Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

26 March 2013

Financial Transactions Tax fails the test of reality... again

Financial Transactions Taxes (also known as Tobin taxes) are the fond friend of the banker-bashing left, believing that there are vast fortunes of money swirling around the ether that, if only they could take a tiny cut of it all, they could save the world.

It has been advocated widely by the likes of Paul Krugman, Bill Gates, Resource intensive fat capitalist dickhead hypocrite  Michael Moore, Greenpeace, Oxfam, WWF, Occupy Wall Street and Fidel Castro

So the EU proposed one, and it has been getting introduced in 11 EU Member States.

It appears to be failing to deliver ... and the Swedes would rightly say, having been there before, "told you so".

25 March 2013

Capital controls - the tool of the statist

"An economic and political disgrace" is how City AM editor, Allister Heath, describes it.

I call it theft.

Capital controls, a euphemism for banning you from taking more than a sliver of your property out of a particular country.

They are motivated by concerns over the "public good", over "the long term stability of the economy", when in fact the mere fact of introducing them speaks volumes about the latter, and is contrary to the former.

It is the logical end point of the moral turpitude of statists, whose fundamental belief is that private property, really, doesn't exist, but is tolerated and can be confiscated, controlled and shared as long as it fits the big picture, the grand plan.

The plans of politicians who think they know best how to run your life.

Cyprus has no future as a financial hub.  Confidence is utterly destroyed, as depositors, regardless of whether they individually will lose part of their savings as part of the bailout, will abandon its banks.

It's over.  Runs on banks happen because people panic about their property and their savings.  That money is their's, and they frequently worked hard and took time to make that money. 

They rightfully seek to protect it, withdrawing it from institutions that might take it from them, because money is an extension of the self.   It is the product of people's minds and labour, translated into a universal medium of exchange, and a means of storing that value.

Being able to take it out of a country is an extension of the right to leave, the right to take your life includes taking your possessions, includes your bank account.

Of course, banks are not foolproof.  In a free market, people rightfully take a risk in deposits with banks, particularly given virtually all banks engage in fractional reserve banking, lending much more than they take in deposits.  If a bank fails, then depositors should become unsecured creditors effectively being a segment of the new shareholders of the bank.

However, it is quite another thing for a sovereign state to do this, to restrict ALL capital flows out of a country.

You see the primary reason why a government does that is because it knows it has lost the confidence of its people, because it is about to steal from them in one way or another (in this case not through devaluation/QE of the kind propounded by Paul Krugman, Russel Norman and Robert Mugabe).  

It is a sign of failure, the tool of the statist and the act of a scoundrel.

22 March 2013

Cyprus in a nutshell

This is my go at summarising this.  Obviously, if someone spots something fundamentally wrong with my analysis, please leave a comment.  I don't profess to be an expert on the Cypriot financial sector.

Cyprus took a light regulatory touch to financial services, so its sector grew.

It gained a reputation for providing only the minimum level of scrutiny needed to comply with European banking rules, hence it tended to attract substantial deposits from Russians keen to keep their money away from Russian authorities.

Cypriot banks grew from this, but invested heavily in Greek public debt as a “safe” investment.
Greece approached bankruptcy, and the Eurozone (Germany) and Greece agreed on a bailout plan that meant its bond holder (those who lent money to the Greek government) would take approximately a 50% cut in their bonds.   This shared the burden between Greek taxpayers and Greece’s creditors.

Cypriot banks have been hit by this “haircut” in their investments, effectively being on the edge of folding without ongoing liquidity support.

The ECB is willing to provide some of this, but is demanding that investors in Cypriot banks take their share.  However, Cypriot banks issued few bonds, so simply demanding Cypriot bondholders take a cut wouldn’t be enough.  So the suggestion was made to take a cut from those who loaned money directly to Cypriot banks – in the form of depositors.

This runs contrary to the pan-Eurozone  guarantee for depositors up to 100,000 Euros.  

The reason given for wanting to confiscate Cypriot depositors is because “most of them are Russian” and “we don’t know where their money came from”.   Concerns that never translated into legal action, and which are at worst racist suspicions.

So now the Cypriot government faces its financial system collapsing.  It is happening now because the previous, communist led, government kept its head in the sand until the election it knew it would lose.
The Cypriot government itself does not have high public debt or a serious budget deficit.  It is not due to rampant overspending, but rather a banking sector that can’t cope with the bailout package for Greece demanding it write off substantial assets.

The Cypriot government is looking to the Russian government to save it, which from the ECB’s point of view means it wouldn’t be willing to provide ongoing liquidity, which means a real risk of a Euro exit, unless Russian support is substantial indeed (to the point where Russia would be the central banker for Cyprus, just think about that for a moment).

To get ECB support, it needs to find money from somewhere and could get it from a levy on deposits over 100,000 Euro.  

If no solution is obtained by Monday and the ECB stops providing liquidity, Cypriot banks will collapse and the Cypriot government may choose to print its own currency to cover spending, meaning a disorderly exit from the Euro by a country that – in itself – did not have a budget.  

Conclusion?

Cyprus’s financial sector is finished, regardless of what happens.   Local and foreign depositors wont trust its banks in most scenarios.

1. If Russia saves Cyprus, and it remains in the Euro, then it will likely mean a substantial withdrawal of deposits from Cypriot banks.  They will shrink, and Cyprus will have a bunch of effectively Russian owned banks operating within the Euro.  It is hard to see the ECB being willing to support this.
2. If Russia saves Cyprus, and it is forced to exit the Euro, then Cyprus will have a nearly worthless local fiat currency that does far more harm to depositors than a levy on Euro deposits.  It is over for Cyprus’s financial sector, but it will become remarkably cheap to holiday and buy land in Cyprus.
3. If the ECB saves Cyprus, along with Russia (providing the Cypriot share), then Cyprus will have a shrinking financial sector. Russians will be looking elsewhere to put their money.
4. If the ECB saves Cyprus, with a bank deposit levy, then Cyprus will see a massive run on its banks, and the financial sector will be effectively finished.  
5. If neither the ECB nor Russia bail out Cyprus, the banks will default, depositors may lose most of their money, it will be forced out of the Euro, and faces considerable civil unrest.

Who to blame?

- Greece, for being fiscally incontinent and being unable to pay back its debts.
- The Eurozone, for being unwilling to guarantee to Cypriot depositors what they guarantee to other Eurozone depositors, on grounds that it was never willing to address in the past.
- Cypriot banks, for being profligate lenders
- Cypriot depositors, for trusting the Eurozone and its government to ensure they avoid moral hazard.
-       Authors of the Euro, for not anticipating the inevitable credit bubbles a pan-economic fiat currency, driven by German economic performance, would fuel.

What to watch?

Monday.  The Cypriot Parliament and the ECB.

My bet is that Cypriots will be dealing entirely in cash in a week's time (they already increasingly are).

The Prodigal Greek has a great summary of the measures taken or soon to be taken, that will ensure this.

31 January 2012

Envy, lies and the gutter of politics

If you want to know what Ayn Rand meant when she described the "drooling beast" in The Fountainhead, one need only look at the events of the past few days in the UK.  For in those days the Labour Party, Liberal Democratic Party and much of the media circled on the government appointed chief executive of the Royal Bank of Scotland (RBS) - Stephen Hester - whilst he was out of the country on holiday - because of reports he was to receive a bonus of just under £1 million in shares.

A witch-hunt of envy, hatred and smearing appeared, as MP after MP called on the government to intervene in the decision of the board of the company to breach his employment contract.  They sniffed blood, goaded on by the leftwing press and media, with the extreme leftwing "Occupy" movement displaying its usual ineptness of analysis by blaming RBS for the budget deficit.   It ended when Mr. Hester returned home from holidays to find his image and name all over the media, and him feeling like a pariah, understandably, and deciding to refuse it for the sake of a quiet life.  The braying left cheer on a small victory, but their true colours are shown not for their stupidity, but their clever, fact-evading, power-hungry bating of class warfare and old fashioned envy in their pursuit of populism.

In 2008, the British Labour Government decided to rescue the RBS, which was weighed down under debts and investments that were going to cause it to go to the wall.  The reason to save it was not to protect depositors, for a deposit guarantee system already existed to ensure anyone with less than £75,000 in deposits had them protected.  No, it was because Gordon Brown wanted to save the jobs, investors and the debtors to the bank, and he feared that letting it fall was worse than saving it.  So he did, by the government pouring in billions of pounds it didn't have, to essentially buy a majority stake in the bank.

That stake was put into an arms-length company so it would be run as a commercial enterprise, and Stephen Hester, previously chief executive of British Land (and having had a successful banking career before then), was appointed CEO with a salary of around £1 million, with bonuses if he successfully turned the company around.

The ownership of RBS and the appointment of Hester had all been by the Brown government.  Until this year, his salary and indeed his previous bonuses - under government ownership - had not been a political football.  This year it has been, and it is all because of a new fever of class envy, stoked hypocritically by Ed Miliband and the vampiric Labour Party, keen to lie, smear and hound for the sake of cheap headlines and gutter press coverage.

RBS has been turned around, in terms of its balance sheet.   It is now profitable, whereas it had lost billions when he had joined.   In other words,  Stephen Hester has been responsible for leading the bank into a state where it financially self sufficient.   Through his leadership, taxpayers have been saved many more billions of pounds - which helps put his £1 million salary in perspective, and indeed the around £960,000 bonus - in shares - that would only be available in a year's time.  Particularly when you consider that the salary and bonus are subject to 50% tax.  

Yet when it came out that he was likely to get this bonus, out came the wolves.   What easier way to stire up anger and envy than to point out to the lumpen proletariat half truths and distortions.  

So what were these half truths?
- "Why get a bonus for leading a bank that needed bailing out"? The fact that he was appointed BY the Labour Government AFTER the bailout to rescue it was blanked out.  You see the standard leftwing view is that they are all guilty - bankers are, after all, the scapegoats for everything.

- "This comes straight from the poor who are suffering from the cuts".  Unadulterated nonsense. It comes from a bank that is making a profit.  Taxpayer money is only from the investment, which of course was a decision by the government of the day.  

- "The bank hasn't delivered on lending to small businesses".  Well yes, maybe it hasn't loaned as much as politicians wanted it to,  but hang on.  Wasn't the fact that it had overstretched itself a primary reason why it was thought of as needing bailing out in the first place?  Do you want a bank that lends prudently, is profitable and safe, or do you want a risk-taking bank that might get burnt?  For financially illiterate (and power and attention seeking) politicians this contradiction is ignored and willfully evaded.

- "The share price is lower than when it was bailed out".  Yes it is.  However, this is common across the banking sector and reflects two trends that are outside Stephen Hester's control. One is the announcement of new heavy handed regulation that imposes significant costs on the banking sector (which politicians approve of) and the Eurozone crisis, which was caused by the sorts of overspending practices the Labour Party speaks with a forked tongue about (cuts are bad, except we know we need to do them, but wont say how, but the Tories must be doing bad cuts).

- "The government as major shareholder can "do something"".  Well yes, it could, it could sack the board and override its decisions.  However, if you were a private shareholder of the bank would you keep your investment in such a politicised bank?  What else would politicians do to it?  Forget that Labour happily let Hester get his salary and bonuses after he joined, it's just decided in 2012 to pursue him.  Government interference in a board of a bank set up specifically to run commercially so it could be privatised would be contrary to how it had been set up.

- "It was because of people like him that we now have a deficit crisis".  No it's not.  The budgetary crisis in the Eurozone, US and elsewhere is because of statist politicians addicted to spending money they aren't collecting in taxes.   This enormous lie is becoming part of the leftwing storyline about the crisis, and needs to be confronted head on as often as possible. 

What was left out?

- The success in turning around the financial results of the bank, and the scale of it.  What nasty little vindictive Labour MP could turn around a paper stand let alone an enormous bank?  Bear in mind these are people who gleefully supported Gordon Brown selling gold when it was the depths of its price and voted for ever increasing budget deficits.   The ignorance is palpable.

- Half of the bonus goes to the Treasury in tax.  Without the bonus the Treasury is not better off.

The government did badly out of this, politically, because it noted that his bonus was half that of last year's and because it insisted that interference would be more damaging (and it would have been).  It wasn't helped that the Chairman decided to forgo his £1.4 million bonus, but more appallingly this was all going on whilst Stephen Hester was on holiday overseas - so was unaware of the campaign of aggressive envy going on back in the UK.

So he has decided now to forgo his bonus, because he feels like a pariah.  What he has learned is that this is the price you pay for politicians selecting you, in good faith, to do a job, and do it well.  The same politicians who backed him to the hilt when they approved of his selection and his employment contract, are now baying for his blood, like the nasty, power hungry vindictive hypocrites that they are.

He could have told them to stick their job and that as far he is concerned they can go to hell, as he could walk into a job elsewhere with ease and without the hassle of petty little MPs surrounding him like hyenas.

As Allister Heath of City AM said today, "nationalising RBS was a monumental error; no bank must ever (be) bailed out again", but the real problem is that the bailout has changed the cultural and philosophical debate around capitalism and the role of the state.

In 2012 that debate will be central to politics.  At the moment it is characterised by the largely ignorant opposing capitalism but largely clueless about what else to do, but also an almost equally inept business sector incapable of arguing the moral as well as the empirical case for capitalism.

What the Stephen Hester bonus issue has shown is that politicians on the left are sinking their teeth into the old Marxist rhetoric of class and envy, with much of the press and media keen to ride on the back of it all.   By contrast, the politicians on the right are almost entirely incompetent and incapable of responding with anything other than some quiet arguments about practicality.

This year there needs to be a sound, loud, confident and intelligent fight for capitalism, or these sorts of mindless attacks will come again and again. 

By the way, you're no more likely to find intelligent and consistent moral defences of capitalism at Davos than you are in Pyongyang.

29 April 2010

The NZ$ vs the £ Sterling... correction time?

The NZ$ is at a record high against the British Pound. Travelex are currently selling NZ$2.05 for £1. This is almost a record low for the Pound against the dollar.

City AM is arguing that a long run correction will be on the way, and the right thing to do is long selling of the kiwi vs the sterling. In other words, the Pound is likely to rise after the election (assuming the uncertainty built into the price is corrected), and that the NZ$ will be on a track to fall because of pressure from the Reserve Bank of NZ.

What does this mean for kiwis in the UK? Bring your money here. The pound is unlikely to ever be this cheap against the NZ$. The NZ$ strength is driven in part by the relatively high interest rates, but also naive belief by some currency traders that the NZ$ has parallels with the $A. City AM dismissed this link a few months ago, as the A$ is driven by rising commodity prices around minerals. The NZ economy is not driven by this, and in fact has a tourism sector being hit by the drooping Pound, Euro and Yen.

Meanwhile, kiwis wanting an overseas holiday should book trips now - it will never be this cheap to visit the UK and Europe, whilst the pound remains low and the Euro gets damaged by the PIIGS (Portugal, Italy, Ireland, Greece, Spain). Unless, of course, you believe in reducing CO2 emissions in which case keep yourself on NZ soil or else you can be readily accused of blatant hypocrisy.

11 March 2010

Hedge fund manager puts socialists on the spot

Last night on BBC's Newsnight, a hedge fund manager, Hugh Hendry participated in a discussion about how he is speculating on Greece defaulting on its debt. He was joined by Joseph Stiglitz, a US economist, and Spanish Ambassador to the UK, Carles Casajuana.

Many on the left blame the likes of him who in speculating on Greece's public finances, when what he actually is doing is exposing the real risk. He is doing it with his own money and money of those who have chosen to trust him to manage.

That is the fundamental difference.

He has bet millions on the Euro, betting on it dropping if Greece defaults. As he says, if he is wrong, he and his investors lose. He expects nobody to bail him out. If he succeeds, it will be because he is right.

Why is he in a position to do this? Because the Greek governments, democratically elected for years, have been both lying about the public finances and been lax about getting those who elect them to pay for what they want.

However, the discussion on Newsnight last night was simply beautiful.

Stiglitz claimed there should be more borrowing and spending, and it is "absurd" to bet on a default. Hendry said simply:

"Look what happens - you get into difficulty and these guys over here [pointing at Stiglitz and Spanish Ambassador to the UK, Carles Casajuana] say, "hey we don't like it."

"Suddenly the truth hurts! Suddenly we want to abandon the truth. Suddenly speculation becomes a pejorative term!"

In other words, the politicians and some economists want reality evaded, the truth of the Greek government's inability to see that constant borrowing is unsustainable, is something they don't want to know - because what it really means is that spending must be cut, drastically.

Then he got threatened by the weasel who is the Spanish Ambassador who said "we're coming to get you".

He replied: "I see you champagne socialists when I travel business class, and the reason you're up in arms now is because you've got yourself into a crisis and cannot get out of it. So you're looking for scapegoats".

Indeed. The unaccountable reality evaders, statists both on the left and right, wont confront the truth that they are trying to defend mortgaging future taxpayers with their profligacy of today.

If the European Union decides to pillage taxpayers to save its members from default, then it will deserve the backlash that will be inevitable. Blaming entrepreneurs for betting with their own money for the failings of government is a lame attempt to cover up massive incompetence and failure by governments to spend within their means. Indeed, it would demonstrate once and for all the anti-business, anti-capitalist and pro-statist agenda of the European Union, except this time taxpayers are unlikely to stand for the machinations of those who like to spend their money for them.

Let Greece default, let Portugal, Spain and others follow.

Meanwhile, watch Hendry's excellent performance here and see the difference between someone who has made a success of his life and taken risks, compared to those who have spent their lives living off the back of others:

>

UPDATE: Here is Hendry again, for UK viewers only (through BBC iPlayer) pulling apart Poul Rasmussen, leader of the Party of European Socialists. The start is 22 minutes into the programme...

http://www.bbc.co.uk/iplayer/episode/b00rdynp/Newsnight_09_03_2010/

11 February 2010

Greece's socialism catching up

The sovereign debt crisis with Greece has a long history. It isn't just about the Greeks lying about their budget deficit.

The symptoms of Greece's current fiscal crisis tell a story of such inept economic management and performance that few should be surprised. Only those with their heads up the short term goals of financial markets (and so untrained and uninterested in the wider context), the proponents of the Euro, and what appears to be most of the Greek political class (and bureaucracy) didn't notice the progressive bankruptcy of what was the cradle of European civilisation.

The roots of the political culture behind this go back to World War 2 and the Greek Civil War. After the Nazis were pushed out of Greece in 1944, the Greek government in exile faced the communist "Democratic Army of Greece" supported by the Soviet Union through communist Bulgaria, Albania and Yugoslavia.

The subsequent five years of fighting (which played no small part in encouraging Greek emigration to the likes of Australia, New Zealand and the USA) divided Greek society enormously. The communists lost in part because of the split between Tito and Stalin that saw the Greek communists side with Stalin, which spelt an end to Yugoslavia's ample support.

However the cost of the civil war was immense in slowing reconstruction after the previous Nazi occupation. Between the civil war and EEC membership in 1981, Greece was politically divided. The military coup in 1967 was due to some fears of a far-left wing takeover by some forces, that junta was one reason Turkey gave for invading and occupying northern Cyprus in 1975, even though the junta was overthrown some months before.

Greece's governments have been dependent on aid since the end of the civil war. The influence of leftwing politics has been strong, with the communist party coming 4th in 1974 and 1977 and 3rd in 1981 with between 9 and 11% of the vote during this time, with more moderate socialists winning power in 1981. Since then the socialists have won a majority of Greek elections, and the communists have come third in all but one of the elections in that time. In other words, Greece is used to being governed with the principles of big government and socialism. The current Prime Minister, George Papandreaou might consider how his father, Andreas, when he was Prime Minister, ran enormous budget deficits in the 1980s when he was PM. Greece has been living beyond its means for a very long time.

When it joined the then European Economic Community in 1981, it was one of the poorest new members. Its membership ushered in a period of 20 years when it, along with Spain and Portugal, got the bulk of the subsidies for infrastructure and development that the EU now lavishes upon the likes of Romania and Bulgaria. Greece was one of the biggest recipients of Western European aid. This helped to bolster Greece's addiction to debt and budget deficits.

With membership of the Euro this gave Greece a high value currency with low European Central Bank interests rates that it could borrow with. It took advantage of the ability to issue sovereign debt in Euros to continue spending up large.

Now the chickens have come home so to speak.

The current government is starting to face fiscal reality by announcing spending cuts, and of course, on cue in a country beset with socialist attitudes, the public sector is going on strike. It doesn't think it is to blame, yet it might look at how its wages and operations have been getting funded for decades - it's been a lot of borrowed money.

However, Greece's problems are not just about spending too much money. It is about the deliberate lying about its accounts, and the lack of transparency of many areas of public spending. For example, Greece has long claimed its expenditure on defence to be a "state secret". The truth is that to placate the army, and evade a risk of a coup, Greek government have taken a blank cheque approach to defence. The current level of spending might have been justified in the Cold War, when Greece was very much on the front line with Bulgaria on its doorstep (Yugoslavia and Albania were not Soviet aligned from 1948 and 1960 respectively).

The airforce has 33,000 personnel and 477 aircraft, the navy 30,000 personnel and 84 warships, whilst the army has 100,000 personnel. This is similar in number to Israel, although Greece has a smaller population. The Netherlands, another NATO member, with higher population, has only 68,000 active members of the military. 5% of GDP is spent on defence it is estimated.

Furthermore, according to Spiegel Greece rigged its accounts to hide its budget deficit, with help from Goldman Sachs, by excluding some military spending and hospital spending. Similarly, Goldman Sachs participated in off balance sheet lending, by using fictional exchange rates to engage in sovereign debt swaps. These are the actions you'd expect of a tinpot sub-Saharan dictatorship, not an EU member state in the Eurozone. Right?

This sort of behaviour should be punished, the politicians who have been a party to it held up for all to see, but also the snivelling useless public sector managers who have ignored basic practices like double-entry accounting, and have participated in enormous fraud, should be shown up for what they are - the shysters that have borrowed and wasted money on behalf of Greek taxpayers.

However, some of the EU wont want that, because they want to protect the consequences of their own failures.

When the EEC accepted Greece, Spain and Portugal it was about looking forward to countries that had only recently turned their backs on military dictatorship, with the European project to pour mountains of European taxpayers' cash into lifting their incomes to levels commensurate with others in Western Europe. The same happened with the former Warsaw Pact countries, most recently with the inclusion of Bulgaria and Romania, both countries still besotted with corruption, organised crime and distinct paucities of transparency in their government accounts. European taxpayers are plundered to subsidise enormous EU funded infrastructure projects and of course the massively inefficient and environmentally disastrous Common Agricultural Policy.

The single currency across a range of economies with wildly varying levels of wealth and development has been a disaster for the poorer economies, who face a highly valued Euro which makes their relatively lower value commodity exports (and tourism sectors) relatively expensive, whilst now also making their mountains of debt unaffordable. Greece's sovereign debt is barely above junk status. Bear in mind that France and Germany have both run budget deficits beyond the Euro rules, but then they set the rules don't they?

So there are strong expectations of some credit being offered to Greece to avoid a default, it will no doubt be at the expectations of massive reductions in the budget deficit (Greece is claiming to cut the deficit from 12.7% in 2009 to 2.8% in 2012, but none of its plans show any sign of meeting this), which will mean accepting strikes, possibly riots and enormous political cost - the cost Greece should and would have faced in the 1980s and 1990s had it not been propped up by EU aid.

Of course what SHOULD happen is that Greece should default - its foolish creditors, who took a risk on a series of lies should suffer for their foolish decision to take up Greek debt. The Greek government, unable to borrow, will then face confronting the socialism and incompetence that has bankrupted itself. The Euro would rightfully suffer, as it should bear the devaluation of one of its participants failing to meet its obligations.

Allister Heath in City AM puts it plainly:

"Regardless of which plan is agreed upon, a rescue would fill the City with joy in the short-term – but would cause huge damage over time. There should be no bailout: it is high time that countries and investors learn to live with their mistakes."

Unfortunately, when you have the ability to plunder the pockets of future generations through taxation, there isn't much incentive to do that.

That, you see, is when the phrase "taxation is theft" so clearly comes into its own.

Unless the role of the state is constrained so that it cannot ever be used to bail out foolish investments or the governments of liberal democracies that vote themselves bankrupt, the easy option - which politicians never truly even start to face the cost of (what is being voted out when you put people in debt for years?) - will be used and the only loser is the taxpayer.

26 January 2010

So what would Obama's proposal have prevented?

Nothing, in the UK in any case.

Allister Heath in City AM - the UK's only consistently pro-capitalist newspaper - says:

Barack Obama’s plan to ban banks with retail arms from those activities – endorsed by shadow chancellor George Osborne – would have done nothing to prevent the crisis; not a single bank that got into trouble since 2007 would have been saved had those rules been in place.

Why?

Northern Rock, HBOS, Bradford and Bingley and the Dunfermline did not engage in prop trading. They lent to people who couldn’t repay, assumed property prices wouldn’t fall, relied on money markets for funding rather than deposits, and purchased securitised sub-prime debt as a “safe” high-yielding investment, often tucked away in off balance sheet vehicles. They held too little quality, liquid capital as a buffer against losses.

So you see it's a mirage. What about RBS?

It was over-leveraged, bought vast amounts of sub-prime securities, lent willy-nilly to unsound borrowers and blew a fortune buying ABN Amro, suffering massive goodwill write-offs. RBS made every mistake in the banking book; it would have been doomed with or without Obama/Osborne.

The Tories are jumping on the bandwagon for political reasons. It makes them look like they aren't beholden to rich capitalists in the City of London, and helps attract the envy vote across the country. At the same time the British government, to its credit, is NOT jumping on the bandwagon. Gordon Brown, for all his faults, is smart enough to not frighten the sharemarkets even more by blundering into nodding in unison with Obama.

Funny though how those on the left who would decry the UK following in step with the US when it was Blair and Bush, now want Brown to follow Obama. Funny that it isn't about making your own decisions, but about making decisions they agree with.

A Guardian poll showed nearly 100% support for doing so, but then who reads the Guardian besides those who think the state should intervene in more, except when it comes to overthrowing nasty dictatorships in the Middle East. So of course it has articles saying "yes Obama", as does the Independent and even the Telegraph is conditionally supportive.

It is deeply unfortunate that many who understand the financial sector are typically without much knowledge of public policy or political philosophy. Indeed, the reverse is true with many political pundits, bureaucrats and journalists not understanding the financial sector.

In the meantime too many are prepared to blame anyone but themselves, and to find solutions that are about addressing symptoms not causes.

25 January 2010

Obama's grab for populism

Commentators across much of the political spectrum have lauded President Obama's hardly coincidental announcement that he is going to regulate the US banking sector on a grand scale.

It came less than a day after voters in Massachusetts gave the Democrats, including Obama and indeed government a bloodied nose. This was largely due to the ham-fisted attempts by Obama, but most disturbingly by the indisputably corrupt forces in both the House and the Senate, to reform healthcare. Instead of taking a breath, Obama decided to go on the front foot and wage war against what has been portrayed as public enemy number one by the left - the banking sector.

The message was simple:

- The banking sector caused the recession (untrue);
- The government was forced to bail out the banking sector as a whole because of its own failings (mostly untrue)
- The banking sector is full of people who earned a lot of money doing the wrong things (partly untrue);
- Time to punish them all and stop it happening again.

What he didn't say was:

- The banking sector took risks because of the fiat money of the Federal Reserve effectively encouraging such behaviour;
- The Federal government through Fannie Mae and Freddie Mac funded a boom in housing investment including loaning to those who couldn't sustain the borrowing;
- Hundreds of thousands of Americans borrowed far too much money making foolish investment decisions;
- Bad banks could have been allowed to fail and it is time to have a fundamental review of the entire monetary system.

The crisis came about because loose money, combined with rules requiring a portion of lending to risky borrowers, saw a bubble of lousy investment in property. It was a bubble seen in many countries, and it has only partially burst. Had it fully burst there would have been hundreds of thousands of more mortgagee sales across the US, UK, Europe and elsewhere. It would have hurt those property owners, but it would have opened up enormous opportunities for many others to buy homes and engage in the sector.

No. Obama is completely uninterested in this. He is far more interested in gaining kudos from the popular masses for bashing bankers. He is "doing something" to divert attention from the Massachusetts result, whether it is right simply wont be understood by most in the media (who have little understanding of economics or finance), and 99% of the public.

So is he not justified, will his measures make a difference? Alastair Heath at City AM thinks not:

Was the financial crisis due to the fact that some banks own private equity firms? No.
Would Lehman have been saved by the restriction on size or any other of the proposals? No. Just one firm, Bear Stearns, a pure investment bank which would not therefore be covered by the new rules, was destroyed because of its ownership of a hedge fund which invested in sub-prime mortgages.

Would any of these rules have protected Northern Rock or HBOS? No.

Did the losses racked up by the state-sponsored Fannie Mae and Freddie Mac mortgage giants have anything to do with prop trading or hedge funds? No – and neither did the failure of Wachovia, Washington Mutual, Countrywide or the over 100 US banks and many others around that world that have gone bust.

In truth, banking losses were caused by bad property loans – and the purchase of this sub-prime debt by other banks and funds in the belief that they were safe. Wall Street was crippled because it was so leveraged and didn’t hold enough high quality, truly liquid capital. AIG insured packages of sub-prime debt through credit default swaps but didn’t set capital aside in case things went wrong.

Obama’s pseudo-remedies completely miss the point.

Heath believes banks should have living wills and it should be made abundantly clear to banks and to depositors that governments wont bail them out again. Banks' creditors and debtors would need to learn to pay more attention to what is behind their assets. In other words, a deal needs to be struck whereby the state turns it back.

However, this cannot be while fiat money continues to be manufactured by central banks at interest rates barely above zero. What is happening right now is a new series of asset bubbles because of it, with property picking up again in London, share prices getting an unholy boost because bank deposits offer nothing, and the cycle starting once again.

It is most telling and disturbing that Conservative Shadow Chancellor George Osborne supports Obama's proposals. A man who hasn't a clue about the banking sector seeking to show his solidarity with the "common folk" when to get votes (when in fact he has never had a real job, and lives primarily off of vast inherited wealth). City Am notes that Obama's proposals would hurt RBS, now primarily taxpayer owned, showing Osborne's foolishness in speaking in such a kneejerk manner.

However, what's being cultivated is not solutions to problems that are primarily about how individuals react to incentives, but envy. Bankers are public enemy number one, and the foolishness of some, who were paid very well, is a fertile breeding ground for hatred of the whole sector.

It's a sector that bores most, that is largely not understood, and ignorance breeds suspicion. Be sure that few politicians will point out that both the Obama and the Bush Administrations (and Clinton before) all bear much responsibility for the monetary policy, and the investment regulatory environment that inspired and rewarded irrationality.

Sadly, what all of this shows is how incapable democracy is at handling complicated public policy. Politicians are mostly clueless, the media similarly so, those who do understand are often accused to seeking to protect vested interests, and most media seeks sales based on massaging public anger. Few will dare profile the average people who took out self certified 120% mortgages at the peak of the property boom and ask them why they took such risks, yet they too contributed to it all.

However, Obama dare not ever say that banks shouldn't be forced to lend to people who are a bad risk, nor that the Federal Reserve system be subject to a fundamental review. It's blame banks, whether they received taxpayer largesse or not, were foolish or not.

The main winners from this will be those countries that don't follow in line - I expect Zurich, Geneva, Hong Kong, Singapore and Shanghai will all be looking for opportunities to attract more of the financial sector from the West.

07 January 2010

Iceland's revolt

Iceland has suffered more than most countries in Europe from the recent recession, not least because it became the host for a series of financial institutions that have since failed. The most notable one is Icesave, which borrowed heavily to establish itself as an institution engaged extensively in providing credit for property and offering high interest bearing bank accounts.

Like other banks that have failed in this part of the world, none of those in the sector drew any attention to the nature of the operation, and the UK regulator - the Financial Services Authority (FSA) - happily rubber stamped it all. In other words, what it did was officially approved as being robust. With Icesave, among others, very highly leveraged, the financial crisis saw it unable to rollover its debt facilities, so it all came to a tumbling end. Hundreds of thousands of depositors in the UK, Netherlands and Germany found their accounts frozen, all assuming that with state "endorsement", their money would be "safe". So the UK government decided that other UK taxpayers should bail out the depositors. Not for a moment did Gordon Brown argue that depositors should have thought more carefully, not for a moment did he seek to fire the FSA for being effectively useless, not for a moment did he think about taxpayers over investors.

So having done this, the UK looked to recover some of this from Iceland, effectively demanding Icelandic taxpayers pay the UK for its policies. Quite what Icelandic taxpayers have to do with a private Icelandic company is beyond me, after all it was a policy choice by Gordon "borrow" Brown to bail out depositors. The Icelandic government agreed to cover a portion of the deposit costs, under significant pressure, but Iceland's taxpayers have turned on their government.

The total cost of this foolish promise is £3.6 billion, for a country with the population of greater Wellington. Allister Heath in City AM points out the scale of this, which explains why nearly a third of Iceland's adult population has signed a petition demanding the President veto legislation authorising the deal:

the proposal will now be put to a referendum and crushed. The sums involved are huge: 40-60 per cent of Iceland’s national income, taking the national debt to 200 per cent of GDP. Each of Iceland’s 304,000 citizen would have to pay £11,700 without getting shares or any assets in return. The money would be gone for good. Imagine if UK taxpayers were asked to pay £700bn to overseas governments because one of our banks had messed up. We too would be up in arms.

Yes, the bank was irresponsible, but it was a private entity.
Yes Iceland's government shouldn't have agreed to help pay part of the bailout to the UK and Dutch governments, but then given the UK economy is 144x the size of Iceland's how could the UK expect much from it?
A better response from Iceland's government would be to state that its banks operate in a free market are not government guaranteed so creditors beware.

So Iceland's taxpayers, who didn't own the failed bank, didn't invest in it and never promised to bail it out and saying "enough". Good for them. Whilst some noise was made about Iceland voting in a new leftwing government, which has supported the deal, the protests have clearly rattled both it, and its belief that taxpayers are there to be fleeced for "their own good".

Big bully Brown is threatening to veto a forthcoming Icelandic application for EU membership. Iceland ought not to be too concerned, since all such membership will do is mean Iceland, as (still) a relatively wealthy European country will probably be a net payer to the socialist subsidy schemes of the EU, and Iceland's ample fisheries would be plundered by the parasitical subsidised fishing fleets of France, Spain, Portugal and the UK.

As Allister Heath continues: "The bankers were incompetent, as were the Icelandic authorities, the UK authorities, the EU and the depositors who didn’t do their research. Egged on by price comparison websites and personal finance pages, the public assumed regulators would ensure every newfangled online bank was safe and forgot that high returns often mean high risk. Instead of acknowledging this, Brown is pursuing a vendetta against Iceland, trying to recoup all of the cash from its government."

Iceland's voters will no doubt say no in a forthcoming referendum, not wanting to put themselves and their children under enormous state enforced debt. If it means pariah status from the IMF and the EU, Icelanders are likely to prefer that to being under servitude to bail out policies from other governments.

As the Daily Telegraph points out, this marks a new low in relations with the UK since the Cod Wars. The UK government classified the Icelandic Central Bank alongside Al Qaeda, under anti-terrorism laws, just so it could seize its assets. Iceland is a member of NATO.

So Iceland has served as a warning, that taxpayers will only take so much from governments claiming to speak on their behalf. Sadly, the UK is too big, and British taxpayers too inert to revolt against state kleptomania.

27 October 2009

London's capitalist paper

I've quoted a few times from City AM. It is London's less well known morning free paper. It focuses on business and finance, so for many will have little appeal. For me it is the one paper in the UK that consistently, without fail, supports free markets and opposes government intervention to prop up failure.

So I recommend looking at the editorials by Allister Heath at least, even if you are uninterested in shares, banking and markets generally. For the philosophy expressed is a positive one. Indeed, Heath wrote last week just this:

"unlike others, we have refused to go down the road of demagogic class warfare and the politics of envy. City A.M is the only newspaper that stands up for City workers and believes in their values. We support a real free-market economy and oppose bailouts as well as crippling tax hikes; first and foremost, we are the paper for London’s capitalist classes. "

Now that's something work looking at for me. So read City AM, and to start how about this little piece on the financial crisis.

It's not libertarian, but it does seek to embrace the creation of wealth and decry those who destroy it. That in itself is a good thing.

George Osborne does not know banking

George Osborne is the Tory Shadow Chancellor of the Exchequer. He has never had a real job. He has a second class degree from Oxford and has spent almost his whole working life either as an MP or working for the Conservative Party. His own ample inherited wealth has protected him from risking his own money in business.

So for him to call for banks to limit bonuses to £2000 or hand them out in shares is stupid, stupid indeed, and shows him up for how incredibly shallow he is, and indeed how shallow the Conservatives are.

The Conservatives are going for the envy vote, knowing that those in the banking sector are small in number and will probably vote Conservative.

The Times quotes Liberal Democrat Treasury spokesman Lord Oakeshott:

“If state-owned banks such as RBS and Lloyds pay bonuses using shares, they would have to issue new equity, which would dilute the taxpayer’s holdings,” he said. “George Osborne clearly does not understand how shares work . . . His ignorance is toe-curling and he hasn’t a clue how markets and public companies operate.”

Osborne talks of retail banks, but it is investment banks that pay large bonuses. So he doesn't even have a cursory knowledge of the banking sector.

Allister Heath in the excellent City AM got it bang on
:

"The Tories are persisting in their belief that there is a moral equivalence between RBS, which went bust and had to be nationalised, and HSBC, which didn’t take any money from any government. Talk of moral hazard: regardless of how well you do, you will still be hammered by the government."

This, you see, is the moral vacuum that those almost across the political spectrum fail to note. Politicians want to punish all banks, yet they rewarded the bad performers, so only the good performers truly lose out. Heath eviscerates Osborne in his editorial and concludes that the outlook is bleak if the Tories really do believe this nonsense:

"expect HSBC and Barclays to start working on their exit plans: no other country, including the US, is planning this sort of separation."

16 October 2008

NZ Superannuation Fund fraud

Think of a superannuation scheme or pension fund that you join - or rather, are forced to join.

Your contribution to the fund varies according to your income. The more you earn the more you pay.

What you receive from the fund depends on one thing: How long you live.

If you don't reach age 65, you'll get nothing, your inheritance will get nothing, in fact your contributions will just have gone to someone else.

If you do reach 65, you'll get - whatever the government thinks everyone who reaches that age will get. If you spent your life on welfare or low income jobs paying next to no tax you'll get the same as a successful entrepreneur who has spent many years on the top marginal tax rate.

You wouldn't choose such a fund now would you?

So why do you vote for political parties that set it up, want to maintain it and even want to use it to play political games as if it is a sovereign wealth fund it can throw at "investments" it makes.

British banks to lend you your own money

Satirical website Daily Mash has an excellent take on the UK government's recent welfare subsidising nationalising handout to banks.

"THE government is to invest £500bn of your money in British banks so they can lend it back to you with interest"

The best line has to be this:

"Meanwhile, Emma Bradford, a sales manager from Bath, said: "Why doesn't the government just give my money to me so I can buy stuff from businesses who will then make a profit and put it in a bank?"

But Mr Darling insisted: "Shut up.""

National policy "akin to communism"

So says a man who should know – Dr Michael Cullen according to Stuff.

He was commenting on the absurd policy announcement by John Key that National would direct the New Zealand Superannuation Fund – the only superannuation fund in the country that pays out the same regardless of how much or little you contribute to it – to invest 40% of its funds in New Zealand companies.

Key’s announcement is completely banal. It risks not only reducing the returns for the fund, but also concentrating too much risk in New Zealand investments. Furthermore, he talks about it investing in “infrastructure bonds”, which means simply, funding government borrowing. You don’t need infrastructure bonds if you let the private sector build, operate and charge users for infrastructure – such as how the country’s two mobile phone networks have been financed and built, and how the internet has been developed, how Auckland and Wellington airports have been developed. No – John Key is in Think Big land.

Dr Cullen is right – regardless of the merit of the NZ Superannuation Fund – not letting the fund managers invest where they see fit will devalue the fund. Furthermore, to suggest that it should finance “Think Big” style central planning government infrastructure projects on telecommunications, water, roads or whatever, is further reducing the likely return (or increasing government borrowing costs, you can’t have both), as well as supplanting private sector investment (increasingly used overseas) with compulsory taxpayer funding.

Of course, renationalising an airline and a railway are also “forms of communism”, so Dr Cullen is very experienced in what he is talking about.

The right answer is to do what, ironically, Winston Peters once advocated. Divide the NZ Superannuation Fund into individual accounts, and hand them to taxpayers to keep, invest in or sell. The consequence is that you are responsible for all or part of your retirement income (with some pro rata adjustment for those currently retired or relatively close to retirement).

Imagine - politicians for individual responsibility.

13 October 2008

£500 billion of socialism

Sorry kiwis, even Auntie Helen can't undo Gordon Brezhnev Brown with socialism - and certainly Gordon outdos the US Federal government.

The Sunday Telegraph reports that the UK government is going to inject £50 billion into British banks, in particular HBOS and the Royal Bank of Scotland, to save both banks, making them both majority government owned. This adds to Northern Rock and Bradford & Bingley, giving the UK government control of four of the biggest financial institutions in the country. This is despite a deal by Lloyds TSB to buy HBOS which it reports is still on track. The government is also seeking to inject funds into other banks, like Barclays and Lloyds, making the government a shareholder of them all.

United Soviet Socialist Kingdom or what? Well this is part of a £500 billion rescue package. Yes that isn't a mistaken zero. It is more than NZ$1.4 trillion. That is ten times the GDP of New Zealand. Half of it is to underwrite debt, £200 billion injection into money markets and the rest to partially nationalise banks. Compared to the US$700 billion package from Washington, given the US has five times the population of the UK, it shows new Labour is old labour once more.

Simon Heffer in the Daily Telegraph points out that with Gordon's nationalisation while painted as saving the UK from disaster "the consequences of his having done so could be catastrophic, too, because the socialist experiment rarely ends up with people feeling happier, richer and more free until it has ended."

"The liability and risk to the taxpayer is terrifying. The political cost to Labour if all this fails will be as nothing compared with the cost to the British public.This is what socialist economics brings. The intervention, or rather interference, of the state in financial and economic matters can only lead to sclerosis, the suppression of enterprise, the raising of taxes, starvation of investment, lack of innovation, technological retardation and the rise of the power of organised labour."


"The partial nationalisation of banks would provide a golden opportunity for Labour to return to the glory days of the George Brown National Plan of 1965, which saw the then Secretary of State for Economic Affairs write to every company in the country and ask them how they did their business. This included such fatuous questions as what they expected to be producing in five years' time. Protests from industrialists that that depended very much on what people were demanding in five years' time were met with incomprehension by the Labour government. "

Indeed some on the left in the US and UK are asking that, if the government can conjur up incredible sums of money to bail out banks, it can do so to build state hospitals, schools, businesses and there is no end to what the benevolent state can do.

What the great wish of Brown is that the financial sector will be buoyed and that there will be no need to guarantee debts, and government capital in banks will result in a significant return that can be privatised.

However the main discourse today is how "capitalism has failed" and how "Roosevelt saved the US in the 1930s". What is most important is for those of us who believe in freedom over statism, and markets over central planning, to ensure that this discourse is not dominated by the left. As PC says in an excellent article at Solopassion "When we see the destruction caused by the depression of the thirties and the means by which the Roosevelts of the world both extended it and then used it to permanently enthrone big government, it should be clear to anyone with eyes to see that what politicians do in the next few months will effect us all for good or ill for at least a generation."

Don't worry Auntie Helen makes you feel safe

Yes, what an image. Helen Clark, in an attack of "me-tooism" has guaranteed all deposits in NZ banks with - your money. Yes, makes you feel so much better doesn't it?

You see, Auntie Helen and Uncle Michael don't have hoards of money stashed away that they earnt from some great endeavour. No, they have your money and your children's money they can take - unless they change the Reserve Bank Act and start increasing the money supply (ohh how tempting that may be for them) and inflation.

Pity at least a quarter of the public is too dumb to know better.

Now to be fair, NZ banks are sound enough for this to be only a little more than a stunt - well, unless you think attracting foreign deposits to NZ (like what has happened in Ireland) isn't a risk for NZ taxpayers - but what is most grating is how Clark is characterising the global financial crisis.

Clark has used what has essentially been a collapse of speculation on property markets fueled by loose monetary policy as a chance to throw some supercilious bile against free markets - of course she would - she's never been a friend of the market economy, whether it be her past in picking coffee beans for communists, her declaration that "the state is sovereign" and her long standing willingness to nationalise (rail and Air NZ) and monopolise (ACC) regardless of what consumers or producers want, demonstrates how much she sees this as a chance to rub her hands and tell the gullible how much they have to feel secure - she's in charge.

It is, of course, banal nonsense. This government has wasted much money, has raised taxes (and only just lowered them), and increased spending of your money year on year well beyond inflation. To say your money is secure because of the government is like saying that the mafia keeps it secure, in exchange for that hefty payout Leftie strongarms from your pay packet every fortnight.

Look at what she wants to borrow from your children to pay for:
- A railway line from Marsden Point to Whangarei. A project so lousy that the local authorities wont risk ratepayers money on it, the profitable port company wont waste its shareholders' funds on it and no other investor thinks it's a good idea (and it has an economic benefit/cost ratio of less than 1, meaning it's as crazy as any Muldoonist scheme);
- Upgrading schools - regardless of whether it will generate better educational outcomes, but it employs the building industry (which had such a hard time didn't it?);
- Back country refforestation- probably on land you own through the state and regardless of whether it's a good idea. More blue collar jobs to vote Labour though, right?

However the look at what the PM thieving bitch had to say about those who responded to the monetary supply provided by governments and to those members of the public who sought to maximise their own welfare from the property bubbles:

"A curtain is being drawn on the era of the free-wheeling unregulated money traders and financiers whose greed has shaken the international financial system to its core. Co-ordinated international action will be needed to ensure that the greed merchants don't ever again get the chance to destroy the lives of ordinary people in real jobs trying to put food on the table for their families"

What are you Helen? An ordinary person in a real job? Since when was it unregulated? Who is responsible for the money supply? Who borrowed self-certified mortgages of up to 120% of property value Helen?

Go wage your class war somewhere else - you don't produce anything Helen Clark - everything you give has been taken by force from someone else.

07 October 2008

European socialism working well then?

BBC reports "World stock markets have plunged after government bank bail-outs in the US and Europe failed to stem fears of slower global economic growth."

Confidence has been rattled, big time, and the European interventionist governments can't resolve their own banking system, after what the Economist described as schadenfreude about the US financial crisis. Europe's more left leaning governments saw it as part and parcel of Yankee wild wild west capitalism - gee how everything looks as bad or worse close to home.

Sarkozy, once seen as the Thatcher of France is no more. The Economist reports:

"In the space of three days, he twice laid into free-market capitalism. “Laissez-faire is finished,” he announced in Toulon. “The all-powerful market that is always right is finished.” It is not just rhetoric. With unemployment climbing, Mr Sarkozy has launched a scheme of state subsidies to supplement low pay, paid for by an extra 1.1% tax on capital income that dismayed his own party’s deputies. Talk of tax cuts has been shelved. " at the same time as saying "that “capitalism is the system that has enabled the extraordinary development of western civilisation,” adding firmly that “anti-capitalism offers no solution to the current crisis.”"

It's not only the USA that printed money indirectly through central banks offering excess credit.

30 September 2008

US taxpayers saved, financial markets sink

The Democrats could have passed the bill on their own - to take US$700 billion from future taxpayers to bail out the foolish borrowings and foolish lendings by US banks, encouraged implicitly by a central bank that kept extending the money supply - but even they couldn't be convinced. Too many saw their constituents demanding why they should be forced to bail out Wall Street. Many more Republicans said the same, and reacted to the lies that this was the result of "8 years of economic mismanagement" as rich little leftwing Democrat Nancy Pelosi bleated. Democrats want this to be painted as the fault of Bush and the Republicans, but their hands are far from clean. This goes back before Bush and even before Clinton - it is a longstanding problem of government growth in the money supply, and the long held belief that the government will step in.

So, according to CNN the Dow Jones has plummeted 7%, it is about time to do some bargain hunting.

Obama and McCain don't know what to do. Obama is trying to make hay from it, McCain is trying to say Obama would spend even more taxpayers' money on new programmes.

The truth is both look like less than Presidential material at the moment - neither give the public confidence in the economic future. Gerald Warner in the Daily Telegraph says that as McCain and Obama both supported the package, US voters chose "none of the above" in putting huge pressure on Congress to say no.

For now the taxpayers have won the battle - the question is what the cost of that will be in the short to medium term.

17 September 2008

Buyer's market

Go on, when stocks plummet along with property prices, there is opportunity. Want to buy a home? Want to buy some shares in major utilities? There are winners and losers when there is a major economic upheaval, don't ignore the opportunities to be a winner. The simple reason is that it may as well be you - because there are plenty just waiting to bargain hunt.