This is an insightful and practical article from Mr. Hastings.
But it would have been nice to add another element apart from political strategy i.e., financial independence or economic base for Afganistan. No economy can survive only on politics nor can any conflict be resolved with just political reconciliation.
With just poppy as a source of revenue, it is very difficult to move Afganistan away from it dependency which leads to crime and terrorism - which is very well exploited by the Taliban & ISI aka Pakistan.
Building infrastructure helps, but an economy needs to have a central core.
I don't know what that can be for Afgans.
Regards,
Pradeep Kabra
------------------------------------
Heroism is no substitute for an Afghan strategy
By Max Hastings
Published: in Financial Times on December 20 2010
President Barack Obama’s year-end review of the Afghan war asserted cautiously that General David Petraeus’s operations are going quite well so far, which caused cynics to say that this is a 20-storey building, and we still have 10 to fall. All parties to the conflict save the Taliban perceive themselves as prisoners of an unhappy predicament. The only issue is whether some outcome can be contrived which is “just good enough”, to borrow one of the military’s favourite clichés.
Both the US and British armies enthuse about progress made in Helmand and Kandahar – markets flourishing, new schools opened, civil aid projects completed, and the Highway 1 main arterial road relatively secure. Special forces’ night raids on local Taliban leaderships have achieved impressive successes. An insider often sceptical about military operations applauds the SAS, especially, as “best of British”.
The phrase most popular among commanders is “bottom up”: having almost abandoned the attempt to empower President Hamid Karzai’s government, they are now focused upon building local institutions in spite of Kabul.
Where General Stanley McChrystal enjoyed an amicable, even close relationship with Mr Karzai, his successor Gen Petraeus has almost none. He regards the president with contempt, and is bent upon sorting out the country without much help from its leader, a doubtful proposition. Gen Petraeus’s efforts are focused upon showing sufficient progress by summer to persuade Mr Obama and the American people to stay the distance, to accept a token summer troop cut in place of beginning a wholesale withdrawal.
The towering irony about Afghanistan is that almost everyone who knows the region perceives its problems as political, and thus requiring political remedies. But, because western diplomacy seems paralysed, soldiers are left to find all the solutions.
Admiral Mike Mullen, chairman of the joint chiefs of staff, said in March this year: “US foreign policy is still dominated by the military, too dependent upon the generals and admirals who lead our overseas commands. It is one thing to be able and willing to serve as emergency responders: quite another to always have to be the fire chief.”
This seems a profound and important observation. Some of the west’s finest soldiers are serving in Afghanistan; but whatever new-age gloss is put upon their role, their professional business is to fight, which must skew their vision. I have always worried that the British army’s attitude to the conflict is distorted first by its admirable “can-do” spirit, which has prompted persistent unfounded optimism; and second, by a desperate desire to be seen to win a campaign, to escape a humiliating retreat to Britain, where new cuts threaten the regiments as soon as they are no longer engaged.
However enthusiastically armies profess commitment to winning hearts and minds, finding “kinetic solutions” – killing people – is what they are chiefly structured to do. The Americans and British are doing their utmost to defeat the Taliban, and achieving considerable tactical success in limited areas. But it seems implausible this will suffice to resolve the underlying problems. An officer wrote to me recently: “There is a sense of momentum that we never had in Helmand and Kandahar this time a year ago, and if only the Afghan government would step up to the plate, we might prevail.”
But his conditional is the part that matters, and is unlikely to be fulfilled. Almost everything in Afghanistan is about tribal relationships, sands shifting constantly as Alikozai elders think themselves denied patronage conceded to Ghilzai, or different branches of the Alikozai vie for cash and favours. Yet many soldiers pay insufficient heed to this issue, and it is almost impossible to master tribal complexities in a limited tour of duty.
The CIA has a vast Afghan station of some 800 officers. Electronically gathered intelligence is good, but political intelligence remains weak. The US government appears baffled about what to do with Pakistan. Of course it would be admirable if the border could be closed to insurgents and the country’s Inter-Services Intelligence (ISI) abandoned its traditional double game, aiding the Taliban.
But there seems no realistic prospect this is going to happen, that the west can either bludgeon Islamabad into compliance or exercise short-term leverage on Pakistan’s tottering institutions. US drone attacks are killing a steady stream of Taliban and al-Qaeda leaders in their Pakistani sanctuaries, but this is an expedient rather than a policy.
Many thoughtful westerners believe it is impossible to achieve regional progress without defusing the Kashmiri confrontation, the cause of so much mutual hatred between India and Pakistan, but there seems little will on either side to do this. Delhi regards itself as having legitimate strategic interests in Afghanistan, which under Taliban rule became a base for many terrorist incursions into India. This, in turn, feeds Pakistan’s paranoia.
The new road built with $136m of Indian aid money from the Iranian border to the Afghan heartland will enable India to ship goods by sea to Afghanistan, strengthening an important trading relationship while weakening Pakistan’s. When it is suggested to Delhi that its activism in Afghanistan is mischievous in its consequences if not intent, Indians respond that they have vital security interests that will have to be protected long after the west has folded its tents and gone home. Meanwhile, Iranian meddling in Afghanistan is becoming more noticeable and injurious to western interests.
These are among the important issues that soldiers cannot resolve, but which the political leaderships of America and its allies seem incapable of addressing. Of course military operations form a critical element in stabilisation, but I suggest that for too long soldiers have been left to do as they think best, because the politicians are baffled.
Hew Strachan, Chichele professor of the study of war at Oxford university, wrote recently that there has been a strategic default both in Iraq and Afghanistan: “The result has often been war shaped by platoon and company commanders, a series of ill-considered tactical actions where killing and casualties define success.”
Western commanders are today enthusiastic about progress in training Afghan soldiers and policemen. Yet almost all army recruits are drawn from the north of the country, and are seen as foreigners in the Pashtun south. Despite annual expenditures of $12.6bn on the security forces, desertions are still running at 18 per cent, which means recruiting an additional 25,000 men a year merely to maintain strength.
The most likely course for Afghanistan in 2011 is that the military will continue to proclaim progress; and that Mr Obama will accept a token summer troop reduction, because he is in thrall to Gen Petraeus, the most celebrated American soldier of his time, and because he fears the political cost of quitting, allowing Republicans to brand him “the man who lost the Afghan war”. The struggle will go on, simply because a lot of people have vested interests in avoiding explicit recognition of failure.
But it seems to some of us impossible that real headway can be made with a broken-backed Kabul government and regional political stagnation. For all the talk about reconciliation with the Taliban, why should they deal when they think they are winning, and when they prosper in large areas where Nato does not? I defer to no one in my respect for soldiers, but nobody should fool themselves that the Afghan war can have a happy ending as long as the military are left to run it on their own.
The writer is an FT contributing editor
Thursday, 23 December 2010
Thursday, 16 December 2010
Re: Europe cannot default its way back to health
The real problem here is the nature of democracy in US and UK and to a certain extent in the Europe. Since the democracy is run without centralised funding aka democracy tax, elections are funded by big business including banks. So, even though people think there is universal suffrage, the real pay-masters i.e., political donors control the politicians.
Just look at Ireland. Even an illiterate person would make bond-holders take hair-cuts. Instead, Brian&Brian have 'mortgaged' not just this generation of tax-payers income but also future generations.
Another example, when AIG was going down, the Fed Reserve under honorary Hank 'GOLDMAN' Paulson made sure that tax-payers booty was distributed to Goldman Sachs at 100% against their CDS's.
The same happened with the bond-holders of Northern Rock.
One can go on and on on this with examples across the 'democratic' world.
How can one justify this kind of day-light robbery? The only answer is, we live in a SHAM DEMOCRACY. The politicians are just the front-end. The real control lies with bankers and corporate honchos.
Pradeep Kabra
------------------------------------
Europe cannot default its way back to health
By Lorenzo Bini Smaghi
Published: December 16 2010 20:59 in Financial Times
Among the many things we have learnt from this crisis is that governments and financial markets find it difficult to understand each other. Governments cannot grasp why the markets lose confidence in the state of public finances so quickly and regain it so slowly, after a long period of fiscal consolidation. The markets, for their part, are mystified by the failure of governments to take simple and timely steps to sort out the problems they face.
To tackle the problems of public finance, one of the measures that many believe should be adopted in some developed countries, particularly in Europe, is to default on or restructure public debt. Not a day passes without a suggestion of that kind being made by market participants, economists and commentators.
Such a measure is considered effective because it allows – according to those who propose it – a rapid reduction in the debt burden, making it more sustainable. It enables a country to avoid implementing an overly restrictive fiscal policy, which may further hamper growth and lead to social tensions. It spares taxpayers from having to pay for mistakes made by investors, especially foreign ones, who have lent too eagerly to the country. More generally – they argue – the default of a sovereign state allows the financial markets to function better and to incorporate the risk premium appropriately.
Given all these apparent advantages, you may wonder why countries currently experiencing financial distress, starting with the European ones, have so far refused to follow this advice. Why are democratically elected governments so reluctant to default on their debt and follow the path taken in the past decade by countries such as Ivory Coast, Pakistan, Nigeria, Ukraine, Venezuela and Zimbabwe?
One hypothesis is that our democracies are incapable of handling sovereign crises such as the one we currently face. An alternative view is that the recommendations made by economists are – at best – based on simplistic models that do not allow the complexity of the situation to be grasped and thus lead to mistaken conclusions. In other words, the cure could do more harm than the disease.
An oft-made assumption is that governments can renegotiate with their creditors the terms and conditions of their debt instruments without this having major repercussions on the rest of the economic and financial system. This assumption is largely based on the experience of developing countries with underdeveloped financial systems and mainly foreign creditors. What is generally not well understood is that, in advanced economies, public debt is the cornerstone of the financial system and an important component of the savings held by citizens.
As recent events have shown, the simple fear of a default or of a restructuring of public debt would endanger the soundness of the financial system, triggering capital flight. Without public support, the liabilities of the banking system would ultimately have to be restructured as well, as was done for example in Argentina with the corralito (freezing of bank accounts). This would lead to a further loss of confidence and make a run on the financial system more likely. Administrative control measures would have to be taken and restrictions imposed. All these actions would have a direct effect on the financial wealth of the country’s households and businesses, producing a collapse of aggregate demand. Taxpayers, instead of having a smaller burden of public debt to bear, would end up with an even heavier one.
Many commentators fail to realise that the main impact of a country’s default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.
The economic and social impact of such an event is difficult to predict. The democratic foundations of a country could be seriously threatened. Attentive observers will not fail to notice that sovereign defaults tend to occur in countries where democracy has rather shallow roots.
Europeans have not forgotten the devastating effects that the expropriation of wealth, such as that carried out during the two world wars by way of inflation or defaults, may have on the economic and social fabric. There is awareness that, in the end, it may be less costly to tackle excessive public debt with the traditional remedies – that is, achieving an adequate level of primary surplus – rather than looking for quick fixes. There is also awareness that, without restoring economic growth, the debt burden cannot be reduced over time. This requires major structural reforms aimed at improving the functioning of the labour, capital and goods markets.
That is why, even if belatedly and reluctantly, governments and parliaments in Greece, Ireland and several other European countries have adopted tough recovery programmes and radical reforms. And that is why the other European countries are supporting them. They know that the alternative is much worse for their citizens.
To understand what is happening in Europe, economics textbooks are useful but the history ones even more so.
The writer is a member of the Executive Board of the European Central Bank
Just look at Ireland. Even an illiterate person would make bond-holders take hair-cuts. Instead, Brian&Brian have 'mortgaged' not just this generation of tax-payers income but also future generations.
Another example, when AIG was going down, the Fed Reserve under honorary Hank 'GOLDMAN' Paulson made sure that tax-payers booty was distributed to Goldman Sachs at 100% against their CDS's.
The same happened with the bond-holders of Northern Rock.
One can go on and on on this with examples across the 'democratic' world.
How can one justify this kind of day-light robbery? The only answer is, we live in a SHAM DEMOCRACY. The politicians are just the front-end. The real control lies with bankers and corporate honchos.
Pradeep Kabra
------------------------------------
Europe cannot default its way back to health
By Lorenzo Bini Smaghi
Published: December 16 2010 20:59 in Financial Times
Among the many things we have learnt from this crisis is that governments and financial markets find it difficult to understand each other. Governments cannot grasp why the markets lose confidence in the state of public finances so quickly and regain it so slowly, after a long period of fiscal consolidation. The markets, for their part, are mystified by the failure of governments to take simple and timely steps to sort out the problems they face.
To tackle the problems of public finance, one of the measures that many believe should be adopted in some developed countries, particularly in Europe, is to default on or restructure public debt. Not a day passes without a suggestion of that kind being made by market participants, economists and commentators.
Such a measure is considered effective because it allows – according to those who propose it – a rapid reduction in the debt burden, making it more sustainable. It enables a country to avoid implementing an overly restrictive fiscal policy, which may further hamper growth and lead to social tensions. It spares taxpayers from having to pay for mistakes made by investors, especially foreign ones, who have lent too eagerly to the country. More generally – they argue – the default of a sovereign state allows the financial markets to function better and to incorporate the risk premium appropriately.
Given all these apparent advantages, you may wonder why countries currently experiencing financial distress, starting with the European ones, have so far refused to follow this advice. Why are democratically elected governments so reluctant to default on their debt and follow the path taken in the past decade by countries such as Ivory Coast, Pakistan, Nigeria, Ukraine, Venezuela and Zimbabwe?
One hypothesis is that our democracies are incapable of handling sovereign crises such as the one we currently face. An alternative view is that the recommendations made by economists are – at best – based on simplistic models that do not allow the complexity of the situation to be grasped and thus lead to mistaken conclusions. In other words, the cure could do more harm than the disease.
An oft-made assumption is that governments can renegotiate with their creditors the terms and conditions of their debt instruments without this having major repercussions on the rest of the economic and financial system. This assumption is largely based on the experience of developing countries with underdeveloped financial systems and mainly foreign creditors. What is generally not well understood is that, in advanced economies, public debt is the cornerstone of the financial system and an important component of the savings held by citizens.
As recent events have shown, the simple fear of a default or of a restructuring of public debt would endanger the soundness of the financial system, triggering capital flight. Without public support, the liabilities of the banking system would ultimately have to be restructured as well, as was done for example in Argentina with the corralito (freezing of bank accounts). This would lead to a further loss of confidence and make a run on the financial system more likely. Administrative control measures would have to be taken and restrictions imposed. All these actions would have a direct effect on the financial wealth of the country’s households and businesses, producing a collapse of aggregate demand. Taxpayers, instead of having a smaller burden of public debt to bear, would end up with an even heavier one.
Many commentators fail to realise that the main impact of a country’s default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.
The economic and social impact of such an event is difficult to predict. The democratic foundations of a country could be seriously threatened. Attentive observers will not fail to notice that sovereign defaults tend to occur in countries where democracy has rather shallow roots.
Europeans have not forgotten the devastating effects that the expropriation of wealth, such as that carried out during the two world wars by way of inflation or defaults, may have on the economic and social fabric. There is awareness that, in the end, it may be less costly to tackle excessive public debt with the traditional remedies – that is, achieving an adequate level of primary surplus – rather than looking for quick fixes. There is also awareness that, without restoring economic growth, the debt burden cannot be reduced over time. This requires major structural reforms aimed at improving the functioning of the labour, capital and goods markets.
That is why, even if belatedly and reluctantly, governments and parliaments in Greece, Ireland and several other European countries have adopted tough recovery programmes and radical reforms. And that is why the other European countries are supporting them. They know that the alternative is much worse for their citizens.
To understand what is happening in Europe, economics textbooks are useful but the history ones even more so.
The writer is a member of the Executive Board of the European Central Bank
Wednesday, 15 December 2010
Hail Silvio...
Dear Sir,
In the business life section of financial times, Luke Johnson aptly quotes Plato "One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors". Further in the article he explains how different are the professions of business and politics which makes it all the more difficult for a businessman to join politics.
In this background, FT's Lex Column is the only newspaper in UK which objectively analyses Silvio Berlusconi's political life. I say objectively because the failures like political corruption, weak growth in South of Italy, too much tax-evasion and organised crime are mentioned. In the same breath, it mentions the positives like, "the country has held together, Italian banks avoided the worst of the credit bubble, growth of gross domestic product has remained slow but fairly steady, inflation has been moderate, the ratio of government debt to GDP has increased less than in most rich countries and Italians are still buying almost all of the government’s debt". Most of all, during tough times, he did not resorted to budget populism.
The fact of the matter is, Silvio Berlusconi has achieved politically more than Tony Blair or Maggie Thatcher in the UK and in business more success than Rupert Murdoch.
But the biggest fact missed by or mis-represented by the media in the UK is that he has been democratically elected not once or twice but thrice by the Italians, has been ruling Italy for almost 8 of last 11 years and has been the premier 3 times. That itself deserves some respect.
Hail FT, where even publications like Economist have failed not to mention the disappointing BBC and tabloid(ish) Murdoch stable.
Regards,
Pradeep Kabra
In the business life section of financial times, Luke Johnson aptly quotes Plato "One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors". Further in the article he explains how different are the professions of business and politics which makes it all the more difficult for a businessman to join politics.
In this background, FT's Lex Column is the only newspaper in UK which objectively analyses Silvio Berlusconi's political life. I say objectively because the failures like political corruption, weak growth in South of Italy, too much tax-evasion and organised crime are mentioned. In the same breath, it mentions the positives like, "the country has held together, Italian banks avoided the worst of the credit bubble, growth of gross domestic product has remained slow but fairly steady, inflation has been moderate, the ratio of government debt to GDP has increased less than in most rich countries and Italians are still buying almost all of the government’s debt". Most of all, during tough times, he did not resorted to budget populism.
The fact of the matter is, Silvio Berlusconi has achieved politically more than Tony Blair or Maggie Thatcher in the UK and in business more success than Rupert Murdoch.
But the biggest fact missed by or mis-represented by the media in the UK is that he has been democratically elected not once or twice but thrice by the Italians, has been ruling Italy for almost 8 of last 11 years and has been the premier 3 times. That itself deserves some respect.
Hail FT, where even publications like Economist have failed not to mention the disappointing BBC and tabloid(ish) Murdoch stable.
Regards,
Pradeep Kabra
Monday, 6 December 2010
Re: A Europe doomed by design flaws
Dear Mr. Münchau,
I'm sorry to say that a) there are loads of assumptions and inconsistencies in your article b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
a) there are loads of assumptions and inconsistencies in your article:
Firstly, you assume a lot about the investors viz., a) if the Eurozone was such a noodle, did they not went to sleep before investing especially the 'smart' bond-holders who unlike equity holders can lose their capital as well and whose upside is very small compared to the 'unlimited' upside of the equity holders? b) You mention that "These are fairly normal investors who are pulling out..." - do you know the break-down of these investors? For instance, what is the percentage of hedge-funds investment on these bonds?
b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
How can Euro Bonds concept work when fiscal management is divorced from monetary management? This is basics. Centralising the fiscal management without political franchise will never work. So, basically this is a political issue which will take time to resolve either way. The fault lies in the basic design of Euro where fiscal-political-monetary policies are controlled by different agencies with different masters.
Finally,
The fact of the matter is, in good times, nobody wanted to look at fundamentals before making investment decisions. Now in the bad times, everybody is using their leverage to cover their positions.
If Germany is talking about private investors taking hair-cuts, it is being prudent unlike the 'idiots' in Ireland who passed on the whole debt on to their own population (including un-born grand-children) and bailed out all the bond investors mostly from outside Ireland. What these bond-holders are doing by pulling out is just a negotiating stunt. Whoever blinks first will lose. In case of Ireland, we have seen what happens when you blink first. Obviously Germany is too strong to do that. So, to make the Germans blink use the break of Euro as a threat. I'm sure Germans are too mature and smart to fall for that trap even if you try to subterfuge it with a stupid idea like Euro Bonds.
Regards,
Pradeep Kabra
--------------------------------------------
A hopeless Europe, unable to cope
By Wolfgang Münchau
Published: in Financial Times on December 5 2010 18:54
Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone’s crisis management rather well. It is überfordert. The nearest English translation is “overwhelmed”, or “not on top of something”, but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante’s hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow.
I am not saying that every policymaker in the eurozone is hopeless. There are a few exceptions. My point is that the system is überfordert, unable to cope. This inability has several dimensions. I have identified six.
The first, and most important, is a tendency to repeat the same mistakes. The biggest of these is the repeated attempt to address solvency problems through liquidity policies. It happened in October 2008 with bank guarantees. The European Central Bank’s never-ending liquidity support is another example. So is the Greek bail-out. And so is the European Financial Stability Facility, the €440bn ($588bn) bail-out fund. Set up in May as a mechanism to resolve financial crises, it became a cause of the Irish crisis in November. What triggered last week’s panic was the sudden realisation by investors that, with an interest rate of 6 per cent and an ongoing no-default guarantee to bank bondholders, Ireland is insolvent.
The second is a lack of political co-ordination. All the decisions taken have one thing in common: no one takes political ownership of the whole system. Everybody inside the system is optimising their corner. International investors, by contrast, are looking at the system as a whole and cannot make sense of the cacophony. Germany’s motivation in the debate on the European Stability Mechanism (ESM), the anti-crisis mechanism from 2013, was to safeguard its financial interest. That is legitimate, but the way it is done offers no solution feasible for the eurozone as a whole.
The third is a breakdown of communication. The EU has a tendency to hype whatever it agrees. The markets first react with euphoria to the announcement, then with disappointment once they have read the small print. When Germany raised the issue of a permanent anti-crisis mechanism, it gave few details. The markets were spooked. When news came out that Germany had climbed down over the question of automatic bondholder haircuts, the markets were euphoric. Details that have come out since are again more alarming. The way the ESM is constructed will make a debt default in the eurozone dramatically more probable. There is a good case to be made for limiting taxpayers’ liability. But the scope and the details must be conveyed much more clearly.
A fourth aspect is a tendency by governments to blame investors when something goes wrong, rather than solve the problem. The prevailing view in Paris and Berlin is that last week’s crisis was the work of nasty speculators. It is not the first time. Remember the ban on short-selling of equities? Or the “locust” debate about private equity a few years back? The point is that this time there is no George Soros-like speculator attacking the system. These are fairly normal investors who are pulling out, or regrouping. They have lost confidence in the eurozone’s crisis management.
Fifth is the tendency to blame each other. In the spring, the Germans had a go at the Greeks. Now the Spanish and the Irish blame the Germans. Readers of this column know that I have been a frequent critic of German policy, but I think it unjustified to blame Berlin for causing the current problems. The cause of the crisis in the European periphery was the bursting of a credit bubble, and that bubble was not the work of the German government. The blame game is not a constructive way out of this crisis.
Finally, a sixth aspect is the tendency to appeal to a deus ex machina when all else fails. That would be the European Central Bank. Last week, several European politicians beseeched the ECB to act as defender of last resort. Market commentators raised expectations that the existing securities market programme would be extended from a volume of close to €70bn to €1,000bn or even €2,000bn.
It did not happen. Or did it? It is hard to say. Jean-Claude Trichet, president of the ECB, said little, but the ECB nevertheless bought hundreds of millions of euros worth of Irish and Portuguese debt that day. Mr Trichet knows that he can prevent contagion but also that he cannot save the eurozone alone.
I do not want to play down the ECB’s role. Its liquidity policies prevented a calamity in August 2007, and later in the autumn of 2008. But it also delayed a resolution to the political crisis. Europe’s bank resolution policy is the ECB, and only the ECB. That is why this crisis is lasting so long.
The euro is currently on an unsustainable trajectory. The political choice is either to retreat into a corner, and hope for some miracle, or to agree a big political gesture, such as a common European bond. What I hear is that such a gesture will not happen, for a very large number of very small reasons. The system is genuinely überfordert.
munchau@eurointelligence.com
I'm sorry to say that a) there are loads of assumptions and inconsistencies in your article b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
a) there are loads of assumptions and inconsistencies in your article:
Firstly, you assume a lot about the investors viz., a) if the Eurozone was such a noodle, did they not went to sleep before investing especially the 'smart' bond-holders who unlike equity holders can lose their capital as well and whose upside is very small compared to the 'unlimited' upside of the equity holders? b) You mention that "These are fairly normal investors who are pulling out..." - do you know the break-down of these investors? For instance, what is the percentage of hedge-funds investment on these bonds?
b) your proposed solution of backing Euro Bonds, is a one more stop-gap / ad-hoc arrangement rather than a long-term solution.
How can Euro Bonds concept work when fiscal management is divorced from monetary management? This is basics. Centralising the fiscal management without political franchise will never work. So, basically this is a political issue which will take time to resolve either way. The fault lies in the basic design of Euro where fiscal-political-monetary policies are controlled by different agencies with different masters.
Finally,
The fact of the matter is, in good times, nobody wanted to look at fundamentals before making investment decisions. Now in the bad times, everybody is using their leverage to cover their positions.
If Germany is talking about private investors taking hair-cuts, it is being prudent unlike the 'idiots' in Ireland who passed on the whole debt on to their own population (including un-born grand-children) and bailed out all the bond investors mostly from outside Ireland. What these bond-holders are doing by pulling out is just a negotiating stunt. Whoever blinks first will lose. In case of Ireland, we have seen what happens when you blink first. Obviously Germany is too strong to do that. So, to make the Germans blink use the break of Euro as a threat. I'm sure Germans are too mature and smart to fall for that trap even if you try to subterfuge it with a stupid idea like Euro Bonds.
Regards,
Pradeep Kabra
--------------------------------------------
A hopeless Europe, unable to cope
By Wolfgang Münchau
Published: in Financial Times on December 5 2010 18:54
Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone’s crisis management rather well. It is überfordert. The nearest English translation is “overwhelmed”, or “not on top of something”, but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante’s hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow.
I am not saying that every policymaker in the eurozone is hopeless. There are a few exceptions. My point is that the system is überfordert, unable to cope. This inability has several dimensions. I have identified six.
The first, and most important, is a tendency to repeat the same mistakes. The biggest of these is the repeated attempt to address solvency problems through liquidity policies. It happened in October 2008 with bank guarantees. The European Central Bank’s never-ending liquidity support is another example. So is the Greek bail-out. And so is the European Financial Stability Facility, the €440bn ($588bn) bail-out fund. Set up in May as a mechanism to resolve financial crises, it became a cause of the Irish crisis in November. What triggered last week’s panic was the sudden realisation by investors that, with an interest rate of 6 per cent and an ongoing no-default guarantee to bank bondholders, Ireland is insolvent.
The second is a lack of political co-ordination. All the decisions taken have one thing in common: no one takes political ownership of the whole system. Everybody inside the system is optimising their corner. International investors, by contrast, are looking at the system as a whole and cannot make sense of the cacophony. Germany’s motivation in the debate on the European Stability Mechanism (ESM), the anti-crisis mechanism from 2013, was to safeguard its financial interest. That is legitimate, but the way it is done offers no solution feasible for the eurozone as a whole.
The third is a breakdown of communication. The EU has a tendency to hype whatever it agrees. The markets first react with euphoria to the announcement, then with disappointment once they have read the small print. When Germany raised the issue of a permanent anti-crisis mechanism, it gave few details. The markets were spooked. When news came out that Germany had climbed down over the question of automatic bondholder haircuts, the markets were euphoric. Details that have come out since are again more alarming. The way the ESM is constructed will make a debt default in the eurozone dramatically more probable. There is a good case to be made for limiting taxpayers’ liability. But the scope and the details must be conveyed much more clearly.
A fourth aspect is a tendency by governments to blame investors when something goes wrong, rather than solve the problem. The prevailing view in Paris and Berlin is that last week’s crisis was the work of nasty speculators. It is not the first time. Remember the ban on short-selling of equities? Or the “locust” debate about private equity a few years back? The point is that this time there is no George Soros-like speculator attacking the system. These are fairly normal investors who are pulling out, or regrouping. They have lost confidence in the eurozone’s crisis management.
Fifth is the tendency to blame each other. In the spring, the Germans had a go at the Greeks. Now the Spanish and the Irish blame the Germans. Readers of this column know that I have been a frequent critic of German policy, but I think it unjustified to blame Berlin for causing the current problems. The cause of the crisis in the European periphery was the bursting of a credit bubble, and that bubble was not the work of the German government. The blame game is not a constructive way out of this crisis.
Finally, a sixth aspect is the tendency to appeal to a deus ex machina when all else fails. That would be the European Central Bank. Last week, several European politicians beseeched the ECB to act as defender of last resort. Market commentators raised expectations that the existing securities market programme would be extended from a volume of close to €70bn to €1,000bn or even €2,000bn.
It did not happen. Or did it? It is hard to say. Jean-Claude Trichet, president of the ECB, said little, but the ECB nevertheless bought hundreds of millions of euros worth of Irish and Portuguese debt that day. Mr Trichet knows that he can prevent contagion but also that he cannot save the eurozone alone.
I do not want to play down the ECB’s role. Its liquidity policies prevented a calamity in August 2007, and later in the autumn of 2008. But it also delayed a resolution to the political crisis. Europe’s bank resolution policy is the ECB, and only the ECB. That is why this crisis is lasting so long.
The euro is currently on an unsustainable trajectory. The political choice is either to retreat into a corner, and hope for some miracle, or to agree a big political gesture, such as a common European bond. What I hear is that such a gesture will not happen, for a very large number of very small reasons. The system is genuinely überfordert.
munchau@eurointelligence.com
Wednesday, 27 October 2010
What is Manchester United's problem this season?
Upfront, Berbatov & Rooney are solid.
Hernandez & Valencia/Nani are addictive.
Giggsy & Scholsey are Vintage.
The real problem is back 5.
Rafael is inexperienced.
Vidic hasn't warmed up to captaincy.
Evra is out of track since the world cup.
Neville is over the top.
Ferdinand is always injured.
Van Der Sar is ripe for retirement.
Hernandez & Valencia/Nani are addictive.
Giggsy & Scholsey are Vintage.
The real problem is back 5.
Rafael is inexperienced.
Vidic hasn't warmed up to captaincy.
Evra is out of track since the world cup.
Neville is over the top.
Ferdinand is always injured.
Van Der Sar is ripe for retirement.
Re: Why US voters are suing Dr Obama
Dear Mr. Wolf,
You mention the policy mistakes by Obama as 'failure to address labour market directly' and 'the mild effort to reduce the overhang of household debt'
But what you don't mention is the lack of action by Obama on the housing market reforms (read Fannie & Freddie). This was the opportunity to use the sledge-hammer reforms on the same.
Ditto for the mild action on Banking reforms.
The real government debt chart exposes both these short-falls.
a) It shows US real govt. debt rise as about 44% but it doesn't includes the actual loss on Fannie & Freddie (appx. $300 bn) and the leverage of about $1.5 trillion which is about 15% of GDP. Isn't that off-government balance-sheet?
b) It shows the huge rise in US (and UK) govt. debt is the result of subsidizing and saving the banking sector.
Regards,
Pradeep
--------------------------------------------------------------------
Obama did many things. That is already impressive.
I agree that there is much to do on housing. But there is no gigantic urgency. There won't be another housing bubble for a long time. Let the Republicans do that!
Martin Wolf
-------------------------------------------------
Why US voters are suing Dr Obama
By Martin Wolf
Published: October 26 2010 22:28 | Last updated: October 26 2010 22:28
An ambulance stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later, far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone.
That is the situation in which Dr Barack Obama finds himself. A large part of the American public has long since forgotten the gravity of the financial heart attack that hit the US in the autumn of 2008. The Republicans have convinced many voters that the intervention by the Democrats, not the catastrophe George W.Bush bequeathed, explains the malaise. It is a propaganda coup.
Does President Obama deserve blame for this outcome? No and yes. No, because his treatment was right, in principle; yes, because it was too cautious, in practice.
It is essential to remember the context. Large financial crises do long-lasting damage. As the University of Maryland’s Carmen Reinhart and Harvard University’s Kenneth Rogoff note in an update of previous work: “More often than not, the aftermath of severe financial crises shares three characteristics. First, asset market collapses are deep and prolonged ... Second, [it] is associated with profound declines in output and employment ... Third, the real value of government debt tends to explode.” As ever, the risks built up, disregarded, in the boom and materialised in the bust.
As Prof Reinhart and Vincent Reinhart of the American Enterprise Institute note in a paper presented at this year’s economic policy symposium at Jackson Hole, the US shared with several other high-income countries (notably, Spain, the UK and Ireland) a massive rise in house prices, credit and the financial sector’s balance sheet: between 1997 and 2007, real US house prices rose by 87 per cent, the ratio of US financial sector debt to gross domestic product rose by 52 per cent and the ratio of total private debt to GDP rose by 101 per cent. This was a disaster waiting to happen. What has made managing the bust far more difficult is the fact, demonstrated in the Reinhart and Reinhart paper, that this has been by far the biggest global financial crisis since the second world war (see chart).
So how well has the US economy done in this crisis? Quite well, in some respects, above all on overall economic output; less well, in others, notably unemployment. On average, real GDP per head (at purchasing power parity) fell by 9.3 per cent in the previous crises studied by Profs Reinhart and Rogoff. This time it fell by 5.4 per cent in the US. The unemployment rate rose by 7 percentage points in previous crises, on average. This time, US unemployment rose by 5.7 percentage points. (See charts.)
This contrast between poor US performance on unemployment and better performance on output, by historical standards, carries over to comparisons between the US and other large high-income countries. Despite being at the epicentre of the crisis, the US experienced a smaller proportional decline in output per head than other large high-income countries, except France. But unemployment rose far faster in the US than elsewhere. The explanation is that US productivity growth was exceptionally fast, above all in 2009.
What, then, does this performance tell us about US policy? The answer is that it did well in terms of what it did address, but far less so in terms of what it did not address.
As Lawrence Summers, the president’s chief economic adviser, noted at the FT’s “View from the Top” conference in New York on October 7, the administration’s focus was on “the return of stability, confidence and the flow of credit to support strong recovery”. The elements were: support for the financial system – through the troubled asset relief programme, inherited from the previous administration, financial guarantees and “stress tests” on banking institutions; the fiscal stimulus; and the actions of the Federal Reserve to sustain the flow of credit.
By their nature, such policies work by sustaining demand and so output. Their impact on employment (and unemployment) is indirect. As it turned out, productivity growth was so strong that not too bad a performance, in terms of output, failed to prevent the surge in unemployment. One would have expected supporters of the free market to conclude that the US economy and, particularly, its labour market, remains flexible, under this “socialist” president. One would have expected them to conclude, too, that more stimulus was needed. After all, it was quite modest: fiscal stimulus was less than 6 per cent of GDP and so accounts for less than a fifth of the cumulative deficits of 2009, 2010 and 2011, while monetary policy is caught in a liquidity trap.
The truth is not that policy was foolhardy and failed, but that it was too timid and so could not succeed. A big mistake was the failure to address the labour market directly, perhaps by temporarily slashing payroll taxation. There were other mistakes, too: the effort to reduce the overhang of household debt should have been stronger.
Yet even the hated Tarp looks remarkably effective in hindsight. As Mr Summers noted, its cost to the taxpayer looks likely to be ⅓ per cent of GDP. This is far less than the cost of the bail-out of the savings and loans institutions in the 1980s. It is also far less than the direct fiscal cost of comparable crises elsewhere.
Unfortunately, the Republicans have succeeded in persuading a large enough portion of the American public that if the patient had been left entirely alone, he would be in perfect health today. This is surely a fairy story. But voters naturally pay little attention to calamities averted. They focus only on how far experience falls short of what they desire. Mr Obama gains no credit for the former and much blame for the latter. His aspirational rhetoric no doubt worsened the disappointment.
The president’s willingness to ask for too little was, it turns out, a huge strategic error. It allows his opponents to argue that the Democrats had what they wanted, which then failed. If the president had failed to get what he demanded, he could argue that the outcome was not his fault. With a political stalemate expected, further action will now be blocked. A lost decade seems quite likely. That would be a calamity for the US – and the world.
martin.wolf@ft.com
You mention the policy mistakes by Obama as 'failure to address labour market directly' and 'the mild effort to reduce the overhang of household debt'
But what you don't mention is the lack of action by Obama on the housing market reforms (read Fannie & Freddie). This was the opportunity to use the sledge-hammer reforms on the same.
Ditto for the mild action on Banking reforms.
The real government debt chart exposes both these short-falls.
a) It shows US real govt. debt rise as about 44% but it doesn't includes the actual loss on Fannie & Freddie (appx. $300 bn) and the leverage of about $1.5 trillion which is about 15% of GDP. Isn't that off-government balance-sheet?
b) It shows the huge rise in US (and UK) govt. debt is the result of subsidizing and saving the banking sector.
Regards,
Pradeep
--------------------------------------------------------------------
Obama did many things. That is already impressive.
I agree that there is much to do on housing. But there is no gigantic urgency. There won't be another housing bubble for a long time. Let the Republicans do that!
Martin Wolf
-------------------------------------------------
Why US voters are suing Dr Obama
By Martin Wolf
Published: October 26 2010 22:28 | Last updated: October 26 2010 22:28
An ambulance stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later, far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone.
That is the situation in which Dr Barack Obama finds himself. A large part of the American public has long since forgotten the gravity of the financial heart attack that hit the US in the autumn of 2008. The Republicans have convinced many voters that the intervention by the Democrats, not the catastrophe George W.Bush bequeathed, explains the malaise. It is a propaganda coup.
Does President Obama deserve blame for this outcome? No and yes. No, because his treatment was right, in principle; yes, because it was too cautious, in practice.
It is essential to remember the context. Large financial crises do long-lasting damage. As the University of Maryland’s Carmen Reinhart and Harvard University’s Kenneth Rogoff note in an update of previous work: “More often than not, the aftermath of severe financial crises shares three characteristics. First, asset market collapses are deep and prolonged ... Second, [it] is associated with profound declines in output and employment ... Third, the real value of government debt tends to explode.” As ever, the risks built up, disregarded, in the boom and materialised in the bust.
As Prof Reinhart and Vincent Reinhart of the American Enterprise Institute note in a paper presented at this year’s economic policy symposium at Jackson Hole, the US shared with several other high-income countries (notably, Spain, the UK and Ireland) a massive rise in house prices, credit and the financial sector’s balance sheet: between 1997 and 2007, real US house prices rose by 87 per cent, the ratio of US financial sector debt to gross domestic product rose by 52 per cent and the ratio of total private debt to GDP rose by 101 per cent. This was a disaster waiting to happen. What has made managing the bust far more difficult is the fact, demonstrated in the Reinhart and Reinhart paper, that this has been by far the biggest global financial crisis since the second world war (see chart).
So how well has the US economy done in this crisis? Quite well, in some respects, above all on overall economic output; less well, in others, notably unemployment. On average, real GDP per head (at purchasing power parity) fell by 9.3 per cent in the previous crises studied by Profs Reinhart and Rogoff. This time it fell by 5.4 per cent in the US. The unemployment rate rose by 7 percentage points in previous crises, on average. This time, US unemployment rose by 5.7 percentage points. (See charts.)
This contrast between poor US performance on unemployment and better performance on output, by historical standards, carries over to comparisons between the US and other large high-income countries. Despite being at the epicentre of the crisis, the US experienced a smaller proportional decline in output per head than other large high-income countries, except France. But unemployment rose far faster in the US than elsewhere. The explanation is that US productivity growth was exceptionally fast, above all in 2009.
What, then, does this performance tell us about US policy? The answer is that it did well in terms of what it did address, but far less so in terms of what it did not address.
As Lawrence Summers, the president’s chief economic adviser, noted at the FT’s “View from the Top” conference in New York on October 7, the administration’s focus was on “the return of stability, confidence and the flow of credit to support strong recovery”. The elements were: support for the financial system – through the troubled asset relief programme, inherited from the previous administration, financial guarantees and “stress tests” on banking institutions; the fiscal stimulus; and the actions of the Federal Reserve to sustain the flow of credit.
By their nature, such policies work by sustaining demand and so output. Their impact on employment (and unemployment) is indirect. As it turned out, productivity growth was so strong that not too bad a performance, in terms of output, failed to prevent the surge in unemployment. One would have expected supporters of the free market to conclude that the US economy and, particularly, its labour market, remains flexible, under this “socialist” president. One would have expected them to conclude, too, that more stimulus was needed. After all, it was quite modest: fiscal stimulus was less than 6 per cent of GDP and so accounts for less than a fifth of the cumulative deficits of 2009, 2010 and 2011, while monetary policy is caught in a liquidity trap.
The truth is not that policy was foolhardy and failed, but that it was too timid and so could not succeed. A big mistake was the failure to address the labour market directly, perhaps by temporarily slashing payroll taxation. There were other mistakes, too: the effort to reduce the overhang of household debt should have been stronger.
Yet even the hated Tarp looks remarkably effective in hindsight. As Mr Summers noted, its cost to the taxpayer looks likely to be ⅓ per cent of GDP. This is far less than the cost of the bail-out of the savings and loans institutions in the 1980s. It is also far less than the direct fiscal cost of comparable crises elsewhere.
Unfortunately, the Republicans have succeeded in persuading a large enough portion of the American public that if the patient had been left entirely alone, he would be in perfect health today. This is surely a fairy story. But voters naturally pay little attention to calamities averted. They focus only on how far experience falls short of what they desire. Mr Obama gains no credit for the former and much blame for the latter. His aspirational rhetoric no doubt worsened the disappointment.
The president’s willingness to ask for too little was, it turns out, a huge strategic error. It allows his opponents to argue that the Democrats had what they wanted, which then failed. If the president had failed to get what he demanded, he could argue that the outcome was not his fault. With a political stalemate expected, further action will now be blocked. A lost decade seems quite likely. That would be a calamity for the US – and the world.
martin.wolf@ft.com
Monday, 18 October 2010
Re: Microsoft Windows Phone 7 OS Review
The reason it will not succeed is because:
a) No apps network - as MS itself knows, the reason for its dominance in Office applications and windows is because it got the apps & user-threshhold surrounding it. Right now, apps are with Apple for stand-alone and Android for multi-device options
b) It is not open-source - Loads of development costs and incompatibility issues on multiple hardware platforms. Who wants to go through that head-ache when one can develop the same stuff on Android and get on all devices across the world in a jiffy.
c) It costs - Unlike Android which is free or Apple which is free but runs only on apple device, the developers/device manufacturers have to pay to Microsoft. Who in his right mind want to pay when you have free options which are excellent with ready-made market.
d) It doesn't cater to niche applications either - Unlike say Blackberry, MS is in the camp of Nokia. In no man's land. Nobody knows what it is for, what it is pushing or what its priorities are in mobile space. It is just following and hoping.
e) Finally, it cannot crush competitors as in the past - Apple is bigger than Microsoft and Google is almost big if not bigger. Unlike in the past when it could crush Netscape to Lotus, that time is gone now. These new competitors have cast-flow of more than $25 billion.
As I said before, the days of easy money is over for Microsoft. Yes, it still raised loads of cash-flow every year, but as Apple and its launch of new innovative products have shown the door for so many well-run, well-established companies from Nokia to Blackberry to Amazon, the disruption caused by innovation leads to a killer-blow when least expected.
I look forward to the launch of touch-screen apple mac. That is when the real blow to Microsoft Cash-Cow of Windows will land. Last year Mr. Ballmer was lucky when $44 billion on Yahoo would have wiped out his company's complete cash reserve. But lady-luck is not like the postman who always rings twice!!!
Pradeep Kabra
a) No apps network - as MS itself knows, the reason for its dominance in Office applications and windows is because it got the apps & user-threshhold surrounding it. Right now, apps are with Apple for stand-alone and Android for multi-device options
b) It is not open-source - Loads of development costs and incompatibility issues on multiple hardware platforms. Who wants to go through that head-ache when one can develop the same stuff on Android and get on all devices across the world in a jiffy.
c) It costs - Unlike Android which is free or Apple which is free but runs only on apple device, the developers/device manufacturers have to pay to Microsoft. Who in his right mind want to pay when you have free options which are excellent with ready-made market.
d) It doesn't cater to niche applications either - Unlike say Blackberry, MS is in the camp of Nokia. In no man's land. Nobody knows what it is for, what it is pushing or what its priorities are in mobile space. It is just following and hoping.
e) Finally, it cannot crush competitors as in the past - Apple is bigger than Microsoft and Google is almost big if not bigger. Unlike in the past when it could crush Netscape to Lotus, that time is gone now. These new competitors have cast-flow of more than $25 billion.
As I said before, the days of easy money is over for Microsoft. Yes, it still raised loads of cash-flow every year, but as Apple and its launch of new innovative products have shown the door for so many well-run, well-established companies from Nokia to Blackberry to Amazon, the disruption caused by innovation leads to a killer-blow when least expected.
I look forward to the launch of touch-screen apple mac. That is when the real blow to Microsoft Cash-Cow of Windows will land. Last year Mr. Ballmer was lucky when $44 billion on Yahoo would have wiped out his company's complete cash reserve. But lady-luck is not like the postman who always rings twice!!!
Pradeep Kabra
Tuesday, 21 September 2010
Re: Words to describe the glory of Apple
Dear Lucy,
Thanks for the insightful article on Apple & Words.
But the fact is "There has hardly ever been a fortune created without a monopoly of some sort, or at least an oligopoly. This is the natural path of industrialization: invention, propagation, adoption, control" - Wired Magazine.
The reason why Microsoft and others of its ilk do not bother, inspite of their shoddy products is because they are monopoly or oligopoly. Why bother. On the other hand Apple is unique because a) Steve Jobs b) it deals in the niche market c) To survive & succeed against the oligopoly like Microsoft, it needs to constantly and creatively innovate.
That is why Apple's achievement is nothing short of a 'black swan' event. We should celebrate while it lasts.
Then you may ask, why is that an exception rather than rule?
Unfortunately, that is because CAPITALISM is all about Monopoly or Oligopoly not Competition or Choice. From Murdoch's Sky to Microsoft's Window, it is Monopoly all the way...Who has the time for Words......when cash register is ringing...
Regards,
Pradeep Kabra
----------------
Sent at 09:00 (GMT+01:00). Current time there: 11:57. ✆
to pradeepkabra@gmail.com
date 23 September 2010 09:00
subject Re: Words to describe the glory of Apple
mailed-by ft.com
Dear Pradeep
Thanks for your wise message. I fear you are quite right.
Lucy Kellaway
--------------
Words to describe the glory of Apple
By Lucy Kellaway
Published: September 19 2010 19:26 | Last updated: September 19 2010 19:26
Like most Brits, I find success in others pretty hard to cope with. When that success is combined with good looks, I can’t tolerate it at all.
Apple’s continued glory eats away at me like a maggot at my core. I long for it to pick up some bruises. When the iPad came out, I prayed that it would be awful. My prayers were not heard: like all Apple products, it is sleek and gorgeous, and in due course I shall go to one of its wondrous temples of consumption and grumpily buy one.
Now I find that Apple has succeeded in an area even more revolutionary than designing beautiful products that are easy to use. This time, though, I feel no discomfort. Apple has discovered something that other companies have long forgotten, if they ever knew: language can also be beautiful and easy to use. Words can be fun to read. They can look elegant. They can make you laugh.
Earlier this month it published a set of guidelines for apps sold at its App Store. According to the laws that govern this sort of thing, this document should have been doubly unreadable. It was a list of legal requirements and was aimed at techies. Instead, it was funny and clear, and I found myself reading it effortlessly, even though I barely know what an “app” is.
“We have over 250,000 apps in the App Store. We don’t need any more Fart apps. If your app doesn’t do something useful or provide some form of lasting entertainment, it may not be accepted.”
The tone is direct, comic and elegantly threatening.
“We will reject apps for any content or behaviour that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, I’ll know it when I see it. And we think that you will also know it when you cross it.”
Now compare this to the standard stuff on the Microsoft website. The brand new browser, it says, “delivers a richer, faster, and more business-ready Web experience. Architected to run HTML 5, the beta enables developers to utilise standardised mark-up language across multiple browsers”. Well I never. Reading this, I’m bored and restless, irritated and alienated.
Given the towering superiority of the first linguistic style over the second, will it catch on? Will other companies copy Apple’s language just as they have copied its design?
You might think so. You might think there was a clear commercial advantage to be had in writing clearly and stylishly. But you would be wrong. There is no sign that Microsoft has been suffering from its stolid, dodgy way with words. Indeed it is one of the great mysteries of capitalism that there is no invisible hand that joins good language and good profits. If anything, the hand pushes the two apart.
Even in industries that make their money by selling messages there is no appetite for clarity. Just last week a reader sent me the following sentence from the blog of Bob Jeffrey, the head of JWT, in which he describes what his vast and successful advertising agency does: “Global consumers are rapidly re-evaluating and readjusting their value paradigms and purchasing decisions. Our job is to keep our ear to the ground with these consumers, providing relevant real-time insight to our clients that inspires cutting-edge, cost-efficient solutions.”
The Apple version of this would be something like: “Consumers can change so we try to keep up.” This version reads better, but it is not hard to see why Mr Jeffrey didn’t put it that way. “A relevant real-time insight” sounds like something that a befuddled client might pay more money for.
An even better example of the link between high profits and low language was on the appointments pages in the Financial Times 10 days ago. It was an advertisement from “one of the largest and most trusted banking and financial services organisations in the world” which was hoping to hire a “customer journey re-engineering manager”.
This title contains three layers of obfuscation: the ludicrous yet ubiquitous idea that a banking customer is on a journey; the idea that this journey needs re-engineering; the notion that this needs managing. There is only one conclusion to be drawn: surplus profits generate bonuses and bullshit in equal measure.
The only customers who are really on a journey are those of the transport sector. And as I looked at a collection of them chugging along into Moorgate station last week I thought of another reason why Apple’s brave effort to rehabilitate language won’t catch on. Words are finished. Customers on journeys don’t read. They watch videos on their iPads, iPhones and iPods.
lucy.kellaway@ft.com
-----------
Thanks for the insightful article on Apple & Words.
But the fact is "There has hardly ever been a fortune created without a monopoly of some sort, or at least an oligopoly. This is the natural path of industrialization: invention, propagation, adoption, control" - Wired Magazine.
The reason why Microsoft and others of its ilk do not bother, inspite of their shoddy products is because they are monopoly or oligopoly. Why bother. On the other hand Apple is unique because a) Steve Jobs b) it deals in the niche market c) To survive & succeed against the oligopoly like Microsoft, it needs to constantly and creatively innovate.
That is why Apple's achievement is nothing short of a 'black swan' event. We should celebrate while it lasts.
Then you may ask, why is that an exception rather than rule?
Unfortunately, that is because CAPITALISM is all about Monopoly or Oligopoly not Competition or Choice. From Murdoch's Sky to Microsoft's Window, it is Monopoly all the way...Who has the time for Words......when cash register is ringing...
Regards,
Pradeep Kabra
----------------
Sent at 09:00 (GMT+01:00). Current time there: 11:57. ✆
to pradeepkabra@gmail.com
date 23 September 2010 09:00
subject Re: Words to describe the glory of Apple
mailed-by ft.com
Dear Pradeep
Thanks for your wise message. I fear you are quite right.
Lucy Kellaway
--------------
Words to describe the glory of Apple
By Lucy Kellaway
Published: September 19 2010 19:26 | Last updated: September 19 2010 19:26
Like most Brits, I find success in others pretty hard to cope with. When that success is combined with good looks, I can’t tolerate it at all.
Apple’s continued glory eats away at me like a maggot at my core. I long for it to pick up some bruises. When the iPad came out, I prayed that it would be awful. My prayers were not heard: like all Apple products, it is sleek and gorgeous, and in due course I shall go to one of its wondrous temples of consumption and grumpily buy one.
Now I find that Apple has succeeded in an area even more revolutionary than designing beautiful products that are easy to use. This time, though, I feel no discomfort. Apple has discovered something that other companies have long forgotten, if they ever knew: language can also be beautiful and easy to use. Words can be fun to read. They can look elegant. They can make you laugh.
Earlier this month it published a set of guidelines for apps sold at its App Store. According to the laws that govern this sort of thing, this document should have been doubly unreadable. It was a list of legal requirements and was aimed at techies. Instead, it was funny and clear, and I found myself reading it effortlessly, even though I barely know what an “app” is.
“We have over 250,000 apps in the App Store. We don’t need any more Fart apps. If your app doesn’t do something useful or provide some form of lasting entertainment, it may not be accepted.”
The tone is direct, comic and elegantly threatening.
“We will reject apps for any content or behaviour that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, I’ll know it when I see it. And we think that you will also know it when you cross it.”
Now compare this to the standard stuff on the Microsoft website. The brand new browser, it says, “delivers a richer, faster, and more business-ready Web experience. Architected to run HTML 5, the beta enables developers to utilise standardised mark-up language across multiple browsers”. Well I never. Reading this, I’m bored and restless, irritated and alienated.
Given the towering superiority of the first linguistic style over the second, will it catch on? Will other companies copy Apple’s language just as they have copied its design?
You might think so. You might think there was a clear commercial advantage to be had in writing clearly and stylishly. But you would be wrong. There is no sign that Microsoft has been suffering from its stolid, dodgy way with words. Indeed it is one of the great mysteries of capitalism that there is no invisible hand that joins good language and good profits. If anything, the hand pushes the two apart.
Even in industries that make their money by selling messages there is no appetite for clarity. Just last week a reader sent me the following sentence from the blog of Bob Jeffrey, the head of JWT, in which he describes what his vast and successful advertising agency does: “Global consumers are rapidly re-evaluating and readjusting their value paradigms and purchasing decisions. Our job is to keep our ear to the ground with these consumers, providing relevant real-time insight to our clients that inspires cutting-edge, cost-efficient solutions.”
The Apple version of this would be something like: “Consumers can change so we try to keep up.” This version reads better, but it is not hard to see why Mr Jeffrey didn’t put it that way. “A relevant real-time insight” sounds like something that a befuddled client might pay more money for.
An even better example of the link between high profits and low language was on the appointments pages in the Financial Times 10 days ago. It was an advertisement from “one of the largest and most trusted banking and financial services organisations in the world” which was hoping to hire a “customer journey re-engineering manager”.
This title contains three layers of obfuscation: the ludicrous yet ubiquitous idea that a banking customer is on a journey; the idea that this journey needs re-engineering; the notion that this needs managing. There is only one conclusion to be drawn: surplus profits generate bonuses and bullshit in equal measure.
The only customers who are really on a journey are those of the transport sector. And as I looked at a collection of them chugging along into Moorgate station last week I thought of another reason why Apple’s brave effort to rehabilitate language won’t catch on. Words are finished. Customers on journeys don’t read. They watch videos on their iPads, iPhones and iPods.
lucy.kellaway@ft.com
-----------
Saturday, 4 September 2010
10 Things You Need to Know About Sleep
This excellent work by BBC's Kate Silverton is relevant to all of us. I gained immensely from the earlier documentary on losing weight and food in general - http://pkabrathoughts.blogspot.com/2009/05/10-things-you-need-to-know-about-losing.html
Individually they are all effective, combined they form a potent tool to lead a healthy life.
For UK Users it is still available on - http://www.bbc.co.uk/iplayer/episode/b00j08h7/10_Things_You_Need_to_Know_About_Sleep/
You can also get more tips on getting a good night's sleep on the BBC Headroom site:
http://www.bbc.co.uk/headroom/newsandevents/programmes/sleep.shtml
1. Bath Before Bedtime - Internal temperature is key to sleep. A warm bath atleast an hour before sleep helps in raising the internal temperature and then dropping it thereby inducing sleep.
2. Stay In The Bedroom Only To Sleep & Get Up At The Same Time - This discipline helps in maintaining the sleep pattern and helps to beat insomnia.
3. Take A Nap In The Afternoon - A short nap of 30 minutes is great for body between 2-5 PM every-day. But for naps to work, they should be taken at the right time. Obviously 2-5 PM is the best time for nap. 7-12 AM & 6-8 PM is bad time for napping.
4. Manage Snoring - Since snoring has a negative effect on 1/5 relationships and also for the well-being, it is extremely important to manage it properly. It has serious health conditions including High Blood Pressure, Heart Attacks & Strokes in extreme cases. Though the program doesn't give a specific way of beating snoring apart from some off-the-shelf commercial & expensive solutions, I believe regular exercise & Breathing Kriya along with Jala/Sutra Nethi helps in beating it.
5. Maintain Sleep Cycles - Our sleep is made up of 5 stages and a set of 5 stages is called a cycle. In Stage 1 we feel Drowsy. In Stage 2 we fall into a light sleep. In Stage 3 & 4, we are in deep sleep. In Stage 5 we dream with rapid eye movements. A healthy night sleep will have 4-6 complete cycles. Disrupting our sleep cycle can make us lose concentration, mood swings and damage our long-term health. Generally drinking alcohol and coffee before sleep disrupts our sleep cycle. Don't Drink high quantity of Coffee or Alcohol more than 4 hours before bed.
6. Power Of A Daylight - Melatonim levels decides our sleepy state. They can be reduced by Blue Light. So if you start your work early, getting up and switching on Blue Light can make a huge difference to induce the daylight in your system. But when you are sleeping, KEEP THE CURTAINS SHUT.
7. What We Eat - Atleast 4 hours before sleep, try and eat food rich in Carbohydrates. Carbs helps sleep while Proteins perk you up. So for instance a diet full of proteins like fish is good in lunch for your sleep.
8. How To Beat Jet-Lag - It is simple really. Forego your airline food. Eat again at regular meal-time in the new time-zone.
9. Relax - Stress obviously is no good for sleep. The easy way of relaxing apart from my favorite breathing Kriya technique is tensing and relaxing body muscles. Starting from toe to head. Muscle Relaxation Therapy helps to lower the Crotisol level and minimizes stress.
10. Herbal Potions - A very old technique but still effective in this computerized age. Apart for Green Tea and its variations, Valerian and Lavender herbs are excellent to help you relax and sleep.
Individually they are all effective, combined they form a potent tool to lead a healthy life.
For UK Users it is still available on - http://www.bbc.co.uk/iplayer/episode/b00j08h7/10_Things_You_Need_to_Know_About_Sleep/
You can also get more tips on getting a good night's sleep on the BBC Headroom site:
http://www.bbc.co.uk/headroom/newsandevents/programmes/sleep.shtml
1. Bath Before Bedtime - Internal temperature is key to sleep. A warm bath atleast an hour before sleep helps in raising the internal temperature and then dropping it thereby inducing sleep.
2. Stay In The Bedroom Only To Sleep & Get Up At The Same Time - This discipline helps in maintaining the sleep pattern and helps to beat insomnia.
3. Take A Nap In The Afternoon - A short nap of 30 minutes is great for body between 2-5 PM every-day. But for naps to work, they should be taken at the right time. Obviously 2-5 PM is the best time for nap. 7-12 AM & 6-8 PM is bad time for napping.
4. Manage Snoring - Since snoring has a negative effect on 1/5 relationships and also for the well-being, it is extremely important to manage it properly. It has serious health conditions including High Blood Pressure, Heart Attacks & Strokes in extreme cases. Though the program doesn't give a specific way of beating snoring apart from some off-the-shelf commercial & expensive solutions, I believe regular exercise & Breathing Kriya along with Jala/Sutra Nethi helps in beating it.
5. Maintain Sleep Cycles - Our sleep is made up of 5 stages and a set of 5 stages is called a cycle. In Stage 1 we feel Drowsy. In Stage 2 we fall into a light sleep. In Stage 3 & 4, we are in deep sleep. In Stage 5 we dream with rapid eye movements. A healthy night sleep will have 4-6 complete cycles. Disrupting our sleep cycle can make us lose concentration, mood swings and damage our long-term health. Generally drinking alcohol and coffee before sleep disrupts our sleep cycle. Don't Drink high quantity of Coffee or Alcohol more than 4 hours before bed.
6. Power Of A Daylight - Melatonim levels decides our sleepy state. They can be reduced by Blue Light. So if you start your work early, getting up and switching on Blue Light can make a huge difference to induce the daylight in your system. But when you are sleeping, KEEP THE CURTAINS SHUT.
7. What We Eat - Atleast 4 hours before sleep, try and eat food rich in Carbohydrates. Carbs helps sleep while Proteins perk you up. So for instance a diet full of proteins like fish is good in lunch for your sleep.
8. How To Beat Jet-Lag - It is simple really. Forego your airline food. Eat again at regular meal-time in the new time-zone.
9. Relax - Stress obviously is no good for sleep. The easy way of relaxing apart from my favorite breathing Kriya technique is tensing and relaxing body muscles. Starting from toe to head. Muscle Relaxation Therapy helps to lower the Crotisol level and minimizes stress.
10. Herbal Potions - A very old technique but still effective in this computerized age. Apart for Green Tea and its variations, Valerian and Lavender herbs are excellent to help you relax and sleep.
Friday, 30 July 2010
Democracy or 'Sham'ocracy
How does the Democracy or shall we say 'Sham'ocracy works in most of the West (USA & UK primarily)
Well, this is how it works:
1. 40-60% of eligible voters vote to elect politicians
2. The politicians are financed by big corporates, businessmen and bankers on wall street
3. Whoever gets the biggest backing has the highest cash to splash
4. Whoever splashes more has the best chance of getting elected
5. Once elected, the politicians have to return the favours of their cash-sponsers
6. They do that in a very transparant and democratic way by killing the regulation and loosening the rules
So, what is the problem?
1. Well, the rich gets richer while the poor stays poorer
2. The poor are taxed to subsidise the rich
3. Equitable distribution of wealth is thrown out of window in the mirage of for example 'the great american dream'
4. Life's value is measured just in money's worth. Quality of Life can be thrown in the bin
5. Natural resources are exploited in the name of quarterly growth
So, what is the solution?
1. Banning all political donations in cash/kind
2. Having a democracy tax which funds the elections
3. Voting to be made 'compulsory' for all eligible people
4. Putting the best resources behind regulation
5. Equitable or near-equitable society should be the the central aim of the state
6. All the utilities should be state-owned but privatised only to run and manage efficiently
7. State should have permanent and thriving presence in Media (ex. BBC in UK)
Unless this happens, it is safe to say, we live in 'Sham'ocracy where the government is nothing but the mouth-piece of their paymasters (corporates, big businessmen and bankers)
That is why, it is no surprise when David Cameron visits US, top on his agenda is protecting BP. When Kraft was cutting jobs after taking over Cadbury in UK, the government said, we don't interfere in the private sector business!!!
That is why, it is no surprise when David Cameron visits India, he take a huge delegation of 400 people (almost all of them are big corporate guys, rich businessmen and banks).
That is why, it is no surprise when in India, the UK chancellor George Osborne spends most of his time in Mumbai, selling the financial services to the Indians. Forget the 'big-talk' on banking regulation at home.
So, you see, what we in West call Democracy is actually 'Sham'ocracy.
Regards,
Pradeep Kabra
Well, this is how it works:
1. 40-60% of eligible voters vote to elect politicians
2. The politicians are financed by big corporates, businessmen and bankers on wall street
3. Whoever gets the biggest backing has the highest cash to splash
4. Whoever splashes more has the best chance of getting elected
5. Once elected, the politicians have to return the favours of their cash-sponsers
6. They do that in a very transparant and democratic way by killing the regulation and loosening the rules
So, what is the problem?
1. Well, the rich gets richer while the poor stays poorer
2. The poor are taxed to subsidise the rich
3. Equitable distribution of wealth is thrown out of window in the mirage of for example 'the great american dream'
4. Life's value is measured just in money's worth. Quality of Life can be thrown in the bin
5. Natural resources are exploited in the name of quarterly growth
So, what is the solution?
1. Banning all political donations in cash/kind
2. Having a democracy tax which funds the elections
3. Voting to be made 'compulsory' for all eligible people
4. Putting the best resources behind regulation
5. Equitable or near-equitable society should be the the central aim of the state
6. All the utilities should be state-owned but privatised only to run and manage efficiently
7. State should have permanent and thriving presence in Media (ex. BBC in UK)
Unless this happens, it is safe to say, we live in 'Sham'ocracy where the government is nothing but the mouth-piece of their paymasters (corporates, big businessmen and bankers)
That is why, it is no surprise when David Cameron visits US, top on his agenda is protecting BP. When Kraft was cutting jobs after taking over Cadbury in UK, the government said, we don't interfere in the private sector business!!!
That is why, it is no surprise when David Cameron visits India, he take a huge delegation of 400 people (almost all of them are big corporate guys, rich businessmen and banks).
That is why, it is no surprise when in India, the UK chancellor George Osborne spends most of his time in Mumbai, selling the financial services to the Indians. Forget the 'big-talk' on banking regulation at home.
So, you see, what we in West call Democracy is actually 'Sham'ocracy.
Regards,
Pradeep Kabra
Wednesday, 28 July 2010
RE: BBC does business a dramatic disservice
Dear Luke,
In your article, you mention that BBC does business a dramatic disservice. The fact is, if BBC stops broadcasting a program like Dragon's Den or The Apprentice, then will private channels not JUMP at the same 'trash'? Your argument is muddled up. It is not clear if you are against BBC or you are criticizing BBC, if yes, then on who's behalf? I'm perfectly happy with the ad-free high-quality television and educational content which BBC provides. Your assertion that BBC 'acting as a spending empire that extorts money from taxpayers' is utter non-sense. Just look at the state of television in USA. All trash. 30% of ads and hardly any educational.
Coming to the specific criticisms of Dragon's Den, I agree. But instead of suggesting constructive improvements to the format of Dragon's Den, you are blindly criticizing BBC.
Regards,
Pradeep Kabra
--------------------------------------------
BBC does business a dramatic disservice
Luke Johnson The entrepreneur
The BBC has always regarded business with suspicion. As an institution funded by a regressive poll tax, it struggles mightily with the whole concept of the profit motive, or indeed the very concept of organisations having to actually generate revenues to pay the bills – rather than just acting as a spending empire that extorts money from taxpayers. For the BBC, the assumption is that business is ruthless, domineering and egotistical. And so the grotesque programme
Dragon’s Den fits their in-house prejudices perfectly.
Dragon’s Den is a cartoon masquerading as factual television. It has more in common with broadcast wrestling than the real world of investing. The very idea that genuine venture capital takes place in such a ludicrous way is a farce. It is obvious that many misguided projects are encouraged to present because they provide a few cheap laughs. Does it serve the cause of enterprise to have multimillionaires humiliate inventors, and cackle like schoolboys while treading on people’s dreams? But the BBC – despite being a public service broadcaster – doesn’t care. It all feeds the ratings monster, even if it does a disservice to innovation and the private sector.
Having chaired a rival broadcaster for six years, I understand well that television is a mass medium that is obliged to use broad brushstrokes. But in the case of Dragon’s Den, entrepreneurship has been dumbed down to the status of staged entertainment. This is a tragedy. Britain needs entrepreneurs who are positive role models, who inspire others, and who help create jobs and accelerate our recovery from the recession. The BBC gives us the bullying of The Apprentice (another idea formatted from elsewhere) and the superficiality of Dragon’s Den.
Perhaps in 2005, when Dragon’s Den was first shown in Britain, there was a degree of novelty and even a modest element of authenticity about it, even if it was a derivative format copied from Japan. But now in its eighth series, the concept has been milked dry and has descended to the level of caricature. The “Dragons” participate for the publicity, the producers want tears and jokes. The amount the investors risk is small change to them, but in return the show buys them plenty of exposure. As Simon Woodroffe, one of the original Dragons, said: “The thing to remember is that when you walk up the stairs [to pitch an idea] it’s not five people thinking ‘How am I going to be able to make an investment here?’ They’re actually thinking ‘Am I going to be the star of this next little piece?’”
Real angel investing is not a game. It is a vital source of funding for early stage companies that may represent the next wave of industry. It succeeds when it involves rigorous due diligence, conscientious research and professionalism. It involves long-term backing and collaboration, not macho bidding contests based on a two-minute pitch. It is a shame such a serious matter is debased by this sort of fake drama, much of it cooked up for the cameras for prime-time consumption.
It takes little imagination to produce shows like The Apprentice and Dragon’s Den, which pander to popular misconceptions about business and entrepreneurs. I suppose the patronising behaviour and casual cruelty are meant to toughen up candidates for the rigours of the market and the workplace. In reality they display a distorted picture closer to slapstick comedy than a genuine 21st century corporation.
As long as the audience and participants realise the programme is an exploitative sham, then I suppose it is merely a missed opportunity. But I do wonder why they bother. The entire purpose of the BBC is to deliver public goods in the form of high quality transmissions that are edifying and uplifting. After all, the BBC does not come cheap. Prosecutions of licence fee evaders undertaken by the British courts on the BBC’s behalf represent at least 10 per cent of all prosecutions of any kind. Meanwhile, law abiding citizens contribute £3.6bn ($5.6bn, €4.3bn) a year – all to deliver misleading confections like Dragon’s Den. When will the BBC adopt a more constructive and grown-up approach to business and free enterprise? lukej@riskcapitalpartners.co.uk The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts
In your article, you mention that BBC does business a dramatic disservice. The fact is, if BBC stops broadcasting a program like Dragon's Den or The Apprentice, then will private channels not JUMP at the same 'trash'? Your argument is muddled up. It is not clear if you are against BBC or you are criticizing BBC, if yes, then on who's behalf? I'm perfectly happy with the ad-free high-quality television and educational content which BBC provides. Your assertion that BBC 'acting as a spending empire that extorts money from taxpayers' is utter non-sense. Just look at the state of television in USA. All trash. 30% of ads and hardly any educational.
Coming to the specific criticisms of Dragon's Den, I agree. But instead of suggesting constructive improvements to the format of Dragon's Den, you are blindly criticizing BBC.
Regards,
Pradeep Kabra
--------------------------------------------
BBC does business a dramatic disservice
Luke Johnson The entrepreneur
The BBC has always regarded business with suspicion. As an institution funded by a regressive poll tax, it struggles mightily with the whole concept of the profit motive, or indeed the very concept of organisations having to actually generate revenues to pay the bills – rather than just acting as a spending empire that extorts money from taxpayers. For the BBC, the assumption is that business is ruthless, domineering and egotistical. And so the grotesque programme
Dragon’s Den fits their in-house prejudices perfectly.
Dragon’s Den is a cartoon masquerading as factual television. It has more in common with broadcast wrestling than the real world of investing. The very idea that genuine venture capital takes place in such a ludicrous way is a farce. It is obvious that many misguided projects are encouraged to present because they provide a few cheap laughs. Does it serve the cause of enterprise to have multimillionaires humiliate inventors, and cackle like schoolboys while treading on people’s dreams? But the BBC – despite being a public service broadcaster – doesn’t care. It all feeds the ratings monster, even if it does a disservice to innovation and the private sector.
Having chaired a rival broadcaster for six years, I understand well that television is a mass medium that is obliged to use broad brushstrokes. But in the case of Dragon’s Den, entrepreneurship has been dumbed down to the status of staged entertainment. This is a tragedy. Britain needs entrepreneurs who are positive role models, who inspire others, and who help create jobs and accelerate our recovery from the recession. The BBC gives us the bullying of The Apprentice (another idea formatted from elsewhere) and the superficiality of Dragon’s Den.
Perhaps in 2005, when Dragon’s Den was first shown in Britain, there was a degree of novelty and even a modest element of authenticity about it, even if it was a derivative format copied from Japan. But now in its eighth series, the concept has been milked dry and has descended to the level of caricature. The “Dragons” participate for the publicity, the producers want tears and jokes. The amount the investors risk is small change to them, but in return the show buys them plenty of exposure. As Simon Woodroffe, one of the original Dragons, said: “The thing to remember is that when you walk up the stairs [to pitch an idea] it’s not five people thinking ‘How am I going to be able to make an investment here?’ They’re actually thinking ‘Am I going to be the star of this next little piece?’”
Real angel investing is not a game. It is a vital source of funding for early stage companies that may represent the next wave of industry. It succeeds when it involves rigorous due diligence, conscientious research and professionalism. It involves long-term backing and collaboration, not macho bidding contests based on a two-minute pitch. It is a shame such a serious matter is debased by this sort of fake drama, much of it cooked up for the cameras for prime-time consumption.
It takes little imagination to produce shows like The Apprentice and Dragon’s Den, which pander to popular misconceptions about business and entrepreneurs. I suppose the patronising behaviour and casual cruelty are meant to toughen up candidates for the rigours of the market and the workplace. In reality they display a distorted picture closer to slapstick comedy than a genuine 21st century corporation.
As long as the audience and participants realise the programme is an exploitative sham, then I suppose it is merely a missed opportunity. But I do wonder why they bother. The entire purpose of the BBC is to deliver public goods in the form of high quality transmissions that are edifying and uplifting. After all, the BBC does not come cheap. Prosecutions of licence fee evaders undertaken by the British courts on the BBC’s behalf represent at least 10 per cent of all prosecutions of any kind. Meanwhile, law abiding citizens contribute £3.6bn ($5.6bn, €4.3bn) a year – all to deliver misleading confections like Dragon’s Den. When will the BBC adopt a more constructive and grown-up approach to business and free enterprise? lukej@riskcapitalpartners.co.uk The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts
Re: Banking needs more robust stress tests than these
Dear Mr. Kay,
Thanks for the article in today's FT.
In the last paragraph, you mention lucidly that "Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital."
You end it by saying, "The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008"
The true lesson is that Democracy in West is a sham where the election funding is controlled by the corporates and rich few. The only way to resolve it is by a) banning all political donations in cash/kind b) having a democracy tax which funds the elections c) voting to be made 'compulsory' for all eligible people.
Till these things are not resolved, we will see the same shameful situations in different guises across the spectrum.
Regards,
Pradeep Kabra
-----------------------------------
Banking needs more robust stress tests than these
by John Kay in Financial Times, 28-Jul-2010
Stress tests should be subject to stress tests. Would the banks that passed the version of the test imposed by Europe’s financial regulators be able to fund themselves adequately if implicit or explicit state guarantees of their non-deposit liabilities were withdrawn? This further test should be applied to each bank individually, and for the group of systemically important banks as a whole. The outcome would indicate how far Europe’s banks have progressed in being able to survive without public subsidy. Not far, I suspect.
The concept of stress tests is derived from the procedures used to ensure the robustness of complex engineering structures. There are three stages. You begin by testing each component in conditions considerably more demanding than it is likely to encounter. Then, you review system design to ensure that, even if several elements break down simultaneously, this does not jeopardise the integrity of the whole structure. Third, and most importantly, you test the total system for outcomes far outside the range of experience. You do not ask, “Will the bridge survive a strong gust of wind?” You ask, “Will it survive a gale worse than any at this site in the last century?”
There is much that the finance sector could learn from this, but no indication it has done so. The adverse scenario of the bank stress tests, far from being outside the range of experience or expectation, is not far from the mean. Sovereign default is not considered, since politicians have decreed it will not happen, although allowance is made for the possibility that pesky markets might not believe that assertion. Any risk manager in a bank who has not considered far more extreme developments than those in the stress tests should be fired.
And that illustrates a problem. One of many adverse consequences of the Basel capital requirements was that banks that held more than the regulatory minimum came under pressure to justify their “surplus” capital. It is easy to imagine the board of a bank feeling reassured when told that their institution is secure against the most adverse scenario postulated by their external regulator – the stress tests are designed to provide precisely that reassurance to capital markets. So the risk manager whose job is in jeopardy today is not the one who fails to insist on more pessimistic assessments than the stress tests: it is the one who does.
Worse, the stress tests are self-referential. Their purpose is to show, not that the bank is sound, but that it meets the requirements for regulatory capital. But one lesson of 2008 was that capital adequacy was almost irrelevant in a crisis. Most institutions met their regulatory capital obligations on the day they failed. Queues formed outside the branches of Northern Rock only weeks after the bank had announced (but before it had implemented) plans to return its “surplus” capital to shareholders.
Depositors were not satisfied by the assurance that the bank was compliant, and they were right. When the Tacoma Narrows Bridge collapsed in 1940, experts said the bridge had satisfied the highest engineering standards even though it had unfortunately fallen down.
Engineers have learned the lesson, but financial regulators have not. Capital adequacy was designed for a world in which a lender of last resort would turn the good but illiquid assets of a solvent bank into cash. But when uncertainty about the value of complex assets and liabilities becomes so great that the bank itself, far less any central bank or external lender, cannot reliably ascertain the true position, capital and cash are very different things.
Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital. The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008. johnkay@johnkay.com
Thanks for the article in today's FT.
In the last paragraph, you mention lucidly that "Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital."
You end it by saying, "The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008"
The true lesson is that Democracy in West is a sham where the election funding is controlled by the corporates and rich few. The only way to resolve it is by a) banning all political donations in cash/kind b) having a democracy tax which funds the elections c) voting to be made 'compulsory' for all eligible people.
Till these things are not resolved, we will see the same shameful situations in different guises across the spectrum.
Regards,
Pradeep Kabra
-----------------------------------
Banking needs more robust stress tests than these
by John Kay in Financial Times, 28-Jul-2010
Stress tests should be subject to stress tests. Would the banks that passed the version of the test imposed by Europe’s financial regulators be able to fund themselves adequately if implicit or explicit state guarantees of their non-deposit liabilities were withdrawn? This further test should be applied to each bank individually, and for the group of systemically important banks as a whole. The outcome would indicate how far Europe’s banks have progressed in being able to survive without public subsidy. Not far, I suspect.
The concept of stress tests is derived from the procedures used to ensure the robustness of complex engineering structures. There are three stages. You begin by testing each component in conditions considerably more demanding than it is likely to encounter. Then, you review system design to ensure that, even if several elements break down simultaneously, this does not jeopardise the integrity of the whole structure. Third, and most importantly, you test the total system for outcomes far outside the range of experience. You do not ask, “Will the bridge survive a strong gust of wind?” You ask, “Will it survive a gale worse than any at this site in the last century?”
There is much that the finance sector could learn from this, but no indication it has done so. The adverse scenario of the bank stress tests, far from being outside the range of experience or expectation, is not far from the mean. Sovereign default is not considered, since politicians have decreed it will not happen, although allowance is made for the possibility that pesky markets might not believe that assertion. Any risk manager in a bank who has not considered far more extreme developments than those in the stress tests should be fired.
And that illustrates a problem. One of many adverse consequences of the Basel capital requirements was that banks that held more than the regulatory minimum came under pressure to justify their “surplus” capital. It is easy to imagine the board of a bank feeling reassured when told that their institution is secure against the most adverse scenario postulated by their external regulator – the stress tests are designed to provide precisely that reassurance to capital markets. So the risk manager whose job is in jeopardy today is not the one who fails to insist on more pessimistic assessments than the stress tests: it is the one who does.
Worse, the stress tests are self-referential. Their purpose is to show, not that the bank is sound, but that it meets the requirements for regulatory capital. But one lesson of 2008 was that capital adequacy was almost irrelevant in a crisis. Most institutions met their regulatory capital obligations on the day they failed. Queues formed outside the branches of Northern Rock only weeks after the bank had announced (but before it had implemented) plans to return its “surplus” capital to shareholders.
Depositors were not satisfied by the assurance that the bank was compliant, and they were right. When the Tacoma Narrows Bridge collapsed in 1940, experts said the bridge had satisfied the highest engineering standards even though it had unfortunately fallen down.
Engineers have learned the lesson, but financial regulators have not. Capital adequacy was designed for a world in which a lender of last resort would turn the good but illiquid assets of a solvent bank into cash. But when uncertainty about the value of complex assets and liabilities becomes so great that the bank itself, far less any central bank or external lender, cannot reliably ascertain the true position, capital and cash are very different things.
Shamefully, the purpose of the stress tests is not to ensure that depositors’ money is safe or that taxpayers will not be called on again. The purpose is to reassure banks and their shareholders that they will not be required to provide significant additional capital. The lesson – perhaps the only lesson – of the stress tests is that Europe’s politicians and regulators have not begun to address, far less resolve, the issues posed by the crisis of 2008. johnkay@johnkay.com
Thursday, 22 July 2010
Spain's Football Dominance - What Next?
They say, it is easier to reach the top than to maintain it. What can be the possible reasons for that? Well, there can be numerous starting from lack of ambition to tiredness to lack of zeal or enthusiasm to self-contentment to hubris. So what can be done about it? More specifically, what should Spanish football team do to maintain their football dominance after holding aloft European Cup and now World Cup?
Without going into the philosophical solutions, I would say that they should do the following:
a) Make Cecs Fabregas regular in the starting line-up.
b) Encourage their forwards to play like mid-fielders. With players like Xavi, Iniesta and Fabregas who needs forwards anyway?
c) Get rid of Ramos.
d) Send Cruyff or somebody from his line of school to Real Madrid's academy to coach youngsters
Bingo. It wouldn't be far-fetched to see Spain repeating the feat of European Cup & World Cup in the coming four years. Wouldn't that be a fitting end to the careers of gems like Xavi & Iniesta?
Pradeep Kabra
Without going into the philosophical solutions, I would say that they should do the following:
a) Make Cecs Fabregas regular in the starting line-up.
b) Encourage their forwards to play like mid-fielders. With players like Xavi, Iniesta and Fabregas who needs forwards anyway?
c) Get rid of Ramos.
d) Send Cruyff or somebody from his line of school to Real Madrid's academy to coach youngsters
Bingo. It wouldn't be far-fetched to see Spain repeating the feat of European Cup & World Cup in the coming four years. Wouldn't that be a fitting end to the careers of gems like Xavi & Iniesta?
Pradeep Kabra
Monday, 19 July 2010
Re: Financial Reform
Dear Sir,
You correctly mention that the real work starts now on the financial reform in-spite of the incompleteness of the same.
But the main point is, issue like 'minimum capital requirements' though pending have been left of for Basel standards to decide, what about the other three-fourths of the reform which has not even been considered viz., Housing Loans/Market Reform (read Fannie & Freddie), Insurance Reform & Rating Agency Reform.
It is a pity that while the biggest financial and economic meltdown since 1930s produce so little reforms from a democratic government in US, it also shows the clout of the bankers on CAPITOL HILL!!!
Regards,
Pradeep Kabra
------------------------------------------
Financial reform - Editorial in Financial Times, 19-Ju-2010
Dodd-Frank bill is historic, but the work is unfinished
The US financial regulation bill passed by Congress last week is comprehensive and far-reaching. The White House, whose first design proved influential, and the bill’s sponsors are right to call it historic. But few delude themselves that the new law settles much. The real work starts now.
The Dodd-Frank law expands the powers and responsibilities of multiple agencies, but says little about what the new rules will require of financial institutions: so many pages, so little content. In many instances, Congress has told the regulators to balance conflicting objectives but given little guidance about how trade-offs – for instance, between financial safety and availability of credit – should be struck.
Wider discretion was in many cases desirable or inevitable. Rules must fit the circumstances. Nonetheless, it is a hazard and a cause of uncertainty. The regulators must waste no time in staffing up, clarifying their rules and methods, and learning how to co-operate.
Better interaction among regulators will be vital. The complexity of the old organisation chart helped cause the crisis – emerging concerns cut across jurisdictions – but the new one is no simpler. According to most counts (there is room for dispute, which tells you something), the number of agencies has increased. New co-ordination mechanisms are in place, and much depends on them.
The new Financial Stability Oversight Council, the principal co-ordinating body, will be responsible for systemic safety. The Fed will be its main operating arm. These are good innovations, but how the system functions will be for its constituent parts to decide.
Maintaining a sense of urgency as the politicians, for the moment, step aside will be a challenge. The same is true of the reform’s other main innovations: early resolution authority, which will not be tested until a big, complex, troubled firm has to be wound up; the diluted Volcker rule, which curbs banks’ proprietary trading without defining proprietary trading; and derivatives regulation, which is to be tightened through standardisation and exchange trading, but with exemptions of uncertain scope.
Most important, the bill is almost silent on capital requirements. Eyes must turn now to the Basel process, in which national regulators are negotiating that crucial issue. Progress has been slow, and there are indications that the new rules may be too lax. If Basel fails, the innovations of the US law will be undermined, and the whole project rendered somewhat beside the point.
You correctly mention that the real work starts now on the financial reform in-spite of the incompleteness of the same.
But the main point is, issue like 'minimum capital requirements' though pending have been left of for Basel standards to decide, what about the other three-fourths of the reform which has not even been considered viz., Housing Loans/Market Reform (read Fannie & Freddie), Insurance Reform & Rating Agency Reform.
It is a pity that while the biggest financial and economic meltdown since 1930s produce so little reforms from a democratic government in US, it also shows the clout of the bankers on CAPITOL HILL!!!
Regards,
Pradeep Kabra
------------------------------------------
Financial reform - Editorial in Financial Times, 19-Ju-2010
Dodd-Frank bill is historic, but the work is unfinished
The US financial regulation bill passed by Congress last week is comprehensive and far-reaching. The White House, whose first design proved influential, and the bill’s sponsors are right to call it historic. But few delude themselves that the new law settles much. The real work starts now.
The Dodd-Frank law expands the powers and responsibilities of multiple agencies, but says little about what the new rules will require of financial institutions: so many pages, so little content. In many instances, Congress has told the regulators to balance conflicting objectives but given little guidance about how trade-offs – for instance, between financial safety and availability of credit – should be struck.
Wider discretion was in many cases desirable or inevitable. Rules must fit the circumstances. Nonetheless, it is a hazard and a cause of uncertainty. The regulators must waste no time in staffing up, clarifying their rules and methods, and learning how to co-operate.
Better interaction among regulators will be vital. The complexity of the old organisation chart helped cause the crisis – emerging concerns cut across jurisdictions – but the new one is no simpler. According to most counts (there is room for dispute, which tells you something), the number of agencies has increased. New co-ordination mechanisms are in place, and much depends on them.
The new Financial Stability Oversight Council, the principal co-ordinating body, will be responsible for systemic safety. The Fed will be its main operating arm. These are good innovations, but how the system functions will be for its constituent parts to decide.
Maintaining a sense of urgency as the politicians, for the moment, step aside will be a challenge. The same is true of the reform’s other main innovations: early resolution authority, which will not be tested until a big, complex, troubled firm has to be wound up; the diluted Volcker rule, which curbs banks’ proprietary trading without defining proprietary trading; and derivatives regulation, which is to be tightened through standardisation and exchange trading, but with exemptions of uncertain scope.
Most important, the bill is almost silent on capital requirements. Eyes must turn now to the Basel process, in which national regulators are negotiating that crucial issue. Progress has been slow, and there are indications that the new rules may be too lax. If Basel fails, the innovations of the US law will be undermined, and the whole project rendered somewhat beside the point.
Friday, 16 July 2010
Re: Watching Google
As published in Financial Times on 20-Jul-2010
Dear Sir,
In your editorial you mention that "Google is not obviously being evil but it is such a powerful technology company that it has the potential to go astray".
Well, but as Google argues - if they mis-use their trust of their customers, the competition is just a click away unlike how majority of people are all locked in Microsoft's inept operating systems.
Unfortunately, the job of most of the arm-chair observers is just to make these kind of comments. What Google has provided is the vision for so many services which were just unimaginable or available only to elite few.
Firstly, they have come up with Search which was ignored by all the big tech companies. (inspite of their so call huge R&D budgets!!!) Which itself has changed the way we live our lives. Which has taken away the stress from our lives by connecting us to what we seek.
The markets where they have entered late (like email), they have redefined the scope of the status-quo by making the product better. (The concept of Conversation in an email to minimum 1 GB storage!!!)
Finally, where they have purchased the companies to get an entry point (like Google Maps or Youtube), they have left the start-ups intact after providing all the resources to pursue their passion rather than killing them in the big beauracratic machine.
So, before worrying about whether Google is evil, you should be encouraging other companies to behave like Google. Think how our lives were before the Google Search, Google Maps, Gmail, Google Earth, Google Apps, Youtube, Google Books etc.,
Regards,
Pradeep Kabra
-----------------------------------
Watching Google - Editorial in Financial Times, 16Jul2010
Regulators need to keep an eye on a powerful company
Google is an innovative company that has produced many benefits for consumers with its free search technology. In turn, it has become a highly profitable enterprise with a strong market share.
It is thus very important to many companies – particularly small businesses – where they appear in Google’s search rankings. They have no way of knowing how Google’s technology works since the company wants to protect its competitive edge.
As a result, Google is coming under increased scrutiny from regulators, with the European Commission already making informal inquiries into the search market. As yet, there is no evidence of Google abusing its market power, but it could do so.
As reported in the Financial Times this week, Google is facing controversy in two areas. The first is “search neutrality”, the suggestion that regulators should oversee its algorithms or set clear rules to ensure that search engines are not systematically biased for editorial or commercial reasons.
This is an impractical and unnecessary idea. As Marissa Mayer, Google’s head of search, argued in the FT, it is better for different search engines to compete vigorously with each other to produce the best and most relevant results. Google may be highly successful in search, but competition is only a free click away.
The second area of concern is Google’s provision of vertical services linked to search – for example, its display of Google Maps when a user looks for an address, or Google comparison shopping data when someone searches for a camera. This affects rival providers in travel and e-commerce.
Barry Diller, chairman of Expedia and InterActiveCorp, protested this week about Google’s $700m acquisition of ITA Software, saying that it would give Google unfair leverage in displaying flight information. Mr Diller wants the deal to be scrutinised carefully by regulators and conditions imposed.
Google’s defence is that it is trying to supply the most useful possible information to users. But the potential for antitrust abuse through the tying of vertical services to search raises clear concerns. European and US regulators should use the ITA deal to examine the issue broadly.
It would be wrong for Google to be hamstrung by regulators simply because its services are superior to rivals, but it needs to be watched with care. Google is not obviously being evil but it is such a powerful technology company that it has the potential to go astray.
--------------------------
Monday, 5 July 2010
Re: Smartphone Subsidies
Dear Lex Team,
You are wrong about your final analysis leading to "uneasy lies the head that wears a crown". Apple is not just developing the cool hardware but also has a support network of more than 200,000 apps. The likes of Nokia, Blackberry, Motorola etc., may reduce the price-gap but they cannot fill the apps-gap.
The only credible source of support operators can have is by embracing Google's android based phones from Chinese / Taiwanese manufacturers with almost 65,000 apps support to get a foot-hold in the market. Funnily, you don't even mention that in your analysis.
Regards,
Pradeep Kabra
------------------------------------------------
Smartphone subsidies
Published: July 4 2010 20:13 in Financial Times
Kingmakers do not take kindly to becoming mere courtiers, so insurrection is only a matter of time. For years mobile phone operators played a delicate game, balancing the power of phone manufacturers’ brands against their own control of customer relationships and a willingness to subsidise handsets. While the carriers risked becoming a dumb pipe, the highly competitive handset market left them room to make decent returns.
Then Apple strolled in and grabbed the industry’s profits. As shown by queues snaking round the block for the latest iPhone, the devices attract customers. Returns for the operators, however, are less clear cut. Some estimates suggest that AT&T, the US carrier, does not break even on an iPhone customer until the 17th month of a 24-month contract. In private, European mobile executives will admit that they only just break even on iPhone customer contracts. The hope is that users spend freely on data services and stick around once their terms are up.
Apple, meanwhile, has kept the average selling price of an iPhone above $600 since the third quarter of 2008. That’s for a device that contains less than $200 worth of parts (not including manufacturing, software and intellectual property costs), according to estimates by iSuppli, a market research firm.
Operators’ powers are diminished, not destroyed, though. While they will not stop subsidising iPhones, they are waiting for a credible pretender to rally round. And
non-Apple smartphone prices continue to fall. Nokia’s next model, the N8, will cost €370. BlackBerry maker Research in Motion recently reported that its average selling price slipped below $300 in its first quarter to the end of May, from more than $350 a year ago. Apple has already developed tiered pricing, selling older iPhones more cheaply. But when the technological gap to the competition narrows, Apple’s price premium must do likewise, or its terrific rate of growth will slow. Uneasy lies the head that wears a crown.
You are wrong about your final analysis leading to "uneasy lies the head that wears a crown". Apple is not just developing the cool hardware but also has a support network of more than 200,000 apps. The likes of Nokia, Blackberry, Motorola etc., may reduce the price-gap but they cannot fill the apps-gap.
The only credible source of support operators can have is by embracing Google's android based phones from Chinese / Taiwanese manufacturers with almost 65,000 apps support to get a foot-hold in the market. Funnily, you don't even mention that in your analysis.
Regards,
Pradeep Kabra
------------------------------------------------
Smartphone subsidies
Published: July 4 2010 20:13 in Financial Times
Kingmakers do not take kindly to becoming mere courtiers, so insurrection is only a matter of time. For years mobile phone operators played a delicate game, balancing the power of phone manufacturers’ brands against their own control of customer relationships and a willingness to subsidise handsets. While the carriers risked becoming a dumb pipe, the highly competitive handset market left them room to make decent returns.
Then Apple strolled in and grabbed the industry’s profits. As shown by queues snaking round the block for the latest iPhone, the devices attract customers. Returns for the operators, however, are less clear cut. Some estimates suggest that AT&T, the US carrier, does not break even on an iPhone customer until the 17th month of a 24-month contract. In private, European mobile executives will admit that they only just break even on iPhone customer contracts. The hope is that users spend freely on data services and stick around once their terms are up.
Apple, meanwhile, has kept the average selling price of an iPhone above $600 since the third quarter of 2008. That’s for a device that contains less than $200 worth of parts (not including manufacturing, software and intellectual property costs), according to estimates by iSuppli, a market research firm.
Operators’ powers are diminished, not destroyed, though. While they will not stop subsidising iPhones, they are waiting for a credible pretender to rally round. And
non-Apple smartphone prices continue to fall. Nokia’s next model, the N8, will cost €370. BlackBerry maker Research in Motion recently reported that its average selling price slipped below $300 in its first quarter to the end of May, from more than $350 a year ago. Apple has already developed tiered pricing, selling older iPhones more cheaply. But when the technological gap to the competition narrows, Apple’s price premium must do likewise, or its terrific rate of growth will slow. Uneasy lies the head that wears a crown.
Monday, 28 June 2010
Re: Only a closer union can save the eurozone
Dear Mr. Munchau,
Many thanks for all the insightful articles you write in FT every week.
In this weeks article, you mention that "Resolution of both the problems require a large fiscal transfer, not from Germany to Greece, but from German public sector to the German bank sector - in the form of new capital. The same would apply to France"
I thought, Capitalism means private business taking risks and if the risk fails then they go under. What is this back-hand solution of transferring funds from public sector to privately managed banks? Why not come to the point directly that the real solution lies not in the fund transfer where in good times the private bankers/share-holders/creditors enjoy and in bad times the public bails them out at the cost/gun-point of recession/depression/higher-taxes/fiscal cleaning etc., but the real solution is WHY NOT CALL THE BANKING SECTOR - A UTILITY SECTOR - AND NATIONALIZE IT!!!
Regards,
Pradeep Kabra
----------------------------------------------------------
Only a closer union can save the eurozone
By Wolfgang Münchau
Published: June 27 2010 19:52 in Financial Times
I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far.
There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union.
I have noticed that whenever the European Council meets in Brussels, the European bond markets tend to slump with short delay. Yields are now close to the level they were at in early May, when the European Council set up the €440bn ($540bn, £360bn) European Financial Stability Facility and when the European Central Bank started to buy bonds. This crisis goes on and on.
The reason is that investors have lost confidence in the political economy of the eurozone. European politicians such as Wolfgang Schäuble, German finance minister, praise their own long-termism. But investors ask with some justification: what is long-termist about a bank bail-out without bank resolution? Or a sovereign bail-out without fiscal union?
I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban naked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the naked short sales it purports to ban. Helmut Schmidt, the former German chancellor, said later that he almost died laughing when he heard about this legislation.
The proposed ban is the latest reminder that European Union members, and Germany in particular, have not learnt a single lesson from their serial communication failures during the crisis. In February, they made the mistake of announcing a political agreement on a Greek rescue package without backing it up for another three months. In May, they hailed the stability facility as a historic breakthrough in political governance; it then turned out to be little more than bail-out facility.
I only hope that they know what they did when they recently announced the publication of the stress tests for 25 banks. Once these are published, the markets will immediately demand to see the tests for all banks. Once that happens, in turn, governments will need to produce a convincing recapitalisation strategy. I fear, however, that they are once again committing themselves to going down a road without a map.
Without an endgame, this exercise will end in disaster. At some point the markets will realise that large parts of the German and French banking systems are insolvent, and that they are going to stay insolvent. You might think that Europe’s policy elites cannot be so stupid as to commit themselves to stress tests without a resolution strategy up their sleeves. But I am afraid they probably are. Europe’s political leaders and their economic advisers are, for the most part, financially illiterate.
Is there a way out? Yes there is, but the chance of a resolution to the crisis is starting to fade. The first step would have to be a serious attempt to resolve bank balance sheets. This is as much a German and French banking crisis as it is a Greek and Spanish debt crisis. You need to resolve both problems simultaneously. Resolution would require a large fiscal transfer, not from Germany to Greece, but from the German public sector to the German bank sector – in the form of new capital. The same would apply to France.
Beyond this restructuring, the eurozone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. And you have to be very naive to think that peer pressure is going to resolve anything.
There is no point in beating about the bush and issuing polite calls for the creation of independent fiscal councils or other paraphernalia. This is not the time for a debate on second-order reforms. I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms. But that is the choice the EU’s citizens and their political leaders will have to make – a choice between reverting to dysfunctional and, as it transpires, insolvent nation states, or jumping to a political and economic union.
munchau@eurointelligence.com
---------------------------------------------
Many thanks for all the insightful articles you write in FT every week.
In this weeks article, you mention that "Resolution of both the problems require a large fiscal transfer, not from Germany to Greece, but from German public sector to the German bank sector - in the form of new capital. The same would apply to France"
I thought, Capitalism means private business taking risks and if the risk fails then they go under. What is this back-hand solution of transferring funds from public sector to privately managed banks? Why not come to the point directly that the real solution lies not in the fund transfer where in good times the private bankers/share-holders/creditors enjoy and in bad times the public bails them out at the cost/gun-point of recession/depression/higher-taxes/fiscal cleaning etc., but the real solution is WHY NOT CALL THE BANKING SECTOR - A UTILITY SECTOR - AND NATIONALIZE IT!!!
Regards,
Pradeep Kabra
----------------------------------------------------------
Only a closer union can save the eurozone
By Wolfgang Münchau
Published: June 27 2010 19:52 in Financial Times
I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far.
There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union.
I have noticed that whenever the European Council meets in Brussels, the European bond markets tend to slump with short delay. Yields are now close to the level they were at in early May, when the European Council set up the €440bn ($540bn, £360bn) European Financial Stability Facility and when the European Central Bank started to buy bonds. This crisis goes on and on.
The reason is that investors have lost confidence in the political economy of the eurozone. European politicians such as Wolfgang Schäuble, German finance minister, praise their own long-termism. But investors ask with some justification: what is long-termist about a bank bail-out without bank resolution? Or a sovereign bail-out without fiscal union?
I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban naked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the naked short sales it purports to ban. Helmut Schmidt, the former German chancellor, said later that he almost died laughing when he heard about this legislation.
The proposed ban is the latest reminder that European Union members, and Germany in particular, have not learnt a single lesson from their serial communication failures during the crisis. In February, they made the mistake of announcing a political agreement on a Greek rescue package without backing it up for another three months. In May, they hailed the stability facility as a historic breakthrough in political governance; it then turned out to be little more than bail-out facility.
I only hope that they know what they did when they recently announced the publication of the stress tests for 25 banks. Once these are published, the markets will immediately demand to see the tests for all banks. Once that happens, in turn, governments will need to produce a convincing recapitalisation strategy. I fear, however, that they are once again committing themselves to going down a road without a map.
Without an endgame, this exercise will end in disaster. At some point the markets will realise that large parts of the German and French banking systems are insolvent, and that they are going to stay insolvent. You might think that Europe’s policy elites cannot be so stupid as to commit themselves to stress tests without a resolution strategy up their sleeves. But I am afraid they probably are. Europe’s political leaders and their economic advisers are, for the most part, financially illiterate.
Is there a way out? Yes there is, but the chance of a resolution to the crisis is starting to fade. The first step would have to be a serious attempt to resolve bank balance sheets. This is as much a German and French banking crisis as it is a Greek and Spanish debt crisis. You need to resolve both problems simultaneously. Resolution would require a large fiscal transfer, not from Germany to Greece, but from the German public sector to the German bank sector – in the form of new capital. The same would apply to France.
Beyond this restructuring, the eurozone will need to commit itself to a full-blown fiscal union and proper political institutions that give binding macroeconomic instructions to member states for budgetary policy, financial policy and structural policies. The public and private sector imbalances are so immense that they are not self-correcting. And you have to be very naive to think that peer pressure is going to resolve anything.
There is no point in beating about the bush and issuing polite calls for the creation of independent fiscal councils or other paraphernalia. This is not the time for a debate on second-order reforms. I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms. But that is the choice the EU’s citizens and their political leaders will have to make – a choice between reverting to dysfunctional and, as it transpires, insolvent nation states, or jumping to a political and economic union.
munchau@eurointelligence.com
---------------------------------------------
Thursday, 3 June 2010
Re: Bankers have been sold short by market distortions
I feel sorry for Mr. Rajan for writing this article. I thought he is an intellectual. But as often with intellectuals, they get carried away by their knowledge to such an extent that they cannot differentiate between woods and the trees any more.
Coming back to this article, apart from the pretty naive generalisations and assumptions he makes, the awful thing is 'to justify' bankers action to the level of empathy vis-a-vis the regulatory & policy forces unleashed.
An example of a naive generalisations or assumption:
'But short-sellers perform a valuable social function by depriving poorly managed companies of resources they will waste'
I'm sure Mr. Rajan is aware that Short-Sellers don't even own the shares of the company they are shorting. How could they? Then, if they don't hold the shares ie., they are not investors. If they are not investors how are they depriving poorly managed companies of resources they will waste?
I'm sure an investor is smart enough to sell the shares if he feels the management is not up to the task. He or We don't need a short-seller to guide us!!!
Agreed about the regulatory and policy inconsistencies. But that can be discussed as a separate article instead of juxtaposing it with bankers behaviour.
Regards,
Pradeep Kabra
Bankers have been sold short by market distortions
By Raghuram Rajan
Published: June 2 2010 22:37 in Financial Times
Bankers must be heaving a sigh of relief as the shenanigans of the offshore drilling industry have pushed them to the edge of the radar screen of those targeting corporate greed. But it is unlikely their respite will be for long. Inquiries under way are bound to unearth more instances of ethically, and even legally, challenged bankers. When overlaid on images of bankers hankering after their outlandish bonuses soon after being bailed out with public money, the public picture of an industry motivated only by money and without any sense of the larger consequences of its actions will be reinforced. How do we instill more social values in the industry? Or is banker greed mostly good?
Most people do not work for money alone; a primary motivation for many is the knowledge that their work makes the world a better place. Bankers are no different, but their work differs from most other professions in two important ways. First, a broker who sells bonds issued by an electric power project is merely a cog in a gigantic machine, who never sees the plant she helped build. Second, the most direct measure of her contribution is the money she makes for her firm. This is where both the merits of the arm’s-length financial system and its costs arise.
Take for instance a trader who sells short the stock of a company he feels is being mismanaged. He does not see the workers who lose their jobs or the hardship that unemployment causes their families. But short sellers perform a valuable social function by depriving poorly managed companies of resources they will waste. A company whose stock price tanks will not be able to raise financing easily and could be forced to close down.
The trader does not cause the company to go out of business. If he is wrong and the company is well managed, other traders will take the opposite side, buy shares, push up the share price, and make the short seller lose money. It is typically only when the short seller’s opinions come to be widely shared, and company management is truly awful, that the share price tanks. Mismanagement is the source of the company’s troubles; the trader merely holds up a mirror to reflect it.
The best measure of the trader’s value to society is whether he made money from the trade: that indicates he was right to short the firm and that society will benefit from his actions. This is why free-market capitalism works and why bankers usually do good even as they do very well for themselves.
However, when the discipline of markets breaks down, as it sometimes does, the finely incentivised financial system can derail quickly and cause immense damage. The very anonymity of money then makes it a poor mechanism for guiding financiers’ activities toward socially desirable ends. Did the mortgage broker make his fees by offering a variety of sensible options to the professional couple who were looking to upgrade their house, or did he do so by urging an elderly couple to refinance into a mortgage they could not afford? When the broker’s loans are scrutinised by sensible banks that refuse to refinance shaky mortgages, there is a market check on his behaviour that forces him to focus on persuading the professional couple instead of deluding the elderly one. When the market is willing to buy any loan he makes, however, he leans towards easy pickings.
The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet. Chastise the banker who hankers after his bonus, but also pity him for he is looking for his primary measure of self-worth to be restored. Rather than attempting to instill social purpose in him, however, it is probably more useful for society to target the forces that distorted the market.
The writer is professor of finance at the Booth School and author of Fault Lines: How Hidden Fractures still Threaten the World Economy
Coming back to this article, apart from the pretty naive generalisations and assumptions he makes, the awful thing is 'to justify' bankers action to the level of empathy vis-a-vis the regulatory & policy forces unleashed.
An example of a naive generalisations or assumption:
'But short-sellers perform a valuable social function by depriving poorly managed companies of resources they will waste'
I'm sure Mr. Rajan is aware that Short-Sellers don't even own the shares of the company they are shorting. How could they? Then, if they don't hold the shares ie., they are not investors. If they are not investors how are they depriving poorly managed companies of resources they will waste?
I'm sure an investor is smart enough to sell the shares if he feels the management is not up to the task. He or We don't need a short-seller to guide us!!!
Agreed about the regulatory and policy inconsistencies. But that can be discussed as a separate article instead of juxtaposing it with bankers behaviour.
Regards,
Pradeep Kabra
Bankers have been sold short by market distortions
By Raghuram Rajan
Published: June 2 2010 22:37 in Financial Times
Bankers must be heaving a sigh of relief as the shenanigans of the offshore drilling industry have pushed them to the edge of the radar screen of those targeting corporate greed. But it is unlikely their respite will be for long. Inquiries under way are bound to unearth more instances of ethically, and even legally, challenged bankers. When overlaid on images of bankers hankering after their outlandish bonuses soon after being bailed out with public money, the public picture of an industry motivated only by money and without any sense of the larger consequences of its actions will be reinforced. How do we instill more social values in the industry? Or is banker greed mostly good?
Most people do not work for money alone; a primary motivation for many is the knowledge that their work makes the world a better place. Bankers are no different, but their work differs from most other professions in two important ways. First, a broker who sells bonds issued by an electric power project is merely a cog in a gigantic machine, who never sees the plant she helped build. Second, the most direct measure of her contribution is the money she makes for her firm. This is where both the merits of the arm’s-length financial system and its costs arise.
Take for instance a trader who sells short the stock of a company he feels is being mismanaged. He does not see the workers who lose their jobs or the hardship that unemployment causes their families. But short sellers perform a valuable social function by depriving poorly managed companies of resources they will waste. A company whose stock price tanks will not be able to raise financing easily and could be forced to close down.
The trader does not cause the company to go out of business. If he is wrong and the company is well managed, other traders will take the opposite side, buy shares, push up the share price, and make the short seller lose money. It is typically only when the short seller’s opinions come to be widely shared, and company management is truly awful, that the share price tanks. Mismanagement is the source of the company’s troubles; the trader merely holds up a mirror to reflect it.
The best measure of the trader’s value to society is whether he made money from the trade: that indicates he was right to short the firm and that society will benefit from his actions. This is why free-market capitalism works and why bankers usually do good even as they do very well for themselves.
However, when the discipline of markets breaks down, as it sometimes does, the finely incentivised financial system can derail quickly and cause immense damage. The very anonymity of money then makes it a poor mechanism for guiding financiers’ activities toward socially desirable ends. Did the mortgage broker make his fees by offering a variety of sensible options to the professional couple who were looking to upgrade their house, or did he do so by urging an elderly couple to refinance into a mortgage they could not afford? When the broker’s loans are scrutinised by sensible banks that refuse to refinance shaky mortgages, there is a market check on his behaviour that forces him to focus on persuading the professional couple instead of deluding the elderly one. When the market is willing to buy any loan he makes, however, he leans towards easy pickings.
The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet. Chastise the banker who hankers after his bonus, but also pity him for he is looking for his primary measure of self-worth to be restored. Rather than attempting to instill social purpose in him, however, it is probably more useful for society to target the forces that distorted the market.
The writer is professor of finance at the Booth School and author of Fault Lines: How Hidden Fractures still Threaten the World Economy
Sunday, 23 May 2010
Is Mourinho A Real Winner???
I think some of the comments on http://www.bbc.co.uk/blogs/philminshull/2010/05/is_mourinho_making_a_real_mist.html#postcomment are ridiculously biased. They say, Mourinho wins because the foundation and money was already there at Chelsea and Inter Milan. Well they how come Chelsea have never won the Champions League and had not won the premier league for 50 years till Mourinho came and showed them how to? Infact, Chelsea have come close to winning Champions League when Mourinho left and have won the Premier League this season because Mourinho had laid the winning foundation. The same goes for Inter Milan. How come Mancini couldn't even take them beyond Quarter Finals in Champions League, if his foundation was so good?
The fact is Mourinho know how to win. Period. He had done with Porto when nobody knew that a team called Porto even exists. (no pun intended). He had done with Chelsea and would have won them the Champions League had Mr. Abramovich not interfered. Now he has done with Inter Milan. Every one knows, had Mr. Moratti not replaced Mancini, they could never even have dreamt of Champions League finals. Forget winning it.
So guys, show some Respect. Just talk makes you look foolish. You may love him or hate him, but don't forget to respect a person who knows something about winning and creating winning teams.
Finally, He Comes, He WINS & He Moves On....St. Jose Mourinho!!!
Regards,
Pradeep Kabra
The fact is Mourinho know how to win. Period. He had done with Porto when nobody knew that a team called Porto even exists. (no pun intended). He had done with Chelsea and would have won them the Champions League had Mr. Abramovich not interfered. Now he has done with Inter Milan. Every one knows, had Mr. Moratti not replaced Mancini, they could never even have dreamt of Champions League finals. Forget winning it.
So guys, show some Respect. Just talk makes you look foolish. You may love him or hate him, but don't forget to respect a person who knows something about winning and creating winning teams.
Finally, He Comes, He WINS & He Moves On....St. Jose Mourinho!!!
Regards,
Pradeep Kabra
Saturday, 8 May 2010
Why men shouldn't write advise columns & Long live the Queen!!!
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Infact I would say, they shouldn't be allowed in politics as well.
For instance, before the elections in the UK none of the three musketeers in the British politics explained how they will reduce the budged deficit. Infact they behaved as if the word deficit doesn't exist.
Now with the hung parliament around their neck, they scare everybody by saying, deficit reduction is the priority. In the national interest, keep the differences aside and let's sleep together. Even if it happens that one side is the Tories (super-quick deficit reduction, anti-Europe, anti-immigration, pro-nuclear) and the other side is Lib Dems (no-idea what deficit reduction means, pro-europe including joining Euro, pro-immigration (remember, fair-society shit), anti-nuclear including nuclear power)
Long live the Queen!!!
Re: Fool's Gold
Dear Gillian,
In your admirable book 'Fool's Gold' you point out all the reasons behind the financial crisis. But the main cause is 'lack of political reforms' in the US and other places. How can lobbyists get away with ludicrous claims in their own interest in not just the financial industry but from software to food to pharma to you name it.
The fact is, all the big corporates are big donors to the politicians. So the politicians face the same conflict of interest as faced by the rating agencies or by Goldman Sachs for instance.
Unless the political funding is not centralized from a common pool and distributed based on some criteria, it is fair to assume that this is just the beginning of all the future 'jungle-raj' for the few, all in the name of democracy, free-markets, globalization and what not.
Regards,
Pradeep
In your admirable book 'Fool's Gold' you point out all the reasons behind the financial crisis. But the main cause is 'lack of political reforms' in the US and other places. How can lobbyists get away with ludicrous claims in their own interest in not just the financial industry but from software to food to pharma to you name it.
The fact is, all the big corporates are big donors to the politicians. So the politicians face the same conflict of interest as faced by the rating agencies or by Goldman Sachs for instance.
Unless the political funding is not centralized from a common pool and distributed based on some criteria, it is fair to assume that this is just the beginning of all the future 'jungle-raj' for the few, all in the name of democracy, free-markets, globalization and what not.
Regards,
Pradeep
Wednesday, 21 April 2010
Re: The challenge of halting the financial doomsday machine
Dear Mr. Wolf,
Many Thanks for this superb analytical article on the financial doomsday machine.
One of the reasons things came to this level is 'the lack of political reforms'. When the politicians & especially the members of congress in the US are sponsored by the Wall-Street and other corporates, how can 'enforcing prudential regulation' is possible? No wonder, any initiative by the president in US case is shot down by the Congress, is diluted by the lobbyists or killed by the corporate sponsers.
Apart from the official approach mentioned by you, two basic things are needed: 1. The political funding reforms needs to be in place in all the democracies of the world. There cannot be a 'real' democracy without independent political funding (Just like NIN or TV Licence Fee in UK there need to be a Democracy Fee) 2. A change is needed in the structure of the 'limited liability' for the management of business (SME's and Corporates alike) That will bring not just accountability to the management which creates havoc with the structure of business itself for their short-term bonuses and gains but will also aligns risks and rewards evenly.
Regards,
Pradeep Kabra
----------------------------------
The challenge of halting the financial doomsday machine
By Martin Wolf
Published: April 20 2010 19:42 | Last updated: April 20 2010 19:42
Can we afford our financial system? The answer is no. Understanding why this is so is a necessary condition for evaluating ideas for reform. The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.
People pay too much attention to the direct cost of bail-outs. As Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis, has noted, these costs may be around 1 per cent of gross domestic product in the US and UK. The costs that matter, however, are those of the recession and the huge jump in public debt. If only a quarter of the world’s loss of output during the recession were to prove permanent, the present value of these losses could be as much as 90 per cent of annual world product.
How did this happen? Quite simply, the financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades. Capital ratios have fallen sharply, while returns on equity have become higher and more volatile. As Mr Haldane notes in another paper, leverage is the chief determinant of returns on equity and increased leverage also explains the level and volatility of banking returns. Finally, the banking sector has also become substantially more concentrated. (See charts.)
Mr Haldane bemoans “a progressive rise in banking risk and an accompanying widening and deepening of the state safety net”. This is a “Red Queen’s race”: the system is running to stand still with governments racing to make finance safer and bankers creating more risk. The route was via liquidity, deposit and capital insurance. Mr Haldane notes that rating agencies value government support for banks. Government support must surely provide a part of the explanation for the low yields on bonds issued by these massively leveraged businesses (see chart).
The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as “rational carelessness”. Its most dangerous effect comes via the extremes of the credit cycle. Most perilous of all is the compulsion upon the authorities to blow another set of credit bubbles, to forestall the devastating impact of the implosion of the last ones. In the end, what happens to finance is not what matters most but what finance does to the wider economy.
Does today’s engorged financial system produce gains that justify these costs? In a recent speech, Adair Turner, chairman of the UK’s Financial Services Authority, argues it does not.* Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.
As Mr Turner notes, the promise of securitisation has turned out to be partly illusory. Arguments used in its favour – “market completion” and the ability to extend credit more widely – look highly questionable. Particularly striking was the failure of the credit default swap market to give any forewarning of the financial crisis (see chart). At bottom, the invention of complex securities hugely exacerbated the information and incentive problems inherent in complex financial systems. Even the frequently heard argument that more market liquidity is better than less is far from unimpeachable: it exacerbates rational carelessness.
So what is to be done? In answering this question, one has to start from a recognition of the chief dangers: first, the high-income countries, with their low underlying rate of economic growth and huge costs of ageing, cannot possibly afford another crisis; second, the big issue is the impact on the economy.
Against these standards, what is one to make of ideas now being floated? Three common ideas need to be put in their place.
One idea, popular in US Republican circles, is: “just say no” to bail-outs. This is a delusion. Since financial institutions are powerfully interconnected, the government cannot credibly commit itself to not rescuing the system when in peril.
Another idea, popular among US liberals, is that the chief issue is “too big to fail”. Mr Haldane shows that the implicit insurance to huge banks is bigger than to smaller ones. He agrees, too, that economies of scale in banking are modest. The challenge of managing such complex institutions is enormous. Finally, the diversification these institutions seek is ultimately illusory: they are all exposed to economy-wide risks.
Yet it is important not to exaggerate the significance of size alone. One point is that some of the systems that navigated the crisis relatively safely – Canada’s, for example – are dominated by a stable banking oligopoly. Another is that, as happened in the US in the 1930s, the collapse of many small and undiversified banks can be highly destructive. Size matters. But it is certainly not all that matters.
A third notion is that the big issue is regulatory completeness. It is argued that if only oversight had been effectively imposed, the pattern of overleveraging and default could have been halted. This, too, is unlikely. It is hard to regulate finance against the incentives of those who run it. Fixing the problem has to include changing incentives in simple and transparent ways. To put it bluntly, participants have to fear the consequences of making serious mistakes, not just be told to stop.
In the end, halting the financial doomsday machine is going to involve fundamental changes in policy towards – and the structure of – the financial system. There are two broad approaches now under discussion. The official one is to make something roughly like the present system far safer, by raising capital and liquidity requirements, moving derivatives on to exchanges and enforcing prudential regulation. The alternative is structural reform. Which is the least bad option? I plan to address that issue next week.
* What do banks do, what should they do? www.fsa.gov.uk
martin.wolf@ft.com
Many Thanks for this superb analytical article on the financial doomsday machine.
One of the reasons things came to this level is 'the lack of political reforms'. When the politicians & especially the members of congress in the US are sponsored by the Wall-Street and other corporates, how can 'enforcing prudential regulation' is possible? No wonder, any initiative by the president in US case is shot down by the Congress, is diluted by the lobbyists or killed by the corporate sponsers.
Apart from the official approach mentioned by you, two basic things are needed: 1. The political funding reforms needs to be in place in all the democracies of the world. There cannot be a 'real' democracy without independent political funding (Just like NIN or TV Licence Fee in UK there need to be a Democracy Fee) 2. A change is needed in the structure of the 'limited liability' for the management of business (SME's and Corporates alike) That will bring not just accountability to the management which creates havoc with the structure of business itself for their short-term bonuses and gains but will also aligns risks and rewards evenly.
Regards,
Pradeep Kabra
----------------------------------
The challenge of halting the financial doomsday machine
By Martin Wolf
Published: April 20 2010 19:42 | Last updated: April 20 2010 19:42
Can we afford our financial system? The answer is no. Understanding why this is so is a necessary condition for evaluating ideas for reform. The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.
People pay too much attention to the direct cost of bail-outs. As Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis, has noted, these costs may be around 1 per cent of gross domestic product in the US and UK. The costs that matter, however, are those of the recession and the huge jump in public debt. If only a quarter of the world’s loss of output during the recession were to prove permanent, the present value of these losses could be as much as 90 per cent of annual world product.
How did this happen? Quite simply, the financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades. Capital ratios have fallen sharply, while returns on equity have become higher and more volatile. As Mr Haldane notes in another paper, leverage is the chief determinant of returns on equity and increased leverage also explains the level and volatility of banking returns. Finally, the banking sector has also become substantially more concentrated. (See charts.)
Mr Haldane bemoans “a progressive rise in banking risk and an accompanying widening and deepening of the state safety net”. This is a “Red Queen’s race”: the system is running to stand still with governments racing to make finance safer and bankers creating more risk. The route was via liquidity, deposit and capital insurance. Mr Haldane notes that rating agencies value government support for banks. Government support must surely provide a part of the explanation for the low yields on bonds issued by these massively leveraged businesses (see chart).
The combination of state insurance (which protects creditors) with limited liability (which protects shareholders) creates a financial doomsday machine. What happens is best thought of as “rational carelessness”. Its most dangerous effect comes via the extremes of the credit cycle. Most perilous of all is the compulsion upon the authorities to blow another set of credit bubbles, to forestall the devastating impact of the implosion of the last ones. In the end, what happens to finance is not what matters most but what finance does to the wider economy.
Does today’s engorged financial system produce gains that justify these costs? In a recent speech, Adair Turner, chairman of the UK’s Financial Services Authority, argues it does not.* Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.
As Mr Turner notes, the promise of securitisation has turned out to be partly illusory. Arguments used in its favour – “market completion” and the ability to extend credit more widely – look highly questionable. Particularly striking was the failure of the credit default swap market to give any forewarning of the financial crisis (see chart). At bottom, the invention of complex securities hugely exacerbated the information and incentive problems inherent in complex financial systems. Even the frequently heard argument that more market liquidity is better than less is far from unimpeachable: it exacerbates rational carelessness.
So what is to be done? In answering this question, one has to start from a recognition of the chief dangers: first, the high-income countries, with their low underlying rate of economic growth and huge costs of ageing, cannot possibly afford another crisis; second, the big issue is the impact on the economy.
Against these standards, what is one to make of ideas now being floated? Three common ideas need to be put in their place.
One idea, popular in US Republican circles, is: “just say no” to bail-outs. This is a delusion. Since financial institutions are powerfully interconnected, the government cannot credibly commit itself to not rescuing the system when in peril.
Another idea, popular among US liberals, is that the chief issue is “too big to fail”. Mr Haldane shows that the implicit insurance to huge banks is bigger than to smaller ones. He agrees, too, that economies of scale in banking are modest. The challenge of managing such complex institutions is enormous. Finally, the diversification these institutions seek is ultimately illusory: they are all exposed to economy-wide risks.
Yet it is important not to exaggerate the significance of size alone. One point is that some of the systems that navigated the crisis relatively safely – Canada’s, for example – are dominated by a stable banking oligopoly. Another is that, as happened in the US in the 1930s, the collapse of many small and undiversified banks can be highly destructive. Size matters. But it is certainly not all that matters.
A third notion is that the big issue is regulatory completeness. It is argued that if only oversight had been effectively imposed, the pattern of overleveraging and default could have been halted. This, too, is unlikely. It is hard to regulate finance against the incentives of those who run it. Fixing the problem has to include changing incentives in simple and transparent ways. To put it bluntly, participants have to fear the consequences of making serious mistakes, not just be told to stop.
In the end, halting the financial doomsday machine is going to involve fundamental changes in policy towards – and the structure of – the financial system. There are two broad approaches now under discussion. The official one is to make something roughly like the present system far safer, by raising capital and liquidity requirements, moving derivatives on to exchanges and enforcing prudential regulation. The alternative is structural reform. Which is the least bad option? I plan to address that issue next week.
* What do banks do, what should they do? www.fsa.gov.uk
martin.wolf@ft.com
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