outright and unreserved approval of mums of real kids.



The tv series is based on a “stage” presentation that Latta started back in 2007 and it has been doing the rounds since then.



The clue to all of this has to be in the name – “The Politically Incorrect Parenting Show”.



This taken from a Listener interview back in 2007 –

It’s time to poke a stick at our child-centred world, says Dunedin-based clinical psychologist, author and father of two boys Nigel Latta. And he does so, unashamedly, in a performance he calls the Politically Incorrect Parenting Show.

What is politically incorrect parenting? It came about because I think we’ve got incredibly precious about children and we stress and worry more than any other generation of parents. We worry about them walking to school, climbing trees, if we read them enough bedtime stories, if we read out all the plaques at the museum … none of it makes a difference.

Isn’t that just the natural order of things for a parent – to worry? If you’re constantly stressed and worried about whether you are doing a good job, you’re not going to do a good job. You’re far better off enjoying your kids, and then when you stop enjoying them, tell them to go away and play. Like our parents did. Our parents raised us on some pretty straightforward guidelines: we’re adults; you’re children. We play with adults; you play with children. Self-esteem hadn’t been invented when we were children. Our parents could just get on with being parents.

Are parents these days too busy trying to be their kid’s best pal? It’s okay to not be their little mate and it’s okay if they hate you. We got a letter last night posted under our door from our seven-year-old, saying how much he hated us.

How creative of him. Did you give him a prize? Why did he hate you? He was sent to bed early for being rude. He’s still learning that sometimes in life it’s best to zip one’s mouth rather than keep arguing for a position that’s already lost.

Are you New Zealand’s answer to Supernanny? If anyone described me as Supernanny, I’d shoot myself in the head. She’s possibly the most annoying woman in the world. I really like the British series Little Angels because it shows parents fixing things.

On one hand you say there’s this enormous anxiety about positive parenting and that we are very child-centred. But on the other, New Zealand has one of the worst records for child abuse in the OECD. The people who get anxious about positive parenting generally are concerned, and the people who beat their kids don’t engage in things like the debate around Section 59 and they often come from generations of crap parenting. They actually don’t care about hurting their children. So, this idea that we can appeal to them is ridiculous.

Not even through television ad campaigns – “Violence is not okay”? It’s just absolute bollocks. It’s lunacy. There are lots of things we could do in this country to reduce the number of kids who die or are hurt, but the problem is that the country is run by politicians and people who are good at advocating to politicians. The good clinicians, the people who can solve the problem, are crap at working the system and they never have very much money.

People say parenting’s the hardest job in the world, even for those least marginalised. Absolutely. I’ve been incredibly lucky, I had fantastic parents and grew up in a stable home and yet there are still times when I feel like chucking my boys out the window. I’d walk into the fire for them, but some days my fingers itch for the want to throw them out the nearest window.

Have you ever hit your kids? Hit, smack – absolutely. In fact, I’m the only person in New Zealand who started smacking because of Sue Bradford.

But aren’t the big people supposed to be in control and not hit or bellow? It’s not the fact that you bellow at your kids, it’s your lifetime average. Everybody bellows when they lose the plot and the reason you yell is that it makes you feel better. But as a long-term strategy, it’s not the best. I think that a lot of people, if they give their kid a smack on the bum, or yell, think, “Oh, I’m a terrible person.” Well, not necessarily.

If you give a shit about your kids and you love them, they know that.

Yes, his language is as direct as that :).



It goes further. He promotes concepts which, while I did not appreciate their importance as a child, I certainly agree with now. Concepts such as “risk”, “consequence”, “self reliance”, independence”, “respect”, “authority” and “effort” come to the fore.



But, how does this tie with TF’s “entitlement mentality”? Well that comes out of the programme last night. Latta was running through the idea of “self”, “self-image” and such-like concepts from the modern school of parenting.

He made the point using birthday parties as a f’rinstance. “When we were kids…”; the person having the birthday got the presents, got the first piece of cake. These days, everyone else gets the presents, everyone has their own personal cake that they can have the first piece of… Parents compete for “the bestest birthday party in the neighbourhood”, aided in their endeavours by advertising usually aimed at the kids if not actively promoted by them. You know the kind of thing, “But muumm, Daisy down the road had…”. The current one on tv promotes the “popularity steaks” with everyone wanting to be your friend because your parents are taking you and all of those “friends” to the local burger house (think here of arches).



The point Latta made was that Generation Y is being – has been – raised with that entitlement mentality to the fore. “I am GOOD. I WANT. I GET!” is the mantra for the selfish moderns. I work with a young fella who has this attitude in spades, and who has a passion for technology. In the past year he has owned, tried, displayed with pride, probably three different and increasingly expensive cellphones; sorry – what would be the generic term for a “Blackberry” or “iPod”? There is total pride in his purchase. There is pride in how much it cost!! On the other hand I have a basic cellphone, solely for communication, and only because SWMBO gave it me as a birthday present five years ago. It cost perhaps $100. It has no camera. It has no internet connection. It is a telephone. I have to use it every six months or so or the service provider will cancel the connection and I will lose the prepaid value on the phone.



The entitlement mentality is reinforced by the advertising industry. “THIS is what you want!! GO GET IT!!” It gets worse. You don’t even need the money. “Hey! Something you want? HERE is the money!” Don’t worry about paying it back. That is not the point. The point is “You want; you get!”



So, when people like TF start to complain (I resist the temptation to use “right whinge”) about “entitlement mentality” I start to get hot. I know what they mean, and I understand all of the connotations that their political beliefs impose on the term.



However, so many people completely miss the truth. What he is complaining of is not something that is restricted to the poor, or to those on welfare, alone. It is endemic in our society. It is the basis, the fundamental, the foundation of the consumer economy. It is a state of mind that requires a person have not this or that, but this and that. It totally pervades our society. It is the attitude that makes us see four wheels with motive power and safety equipment not as a simple mode of transport but as a symbol of our personality. How many people go out and buy a “replacement” for a perfectly good, still serviceable appliance simply because there is a new one advertised on the tv which has a different colour, a new motor, or which is merely more in keeping with the current fashion?



Returning to the thoughts TF proposes on entitlement mentality, there is a question that has to be asked.



How many of those who by the implications he puts on the term, those on welfare, the dodgers, the bludgers, the lazy and the unproductive are in fact responsible for the credit squeeze and the bad loans and all of the other ills of the financial and banking systems? I would suggest very few indeed.



The far greatest part of the bad debt is probably owed by teenage children who are entitled to credit cards paid by their forty-something parents; by twenty-somethings who are entitled to add a new car, an expensive home theatre system and their OE to their student loan; by thirty somethings who marry and are entitled to spend far more than necessary on their wedding because they must make the social statement “I am rich!”; by forty-somethings who are entitled to the expensive house, the two cars, the RV, the sports car, and the boat…



Not just the people who fall into the right wing paradigm…

Babes in the international economic wood...

Back in November I put together a few thoughts that came out of the weekend papers while I was toasting the toes in the balmy and relaxed atmosphere of the Hokianga.

One of the lines of thought in that echoed comment that I have left with a number of people over the past year or so, to the effect that the economic power and influence of the US will as a result of the present "global correction" wane and be replaced by the likes of China and India.

So, the WSJ features the damage control reaction to Wen Jiabao's rather blunt scepticism of the worth of US bonds.

The Obama administration rejected China's concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.

In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.

"There's no safer investment in the world than in the United States," said presidential spokesman Robert Gibbs.

That view was reiterated by the president's chief economic adviser, Lawrence Summers, who defended record U.S. deficit spending as a salve to the nation's economic woes. "If you don't prime the pump and you allow the processes of decay and decline and de-leveraging to continue, it's much more costly to do it later," he said.

Which is what the US (under the new administration) has been doing.

But the meat is here -

In late January, Mr. Wen squarely blamed the U.S.-led financial system for the world's deepening economic slump. Chinese leaders have felt bruised by some badly performing U.S. investments they thought were safe, including holdings in mortgage giants Fannie Mae and Freddie Mac, Morgan Stanley and the collapsed Reserve Primary Fund, the money-market fund that "broke the buck" in September as a result of the Lehman collapse. China, which for years was the largest foreign investor in bonds from Fannie Mae and Freddie Mac, has trimmed back its holdings of that debt.

The premier's comments were unusually pointed and raised the possibility that Beijing's appetite for U.S. debt could wane. In the worst-case scenario, a significant new aversion to U.S. investments could drive down the dollar and drive up interest rates, worsening the U.S. recession. Mr. Wen indicated China wouldn't be rash in making changes to its $1.946 trillion stockpile of foreign reserves. While China is looking out for its own interests, it will "at the same time also take international financial stability into consideration, because the two are inter-related," he said.

The Obama administration has been working to ease tensions with Beijing after Treasury Secretary Timothy Geithner, during his confirmation process, accused Beijing of manipulating its currency to gain a trade advantage over U.S. companies. Since then, Obama officials have been at pains to praise China's purchase of Treasurys and its efforts to stimulate domestic economic growth.

As one might expect, there is a fair bit of politiking going on in the background. Read the whole thing. What is certain is that a man in Wen's position does not say anything without reason.

On parallel histories... and depression

Do you remember this?

...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.

Thanks to the old confirmation bias and the good folks at ALDaily I have come across The American featuring an article titled “Our Epistemological Depression”. Now, I had to look “epistemology” up in the COD to make sure I got it right. “The theory of the methods or grounds of knowledge.”. The opening paragraph

The history of socialism is the history of failure—and so is the history of capitalism, but in a different sense. For the history of socialism is one of fundamental failure, a failure to provide incentives and an inability to coordinate information about supply and effective demand. The history of capitalism, by contrast, is the history of dialectical failure: it is a history of the creation of new institutions and practices that may be successful, even transformative for a while, but which eventually prove dysfunctional, either because their intrinsic weaknesses become more evident over time or because of a change in external circumstances. Historically, these institutional failures have led to two reactions. They lead to governmental attempts to reform corporate and financial institutions, through changes in law and regulation (such as limited liability laws, creation of the FDIC, the SEC, etc.). They also lead market institutions to reform themselves, as investors and managers learn what forms of organization and which practices are dysfunctional. The history of capitalism, then, is the history of success through dialectical failure.

I am not going to dispute the difference. Socialism (true socialism, not the kind Americans dream of in their nightmares) stifles experimentation, expels individuality. Capitalism on the other hand (in its dreams at least) sees the individual as prime, sees wealth as the incentive for innovation and greed. That Muller sees the success of Capitalism (yes, the capitals are important to me...  ) as derivative from “dialectical failure” (the failure of logical debate?).

But [the various known causes of the current crisis] are not the whole story, and certainly not the most original part of the predicament. What seems most novel is the role of opacity and pseudo-objectivity. This may be our first epistemologically-driven depression. (Epistemology is the branch of philosophy that deals with the nature and limits of knowledge, with how we know what we think we know.) That is, a large role was played by the failure of the private and corporate actors to understand what they were doing. Most heads of ailing or deceased financial institutions did not comprehend the degree of risk and exposure entailed by the dealings of their underlings—and many investors, including municipalities and pension funds, bought financial instruments without understanding the risks involved. We should keep this in mind when we chastise government agencies such as the SEC for failing to monitor what was going on. If the leading executives of financial firms failed to understand what was taking place, how could we expect government regulators to do so? The financial system created a fog so thick that even its captains could not navigate it.

In other words, “they knew not what they were doing”.

Arguable, there were some who knew very well what they were doing. The lessons lie at the next level down with the people who "accepted" what they were told or even not told but believed. (Does that sound familiar? It should!!)

Has that changed? Is it likely to change? Reading both the lines and between the lines of the new Administration it seems likely not. Well not yet anyway. Muller again...

The cult of “accountability” was linked to key innovations that turned out to have unanticipated undersides. One was the shibboleth of linking pay to performance, which put a premium on schemes that purported to measure performance. This tended to produce “hard” numbers that seemed reliable but were not. It created tremendous incentives for CEOs, executives, and traders to devote their creative energies to gaming the metrics, i.e. into coming up with schemes that purported to demonstrate productivity or profit by massaging the data, or by underinvesting in maintenance and human capital formation to boost quarterly earnings or their equivalents.
Two milestones in the process of creating the fog of finance were the transformation of Wall Street investment banks from private partnerships to publicly traded corporations (beginning with Salomon Brothers in 1986), and the repeal of the Glass-Steagall Act of 1933 through the Gramm-Leach-Bliley Act of 1999. The former created tremendous incentives for risk-taking, since the firms no longer invested using the money of their top executives, who instead were remunerated based in large part on the amount of business the firm conducted, creating incentives to increase business by producing ever more complex and opaque financial instruments, such as collateralized debt obligations, swaps, etc. Then along came Gramm-Leach-Bliley, which opened the door to unlimited contagion, so that when one financial sector turned downward, it took the rest with it.

Looking ahead, the sort of government regulation and private re-organization that will be most beneficial will focus on these epistemological problems. Some of this goes under the rubric of transparency: making the asset holdings of financial institutions more publicly visible in order to reduce the problem of counterparty risk. Equally desirable would be transparency through the reduction of complexity, which includes avoiding intra-institutional contagion through greater limits on the ability of financial institutions to engage in an open-ended variety of financial activities. It means, in short, the reformulation of something like the Glass-Steagall Act, which would separate savings banks, investment banks, insurance and brokerage from one another.

Would that help? Well it might in the short term. The difficulty is the requirement for “new” controls – the anathema of Capitalism. The very greatest difficulty is really stated elsewhere. Remember Enron? That particular shibboleth is one which Capitalism would like very much to sweep under the carpet of history. Yet, in truth it is exactly the same process as has been the current “financial crisis”. A group of high level managers, accounting and financial practices used to increase their personal wealth and at the same time to conceal the truth, self promoted as “the brightest men in the room” beyond question or even doubt.

And, while one or two individuals have thus far been brought to account (to justice and not money) the lunatics are still in charge of the asylum.

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.

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.

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!

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.

"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...

...Is this the end my friend?...

I tried to google the lyrics I was thinking of - "...so let's keep dancing... let's have a ball..." and the only song that it turned up was a little ditty about the suicide of a friend. Most depressing but, for that reason, perhaps also a propos.

Readers will know that Freddie Mac and Fannie Mae is a topic that I have been banging on about for some while now; most recently here.

From Bloomberg 11 July...

07.11.08, 11:55 AM ET

NEW YORK (Thomson Financial) - U.S. stocks fell further Friday after U.S. Treasury Secretary Henry Paulson indicated that a bailout of troubled mortgage giants Fannie Mae and Freddie Mac was not on the horizon.

A somewhat short-sighted Henry Paulson.

Oh, what a different tune today! Bloomberg again...

Sept. 7 (Bloomberg) -- The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

``Our economy and our markets will not recover until the bulk of this housing correction is behind us,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in Washington today. ``Fannie Mae and Freddie Mac are critical to turning the corner.''

Now, in times gone past, NZers used to have access to government mortgages. They were "means tested" for interest rates - the lower your income the better the rate; they were in general fixed interest rates for the full 20 year term. The mortgages were available only for a first house. Most importantly, the proceeds of the loan were strictly controlled - by the lender. But then, about 20 years back, the government of the day decided that this approach was far too socialist. The portfolio was sold off to "private interests" who in their turn made quite a good profit from the deal. Now, I could if I had the inclination, mortgage both my properties to 100% (more if I had a friendly valuer) and use the proceeds for anything from more properties to a permanent global tour. Naturally, failure to make repayments and interest obligations would result in fairly rapid foreclosure, but if the funds were safely tucked away and I was in Brazil why should I worry.

What was wrong with Freddie Mac and Fannie Mae stemmed from the "government guarantee" that accompanied the privatisation back in the late '60's early '70s. There was no risk to either borrowers or investors; the government would stump up if things went pear-shaped. Because there was no commercial risk the twins effectively became lenders of last resort for all and any hare-brained idea that a person wanted to hang from a loan on their house.

And so it is.

For a nation that promotes "capitalism" as the ultimate goal of humanity, there are a lot of things wrong.

UPDATE.
Found those lyrics, too.

Peggy Lee -

Is that all there is, is that all there is
If that's all there is my friends, then let's keep dancing
Let's break out the booze and have a ball
If that's all there is

The prospect of a future collapse...

I have opined, in several places over the past few months, that the non-prime mortgage "crisis" in the US would lead to a total collapse of the US economy.

Now comes a second factor - of which I was not aware until this morning when I was listening to the radio news in bed...

But when I google through the thought, the first rumbles were there as long ago as March...

There were more homes on the auction block in California in January than actually sold through traditional channels. And with more notices of loan default going out in January, there is little doubt that the state's real estate crisis is far from over.

Since only 2 percent of the homes auctioned off through the state-mandated foreclosure process actually received a bid according to auction tracker ForclosureRadar, the vast majority of those homes reverted back to the lender, only to show up again in a cycle that may not end until the bulging supply of homes dwindles.

Nearly 20,000 foreclosed homes in California were auctioned off in January, up from about 13,000 in December.
...
Sharp said that while he is getting a lot of calls, selling a home through an online auction is not a good solution for a homeowner who finds he owes more than his house is worth.

"To make a good auction you've got to be willing to sell that day," Sharp said. But what's happening is that homeowners in default who want to sell their homes for less than they are worth need approval from their lender, and banks are taking weeks to approve a sale.

"With these types of auctions, we need to be able to give the buyer confidence he can buy this home today," Sharp said. "So far, banks aren't that aggressive (in approving a sale). I think they might get there."

Bringing that up to this morning with the Beeb piece...

With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is authorising new legislation to pave the way for massive new government intervention designed to slow the slide.

The intervention would come as a little known quirk of US law threatens to drive down house prices even faster.

Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.

The "little known quirk of US law"?

In California and much of the rest of America, there is a powerful incentive for homeowners such as Ms Trainer to walk away from their mortgage obligations.

Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes.

Consequently, by walking away from her apartment, Ms Trainer has also walked away from the loss on her property.

That "protection" does not - directly - exist in NZ. There are quite legal protections that can be put in place that might have a similar effect. The "family trust" for example could be seen to limit losses in a situation such as falling property prices. However, in totality (for the owners of the trust) the loss still is taken at that level. Not, as is the case in a good part of the US, by the lender.

The Beeb article concludes...

Total disaster

It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.

But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.

"This is becoming a tsunami of voluntary defaults," Professor Roubini says.

"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.

"You could have most of the US banking system wiped out, so this is a total disaster."

Which is why it is not just US policymakers who are hoping America's new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.

Because if it fails, the economic fallout could be felt far beyond America's shores.

And that is a mighty scary thought.

And here, with no support for its truth other than the plausibility of the "tale" is just one instance of how another aspect of the "system" works...

This property is only worth some $375K maximum (if the original loan was 80% LTV). The property was resold as $625K, with $125K down payment from a "mysterious” person/company. Since $125K is 20% of $625K, it would make the loan to be at "80% LTV”, while in reality, the buyer has no skin, and it's really 100% financing. The seller got a net of $500K minus the $30K that he shared with the straw buyer. So the seller walked away of $500K - $30K - $375K (estimated property value) - $20K (for remodeling) = $75K profits. The buyer will walk away with $30K, and if the loan later gets reset and become unaffordable. At the end, WellsFargo will probably end up with $500K - $400K = $100K loss on the primary loan again.

Actually, WellsFargo will probably resell this loan to Fannie Mae, which gets bailed out by taxpayers' money. Fannie Mae will sustain a $100K loss, but in the name of propping up the mortgage & housing markets, it "would be okay".

There were similar scams being perpetrated in NZ about ten years back. They came to light when specific mortgagors defaulted on what turned out to be 120% lending - due in that instance to inflated property valuations prepared by (supposedly) "independant" valuers. The difference in NZ is that the mortgagor (borrower) is not entirely isolated from the loss. The bankrupt does have some protections - the family home for example does not get included in the bankrupt's "estate". What has to be proved is that the "home" is appropriate to his family's requirements. So a 20 room mansion in Remmers or Hellers for a family of four would probably not be "protected". But more to the point, the existence of unethical - and quite illegal - practices led to criminal convictions and severe financial penalties for the perpetrators.