Saturday, January 31, 2009

Why Citibank Might Not Be Around ... Soon

Why pick on Citibank? Didn't they agree to break up the company already? Well, one can argue that the biggest toxic assets reside in Citigroup, Lehman Brothers and Merrill Lynch. We all know Lehman was hung out to dry. Merrill's woes are now part of Bank of America's problems. BoA may or may not be able to digest Merrill's positions. Both Citi and BoA have been given tons of money by the US government. Will it be sufficient? In the past 12 months, taxpayers, sovereign wealth funds and private investors have sunk $1 trillion into failing U.S. and British financial institutions, while central banks have slashed their cost of funds to nothing and their collateral standards even lower.

It looks likely that the hole is simply too big to fill even by governments. Bank losses from the write-offs of bad loans and busted derivatives tally up to $1.5 trillion so far. In addition, $5 trillion to $10 trillion worth of off-balance-sheet businesses such as structured investment vehicles - leveraged lending vehicles used by big banks are being forced back to banks' balance sheets by regulators. Rules require banks to keep a base of real shareholder capital amounting to 10% of those funds. So banks need to find up to $1 trillion within the next year to meet that objective.That is in addition to all that has been injected into banks so far.

Add the $1.5 trillion in losses to $1 trillion in needed new reserves, and you can see that banks need as much as $2.5 trillion in new capital to remain solvent under current rules. Consider that the entire world banking system had only $2 trillion in shareholder capital in 2007, before everything blew up. Therefore, the entire system is simply insolvent, as liabilities are greater than assets. Governments aren't forcing banks to admit this, but investors are, and that is why big banks' shares are only a fraction of their value this year compared to their highs in 2008.

Governments, meanwhile, are trying desperately to help banks plug the gap, but they're coming up short. When you add the $500 billion from sovereign wealth funds to the $500 billion from the first tranche of the Troubled Assets Relief Program, it's only $1 trillion. That's already been provided. So that leaves a gap of $500 billion to $1.5 trillion. That's why Trichet said that banks don't need to keep 10% capital reserves.

Is this all priced in? Well, insolvent banks is why credit is not flowing, besides being a confidence issue as well. Even BoA and JP Morgan Chase are continuing to drop despite being on firmer ground. Investors have already factored in the likely outcomes. Nationalise (take over) Citibank, and force a merger with either BoA or JP Morgan Chase. Nationalisation means that banks would have to issue equity to the government, a process that wiped out current shareholders. Yes, that would mean most bank stocks would go to zero. If banks are insolvent, the most attractive asset they have is the brand. To leave them hanging around means they won't be able to do any lending, just like zombie firms. The new administration will have to bite the bullet on this. When this happen, it will be viewed as a positive, not a negative, as we will be on our way to cleaning up the zombies.

To be clear, when I say that Citibank and/or BoA might not be around soon, it basically means that they will be absorbed into another entity, not that they will disappear or that their jobs will disappear. The best that the big banks can hope for is that the 'bad bank' idea takes root - but they will have to ask for another $1.5 trillion to fund the 'bad bank', if that takes flight, then Citigroup, BoA and the rest can sell the toxic assets to the 'bad bank' ... then they can still survive, if the 'bad bank' idea fails... its nationalisation , baby...

JP Morgan (JPM), Citi (C), Bank of America (BAC), Morgan Stanley (MS), Goldman (GS) and UBS. Analyst ratings on fellow banks as at 28 January 2009. Knowing analysts' ratings, a SELL is a big sell, a HOLD means its a SELL as well.

This will not just be in the US but will affect a few of the top banks in Europe as well. The idea of a bad bank is basically an alarm bell to all that TARP as it is will be insufficient to bailout the big banks. We now cringe at the size of the TARP and Obama's stimulus package, well how about another $1.5 trillion for the bad bank - while that is good for the markets, it should be the death knell for USD.

p/s photos: Chen Run Xi

Friday, January 30, 2009

Critics Of The Stimulus Plan

Its often been said that you cannot please everyone. Having watched CNBC, I can finally confirm that they have too many Republicans on the show as anchors. I am not saying that Obama's stimulus plan is perfect, far from it, but it is never going to please the majority because there are not just two sides to the stimulus plan. There are many sides you can take. If you put the top 10 economists into a room to debate the plan, I would bet that there would be 11 views.

I also think I have to put a strong protective layer on my TV screen as I am very very close to throwing things at my TV everytime Gasparino or Kudlow speak.

We have to appreciate that beneath our views and opinions on the stimulus plan are our very unique assumptions of what will work and where our inherent priorities and biases lie. Safe to say that most people who like to say things on business channels will have a view, and believe that their understanding of economics are the appropriate school of thought.

It is easy to bash the plan if you are a conservative, hence you are unlikely to find favourable articles reading Wall Street Journal. Not calling everyone is wrong but that we all need a broader context to appreciate the enormity of the task at hand. My words in purple below.

WSJ: There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.( OK, the Amtrak thing and Arts facility are a bit silly but the child subsidies sounds ok for those who require them in times like these. The global warming and carbon capture are ok as part and parcel for the US to further their advancement in cutting edge arena - the US not only need to boost employment but also invest for the long term to boost their competitive advantage in technology and other cutting edge industries).

In selling the plan, President Obama has said this bill will make "dramatic investments to revive our flagging economy." Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities. (Both are essentials, although one can argue for a greater deployment for infrastructure). Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren't likely to help the economy immediately. (That's the bone of contention for most critics, that only 12% of actual plan is for actual stimulus. If thats the basis for judging the stimulus plan, then its a short sighted view as what brought the US to its knees is the lack of savings, lack of proper regulation, voracious appetite for debt... the plan needs to address the future as well, if not, then even after recovery the US will be left behind in many cutting edge industries, and investing in broadband, education, science are necessary to go hand in hand with jobs creation in order to sustain a more competitive USA of the future).

[Review & Outlook]

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party? Here's another lu-lu: Congress wants to spend $600 million more for the federal government to buy new cars. Uncle Sam already spends $3 billion a year on its fleet of 600,000 vehicles. Congress also wants to spend $7 billion for modernizing federal buildings and facilities. The Smithsonian is targeted to receive $150 million; we love the Smithsonian, too, but this is a job creator? (OK, the Smithsonian is not necessary but please, look at the bigger picture, its only $150m, same with cars, its $600m... if you guys want to get bogged down in small stuffs you will be missing the bigger picture. As for renewable energy and mass transit, these low yielding investments are necessary as backbone for business and seeking alternative energy sources.)

Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators. (This is where the Republicans come out whingeing ... you need safety nets strengthened during difficult times. Its not a yes/no question for the stimulus, and as conservatives you would shy away from supporting these measures, but they are not wrong or bad, just what you believe in and what is fair).

As for the promise of accountability, some $54 billion will go to federal programs that the Office of Management and Budget or the Government Accountability Office have already criticized as "ineffective" or unable to pass basic financial audits. These include the Economic Development Administration, the Small Business Administration, the 10 federal job training programs, and many more. (Obama has already promised for more oversight and accountability. The ineffectiveness of these institutions has more to do with the previous government or rather the Republicans, so shut up... I guess if I was American I would be a Democrat).

Oh, and don't forget education, which would get $66 billion more. That's more than the entire Education Department spent a mere 10 years ago and is on top of the doubling under President Bush. Some $6 billion of this will subsidize university building projects. If you think the intention here is to help kids learn, the House declares on page 257 that "No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools." Horrors: Some money might go to nonunion teachers. (I don't see the issue here, you need to invest in education. God knows how far behind the US is lagging behind many other countries. So what if some of it goes to teachers, you want better teachers, and people who are properly incentivised).

The larger fiscal issue here is whether this spending bonanza will become part of the annual "budget baseline" that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it's hard -- no, impossible -- to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays -- increasing pressure for tax increases in the bargain. Any Blue Dog Democrat who votes for this ought to turn in his "deficit hawk" credentials.

This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living -- or dead -- Democratic interest group. As Speaker Nancy Pelosi put it, "We won the election. We wrote the bill." So they did. Republicans should let them take all of the credit.

(Well, to all the conservatives, I know one thing the Republicans won't do if they were in office... they wouldn't freeze their own pay. Let the change begin, let they guy do something, you buggers had your chance, in fact, you buggers fucked it up royally during the last administration).

p/s photo: Noon Wongsawan

Thursday, January 29, 2009

Wen Jiabao Can Criticise But Putin Should Shut Up!!!

At the current Davos summit, many leaders have whacked the US for its role in bringing the global economy to its knees. Wen Jiabao of China can criticise, but OMG Putin should shut his face. For my life, I cannot understand why Russia was invited into the G8 and not China????? Why does he have the gall to even criticise the US? Its like Thailand advising Malaysia on how to play better politics, or rather, like Malaysia advising Thailand on how to play better politics!

Why Russia should shut up:

a) Despite the huge run up in oil price and hence Russia's reserves, the country did not improve its infrastructure. It allowed Russian gang leaders (or some may call them oligarchs) to lead many big companies, and when things do not go their way, these ballbusters would use the courts, extortion, kidnapping and murders to get their way. Foreign investors who have been in Russia can attest to that.

b) While opening arms to welcome foreign funds, Russia also openly go about nationalising industries whenever they wanted to, or coerce foreign interests to sell back their stakes whenever Russia wants. Now they are angry when foreign funds flee Russia in droves over the past 12 months... wonder why?

c) Business has been firmly reminded that in a country where traditional institutional mechanisms for the implementation of policy are weak, the informal lines of communication should be respected. Its a whole load of bureaucracy and tinged with vested interests everywhere.

d) According to Insead, some recent moves by the Russian central government suggest that foreign companies may face new formal and informal hurdles such as restrictions on investing in certain industries without presidential approval. The current challenging atmosphere creates greater possibilities for those firms that acquire this knowledge to reap greater profits. For example, a company is often served by such simple actions as paying regular visits to government officials, inviting bureaucrats to visit the foreign company, and helping to administer local programs such as work-force retraining or upgrading health care facilities.

e) Compared with the other BRICs, Russia’s market infrastructure is only moderately effective because of the government’s significant participation in and direct ownership of firms. Of Russia’s 80 largest public companies, 71% had a controlling shareholder. Among these controlling stakes, the government held 30%. An additional 21% (of the 80) had one or more blocking shareholder (those with a 25% or greater stake), with the government representing 10% of these. In Russia, the government’s influence is particularly strong at large “strategic companies,” and the combination of a bureaucratic approach to management and continuing pockets of government corruption can hinder the development of more effective corporate governance across a range of industries.

f) The problems with the ruble and Russia's fragile oil base economy seem to be rooted in an erroneous perception of the Russian economy, as the government is echoing the course that was taken following the 1998 default, but the present situation is drastically different. Ten years ago, most prices and salaries were in dollars, and those who were able to keep their jobs had their incomes indexed. Now, everything is mostly in rubles. The consumption growth model has been in place for the last eight years. It has been stalled and it is time to move on to an investment-based economy to improve production. Now they’re still following that model trying to get people to go and spend their savings by allowing further devaluation and inflation; whatever positive effect it has will be only short-term and we’ll still have the same model in place.

Russia, don't go blaming someone else for your problems. Yes, the US credit implosion had some effect but if you had improved your infrastructure, balance sheet, stopped bullying smaller former nations into submission, rein in your gang-like oligarchs, sell more government shares, improve shareholders' rights, treat foreign investors fairly and not in a Sopranos-way, regulate your banks better.... Russia might not be in such a pile of heap.

Russia should not be criticising the US until it has improved their market transparency, accountability, regulatory effectiveness, protection of minority shareholders... its like Iceland criticising the US, shuddup already!!!

Putin is mad because the ruble has totally collapsed, foreign investors have left in droves, and most galling is the fact that Russia used to get above $120 per barrel of oil just a year back. Now he is using the platform to criticise the US and everybody else for heaping troubles onto Russia. Please la Putin, why I don't hear you saying "Gee, oil at $140 is totally out of whack, it is unsustainable, its the US liquidity pushing up commodity prices... you guys beware OK"... If you were smiling when oil was raking in dough above $100... well, take your medicine now. You cannot have it both ways, grow up.


Various News Media:
Wen Jiabao and Vladimir Putin on Wednesday blamed the United States for causing the global economic crisis on a gloomy first day of the Davos forum. Both called for a new attitude by President Barack Obama, while deepening pessimism over the future of the global economy enshrouded the World Economic Forum.

Chinese premier Wen said America's voracious appetite for debt and 'blind pursuit of profit' had led to the worst recession since the Great Depression which has rocked the 2,500 strong political and business elite gathered in the Swiss mountain resort.

Mr Putin said the disappearance of some Wall Street titans over the past six months testified to the errors committed. Mr Wen blamed the crisis on 'inappropriate macroeconomic policies of some economies' and 'prolonged low savings and high consumption,' in a lightly veiled attack on the United States. He blasted the 'excessive expansion of financial institutions in blind pursuit of profit and the lack of self-discipline among financial institutions and ratings agencies' while the 'failure' of regulators had allowed the spread of toxic derivatives.

Mr Wen said the crisis had posed 'severe challenges' for China and that it needed 8.0 per cent growth in 2009 to maintain social stability while the International Monetary Fund predicted 6.7 per cent for this year. The Chinese leader called for faster reform of international financial institutions and for a 'new world order' for the economy.

The Russian prime minister followed him to the podium and said the crisis had been a 'perfect storm'. He also took aim at US banks and the outgoing US administration.' Although the crisis was simply hanging in the air, the majority strove to get their share of the pie, be it one dollar or one billion, and did not want to notice the rising wave.'

Mr Putin insisted that he would not join critics of the United States, but added: 'I just want to remind you that just a year ago, American delegates speaking from this rostrum emphasised the US economy's fundamental stability and its cloudless prospects. Today investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism,' said Mr Putin.

Mr Putin called for a constructive attitude from Mr Obama in international affairs. 'We wish the new team success. I hope they are willing to cooperate constructively,' he said.

US tensions with China have been raised in recent days with new US Treasury Secretary Timothy Geithner saying Mr Obama believes China manipulates its currency to gain an edge in trade. 'In meeting the international financial crisis, it is imperative for the two countries to enhance cooperation, that is my message to the US administration. Three decades of formalised ties between the United States and communist China had shown that 'a peaceful and harmonious relationship will make both sides winners, while a confrontational one will leave both losers,' he added.

p/s photo: Akumsiri Suwansook

Is Asia Doing Enough Stimulus?

Well, the US can afford the stimulus because it can print as much Treasuries that it wants as long as there are demand for it. Other countries don't have it so good. Other countries have to watch our balance sheet, our reserves, our foreign debt levels, etc... Its unfair, and the global economic paradigm will shift, albeit slowly, to require more accountability from the US, but until then, we have to play by the slanted rules. Asia have come up with its own economic stimulus, with Japan and China hogging the limelight, and both should have no problem financing the stimulus. What about other Asian countries?

So far, Asian countries are introducing over $600 bn in fiscal stimulus to raise govt spending on infrastructure and public services, cut taxes, offer subsidies and ease credit for households and firms incl. exporters and SMEs in order to cushion domestic demand, promote investment and curtail job losses amid export slowdown and global recession. Stimulus by most countries have been a small share of GDP, esp. in those running deficits. Therefore, stimulus will be largely insufficient to offset the shortfall in private demand during 2009.

Apart from stimulus spending, other risks to fiscal deficit may reduce the ability of govts to use counter-cyclical policies: High food and fuel subsidy burden (esp. in in Indonesia, Malaysia, India, Taiwan, Vietnam), slowing income and corporate tax revenues. Cut in import tariffs/excise duties (to reduce import prices of food, oil) are reducing revenues; scheduled elections in 2008-09 in India, Indonesia and political uncertainty in Malaysia is also raising populist spending.

India - Eased credit access for NBFCs, infrastructure, housing, SMEs, export firms in 2nd stimulus. 1st stimulus of $4bn incl. additional spending; value-added tax cut; export credit and elimination of duties; govt refund for sales taxes; tax-free bonds for infrastructure. Fiscal deficit may hit 8-9% of GDP in 2009.

China - $586 bn fiscal stimulus package is dominated by infrastructure spending but includes tax reform to support fixed investment, and social security investment, provide capital SMEs; has increased selected export rebates. But falling revenues post challenge. Furthermore some of the package is repackaging of older projects. Still, China's stimulus if enacted speedily, will cushion the slowdown from export demand somewhat. Dollar for dollar, the China's stimulus is greater in its effects than the $825 bn proposed by Obama.

Taiwan - speed up infrastructure and investment-promotion projects, distribute spending vouchers, loan guarantees for businesses. Budget deficit to be around 2% of GDP in 2008-09. One of the mildest stimulus packages - does the Taiwanese think they are so different from the rest?

Malaysia - RM7 bn stimulus to boost govt investment, spending on infrastructure, public services, incentives for firms. Govt planning for another RM7-10 bn package. Deficit estimate for 2009: 4.8% of GDP. Unlike other market watchers, I am not terribly concerned with the level of deficit funding as that is just one side of the story. I am comfortable with another RM7-10 bn package. Just stop lying to the people - our politicians need to grow up because the populace have. Its not like 30 years ago whereby you can control the media and say the right things and lull people into a false sense of security. The internet is the great equaliser with most taking their news and analysis from the web rather than mainstream media. We all know the global credit crisis is bad, what we want is a government that acknowledges the problem and deals with it. Nobody is blaming the government, we ride it out but we want honest people to us things as it is, and not whitewash them. Its a credibility issue.

Thailand - Announced 3 stimulus packages to alleviate the impact of inflation on poor and govt's waning popularity; Oct-08:10 billion baht injection into SET, accelerated disbursement of government expenditure; Aug-08: $1.3bn package to cut excise tax on fuel, subsidize transportation and electricity; Mar-08: Personal and corporate tax cuts, state-owned bank loans to small businesses and low-income earners. Will raise 2009 deficit to 3.5% of GDP

HK - higher fiscal spending incl. rent concession, Inflation relief package, electricity subsidies, cash grants; reduce diesel duty and fuel tax; projected $15 bn surplus for 2008-09 and may return $7bn to public (20% of total spending). Being the most open economy in the world, HK has the added cushion of being the services capital to mainland China. The flow on effects of China's stimulus will help HK somewhat.

Indonesia - 27.5 trillion IDR package in tax incentives and lower import duties for labor intensive exporting firms, lower diesel and electricity tariffs, spending on infrastructure and public services, create 3 mn jobs. Deficit forecast to rise to 2.5% of GDP in 2009 financed by multilateral loans. Hate to say this but Indonesia will be more harshly affected than most of its neighbours. It has to do with its balance sheet.

Singapore - S$20.5 bn in tax incentives and public works spending. Includes corporate tax cut, tax rebates for industrial/commercial properties, loss-making firms to retain local workers. Split risks of bank loans to firms; rebates for citizens, the poor and unemployed. deficit forecast for FY2009 of S$8.7 bn (3.5% of GDP) will be financed using S$4.9 bn of its forex reserves. The country which has put out the most aggressive stimulus and defence plan. The package is already more than 3x the size proposed by Malaysia. Singapore is more vulnerable owing to its open economy and property bubble there as well.

Vietnam - $1bn stimulus fund (to aid businesses) as part of the overall $6bn stimulus package to promote consumption and investment incl. construction projects, electricity plants, low-income housing; cut taxes on businesses. Deficit expected to rise to 7% in 2009. Vietnam was already in trouble prior to the global credit crisis. Will be a long hard slog for the country. Beware companies that still have huge committments in Vietnam.

p/s photo: Zhou Wei Tong

Tuesday, January 27, 2009

Gold Investing In 2009

Been rolling over my sole gold futures position as a bet and a hedge. So far, it allows me to sleep well at night. You may choose to trade stocks now or stay on the sidelines, both have solid arguments for doing so. Do consider that as the yen rate is still below 93, it would be wise to only have 1/3 or less of your cash in shares.

The gold position acts as a good bet and good hedge for me. Its a hedge if inflationary pressures come into play, owing to vast sums of liquidity being injected by the many central banks. Its a bet that the risk aversion may favour holding only real assets, if you come to extreme pessimism, all assets classes will be shunned, including stocks, bonds, even Treasuries, thus leaving gold as the sole carrier of value.

The case for gold is this: The US government (and many other governments actually) is pumping trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reversing current deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation and fiat currencies.

The opposing view: The inflation argument hasn't been seen yet in government data, and once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy, negating any inflationary pressures. That to me is a weak argument because if the economy starts a strong run up, there will be substantial inflationary pressure on that alone, and having dug back from the abyss of financial ruin, it is very unlikely that the governments would suck back the liquidity too quickly.

The better opposing argument would be that the weak economic data in trade and employment may bring about a dis-inflation period rather than a re-inflation era. That is also easily dismissed because if the weak data continue for another 6-12 months, we would be well into a deep recession, which will make stocks and commodities fall even more. Though gold would also weaken, but in that situation I do not see gold prices weakening by that much as jittery conditions would result in fear which favours gold... those jittery conditions would result in more liquidity and bailouts, not less, thus priming the global economy for a reflationary period, not dis-inflation.

Most stocks have fallen by 40% on average from their highs while gold as only eased by 18% from its highs. The supply of gold is being tightened - Africa’s production of gold sank 14% in 2008 which was the lowest levels since 1899. Even U.S. gold production fell 2% last year. Governments are not selling any gold, any smart government would be hoarding or even diversifying some of their currency holdings away from USD and Euro into gold. The financial health of many countries are on the edge, we may see the British pound collapsing further and/or a selldown in Euro and USD as well. In these trying conditions, many smaller governments would want to hold more gold, not less.

We must remember that the USD and Euro are not backed by anything - must revisit my economic thesis on the wonders of linking currency to the gold standard. If one major currency totally collapses, the best way to recover is to announce that the currency would be backed by a certain amount in gold.
In good times, or for most of the last 5 years, central banks worldwide have been net sellers of their gold holdings because they see it being more prudent to hold a wider array of currencies in strong economies. For 2008, as a reflection of the fear within governments, gold selling by central banks dropped by 42%.

Gold is a must for your portfolio. It should equate the amount of fund you are dabbling in stocks. If you are throwing in only 20% of your cash into stocks, you should have a similar sum in gold. Even if you have zero equity exposure, you should still have some gold positions.

p/s photos: Ivy Chen

Monday, January 26, 2009

More Jokes On Economists

Grow your own dope -- plant an economist.

Economic forecasters assume everything, except responsibility.

A friend of mine was taking a class by Milton Friedman at the U of Chicago, and after a late night studying fell asleep in class. This sent Friedman into a little tizzy and he came over and pounded on the table, demanding an answer to a question he had just posed to the class, my friend, shaken but now awake said " I'm sorry Professor, I missed the question but the answer is increase the money supply."

We love it on the floor of the CBOT.

What does it take to be a good economist? An unshakeable grasp of the obvious!
Achieving free trade is like getting to heaven. Everyone one wants to get there, but not too soon.
President Truman once said he wants an economic adviser who is one handed. Why? Because normally the economists giving him economic advice state "On one hand and on the other..."
On the first day God created the sun - so the Devil countered and created sunburn. On the second day God created sex. In response the Devil created marriage. On the third day God created an economist. This was a tough one for the Devil, but in the end and after a lot of thought he created a second economist!

An Economist is someone who didn't have enough personality to become an accountant.
An economist is someone who knows 100 ways to make love, but doesn't know any women/men.

An economist returns to visit his old school. He's interested in the current exam questions and asks his old professor to show some. To his surprise they are exactly the same ones to which he had answered 10 years ago! When he asks about this the professor answers: "the questions are always the same - only the answers change!"

Reproduced below is an Economist Joke that illustrates the separate facilities solution to an externality problem.

Three guys decide to play a round of golf: a priest, a psychologist, and an economist.

They get behind a *very* slow two-some, who, despite a caddy, are taking all day to line up their shots and four-putting every green, and so on. By the 8th hole, the three men are complaining loudly about the slow play ahead and swearing a blue streak, and so on. The priest says, "Holy Mary, I pray that they should take some lessons before they play again." The psychologist says, "I swear there are people that like to play golf slowly." The economist says, "I really didn't expect to spend this much time playing a round of golf."

By the 9th hole, they have had it with slow play, so the psychologist goes to the caddy and demands that they be allowed to play through. The caddy says O.K., but then explains that the two golfers are blind, that both are retired firemen who lost their eyesight saving people in a fire, and that explains their slow play, and would they please not swear and complain so loud.

The priest is mortified; he says, "Here I am a man of the cloth and I've been swearing at the slow play of two blind men." The psychologist is also mortified; he says, "Here I am a man trained to help others with their problems and I've been complaining about the slow play of two blind men."

The economist ponders the situation-finally he goes back to the caddy and says, "Listen, the next time could they play at night."

Q: What's the difference between a finance major and an economics major?

A: Opportunity Cost

The First Law of Economists: For every economist, there exists an equal and opposite economist.

The Second Law of Economists: They're both wrong.

If all the economists were laid end to end

a) it would be a good thing

b) they would be more comfortable

c) they would never reach conclusion

d) all of the above

e) none of the above

f) they would point in different directions

We have 2 classes of forecasters: Those who don't know . . . and those who don't know they don't know.

- John Kenneth Galbraith

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.

If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.

- Winston Churchill

There is also a joke about the last Mayday parade in the Soviet Union. After the tanks and the troops and the planes and the missiles rolled by there came ten men dressed in black.

"Are they Spies?" Asked Gorby?

"They are economists," replies the KGB director, "imagine the havoc they will wreak when we set them loose on the Americans"

The following joke is a joint invention of Preston McAfee, Phil Reny and several so far anonymous writers.

Why God Never Received Tenure at the University

1. Because he had only one major publication.
2. And it was in Hebrew.
3. And it had no cited references.
4. And it wasn't published in a refereed journal or even submitted for peer review.
5. And some even doubt he wrote it himself.
6. It may be true that he created the world but what has he done since?
7. His cooperative efforts have been quite limited.
8. The scientific community has had a very rough time trying to replicate his results.
9. He never applied to the Ethics Board for permission to use human subjects.
10. When one experiment went awry, he tried to cover it up by drowning the subjects.
11. When subjects didn't behave as predicted, he often punished them, or just deleted them from the sample.
12. He rarely came to class, just told students to read the book.
13. He had his son teach the class.
14. He expelled his first two students for learning.
15. Although there were only ten requirements, most students failed his tests.
16. His office hours were infrequent and usually held on a mountain top.

If an economist and an IRS agent were both drowning and you could only save one of them, would you go to lunch or read the paper?

They say that Christopher Columbus was the first economist. When he left to discover America, he didn't know where he was going. When he got there he didn't know where he was. And it was all done on a government grant.

p/s photo: possibly the best photo of Fiona Xie that I have

Obama's Ride

Its certainly not easy being President of America. The car is a beauty though. Click on image to enlarge.

Sunday, January 25, 2009

CNY Entertainment

If you guys are still surfing the net on CNY, you must be real desperate. For you, I have compiled some very special entertainment nuggets. These are very treasured performances by some of my favourite artistes. Trust me when I say these clips are very hard to find.

I have saved the best for last, .... Enjoy!

The very hard to find clip where Sam Hui performed with the original group Beyond with Wong Ka Kui.

The very versatile Leslie Cheung where he performed the best known Canto opera with Wong Ming Chuen. Leslie's command of Canto operatic nuances was very admirable, complemented with the proper way to hold the text and hand movements. Sent all Canto opera fans into delirium. Followed by a rare duet by Leslie and Roman Tam.

During Sam Hui's retirement party, one of the treasured moments where Leslie Cheung sang with Sam Hui.

A rare live duet by Sam Hui with Paula Tsui.

Double pleasure in seeing Danny Chan on the same stage with Leslie Cheung.

And finally, possibly the most important Canto song ever recorded. It became a rock anthem, its a power ballad, it was used as an anthem for freedom / democracy / political reform / human rights ... it signified that Cantopop grew up from that day onwards. Its a must for karaoke or pub nights. By Beyond, Hoy Foot Tin Hoong. Brilliant unplugged version, as it should be, and with Ka Kui, of course. I must say that the person who posted the clip translated the song title well, Boundless Oceans, Vast Skies.

Saturday, January 24, 2009

Chinese New Year 2009

To all who celebrate CNY, may you have a healthy and prosperous 2009. May the new year be more meaningful and fruitful to you and your loved ones.

p/s drive safely...

Friday, January 23, 2009

Making Fun Of Economists

"Economics is the only field in which two people can share a Nobel Prize for saying opposing things." Specifically, Myrdal and Hayek shared one.

Man walking along a road in the countryside comes across a shepherd and a huge flock of sheep. Tells the shepherd, "I will bet you $100 against one of your sheep that I can tell you the exact number in this flock." The shepherd thinks it over; it's a big flock so he takes the bet. "973," says the man. The shepherd is astonished, because that is exactly right. Says "OK, I'm a man of my word, take an animal." Man picks one up and begins to walk away.

"Wait," cries the shepherd, "Let me have a chance to get even. Double or nothing that I can guess your exact occupation." Man says sure. "You are an economist for a government think tank," says the shepherd. "Amazing!" responds the man, "You are exactly right! But tell me, how did you deduce that?"

"Well," says the shepherd, "put down my dog and I will tell you."

A mathematician, an accountant and an economist apply for the same job.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."

Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says "What do you want it to equal?"


1. Economists are armed and dangerous: "Watch out for our invisible hands."
2. Economists can supply it on demand.
3. You can talk about money without every having to make any.
4. You get to say "trickle down" with a straight face.
5. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out.
6. When you are in the unemployment line, at least you will know why you are there.
7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".
8. Although ethics teaches that virtue is its own reward, in economics we get taught that reward is its own virtue.
9. When you get drunk, you can tell everyone that you are just researching the law of diminishing marginal utility.
10. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have something to talk about.

ECONOMISTS do it at bliss point
ECONOMISTS do it cyclically
ECONOMISTS do it in an Edgeworth Box
ECONOMISTS do it on demand
ECONOMISTS do it risk-free (in reference to the risk-free interest rate)
ECONOMISTS do it with a dual
ECONOMISTS do it with an atomistic competitor
ECONOMISTS do it with crystal balls
ECONOMISTS do it with interest

"Economists do it with models"

Bentley's second Law of Economics: The only thing more dangerous than an economist is an amateur economist!

Berta's Fundamental Law of Economic Rents.. "The only thing more dangerous than an amateur economist is a professional economist."

A true story:
"I heard this from one of my professors. To protect him, no names will be revealed. This professor was about to get married. He went to the jewelers to get a wedding ring for his fiancee. The jeweler told him that he can have the inside of the ring engraved with the name of his fiancee for an additional $20 (remember, this was a LONG time ago). He said, "But that will reduce the resale value!" The jeweler was aghast. He said, "How can you say such a thing. You are a butcher!" "No," replied the professor, "I am an economist"."

Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a meter to the left. The second econometrician fired, but also missed, by a meter to the right. The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"

Heard at the workshop of evolutionary economists at INSEAD:

Q: How has French revolution affected world economic growth?
A: Too early to say.

A civil engineer, a chemist and an economist are traveling in the countryside. Weary, they stop at a small country inn. "I only have two rooms, so one of you will have to sleep in the barn," the innkeeper says. The civil engineer volunteers to sleep in the barn, goes outside, and the others go to bed. In a short time they're awakened by a knock. It's the engineer, who says, "There's a cow in that barn. I'm a Hindu, and it would offend my beliefs to sleep next to a sacred animal." The chemist says that, OK, he'll sleep in the barn. The others go back to bed, but soon are awakened by another knock. It's the chemist who says, "There's a pig in that barn. I'm Jewish, and cannot sleep next to an unclean animal." So the economist is sent to the barn. It's getting late, the others are very tired and soon fall asleep. But they're awakened by an even louder knocking. They open the door and are surprised by what they see: It's the cow and the pig!
When Albert Einstein died, he met three New Zealanders in the queue outside the Pearly Gates. To pass the time, he asked what were their IQs. The first replied 190. "Wonderful," exclaimed Einstein. "We can discuss the contribution made by Ernest Rutherford to atomic physics and my theory of general relativity". The second answered 150. "Good," said Einstein. "I look forward to discussing the role of New Zealand's nuclear-free legislation in the quest for world peace". The third New Zealander mumbled 50. Einstein paused, and then asked, "So what is your forecast for the budget deficit next year?"
Light bulb jokes are always in...

Q: How many Chicago School economists does it take to change a light bulb?

A: None. If the light bulb needed changing the market would have already done it.

Q: How many neo-classical economists does it take to change a light bulb?
A: It depends on the wage rate.

Q: How many conservative economists does it take to change a light bulb?

A1: None. The darkness will cause the light bulb to change by itself.

A2: None. If it really needed changing, market forces would have caused it to happen.

A3: None. If the government would just leave it alone, it would screw itself in.

A4. None. There is no need to change the light bulb. All the conditions for illumination are in place.

A5. None, because, look! It's getting brighter! It's definitely getting brighter !!!

A5. None; they're all waiting for the unseen hand of the market to correct the lighting disequilibrium.

Q: How many B-school doctoral students does it take to change a light bulb?
A: I'm writing my dissertation on that topic; I should have an answer for you in about 5 years.

Q: How many investors does it take to change a light bulb?
A: None - the market has already discounted the change.
Q:How many Keynesian economists does it takes to change a light bulb?

A:All. Because then you will generate employment, more consumption, dislocating the AD (agg. demand) to the right,...

Q: How many Trotskyists does it take to change a lightbulb?
A: None. Smash it!
Q; How many central bank economists does it take to screw in a lightbulb?

A: Just one -- he holds the lightbulb and the whole earth revolves around him.
Q: How many marxists does it take to screw in a lightbulb?

A: None - the bulb contains within it the seeds of its own revolution.

It's not easy being an economist. How would you like to go through life pretending you knew what M1 was all about?
Economics is the painful elaboration of the obvious.
Q: How many economists does it take to change a light bulb?

A: Seven, plus/minus ten.

An economist is someone who doesn't know what he's talking about - and make you feel it's your fault.

(Best Economist Joke Award #1) Experienced economist and not so experienced economist are walking down the road. They get across shit lying on the asphalt.

Experienced economist: "If you eat it I'll give you $20,000!"
Not so experienced economist runs his optimization problem and figures out he's better off eating it so he does and collects money.
Continuing along the same road they almost step into yet another shit.
Not so experienced economist: "Now, if YOU eat this shit I'll give YOU $20,000."
After evaluating the proposal experienced economist eats shit getting the money.
They go on. Not so experienced economist starts thinking: "Listen, we both have the same amount of money we had before, but we both ate shit. I don't see us being better off."
Experienced economist: "Well, that's true, but you overlooked the fact that we've been just involved in $40,000 of trade."

Following story is to demonstrate some possible implications of the above statement. Two stangers, a man and a woman, meet in a cafe, the man asks.
"My Dear, would you go to bed with me for a million dollars?"
"Well, yes, I guess I would."
"How about $100?"
"What kind of person do you think I am?"
"My Dear, we have already established that. We are merely haggling over the price!"

According to Ross Emmet, the story was told by George Bernard Shaw. The man and woman are Winston Churchill and Lady Astor and the incident allegedly did occur.

Economists are people who are too smart for their own good and not smart enough for anyone else's.
A woman hears from her doctor that she has only half a year to live. The doctor advises her to marry an economist and to live in South Dakota. The woman asks: will this cure my illness? Answer of the doctor: No, but the half year will seem pretty long.
A boy was crossing a road one day when a frog called out to him and said, "If you kiss me, I'll turn into a beautiful princess." He bent over, picked up the frog and put it in his pocket. The frog spoke up again and said, "If you kiss me and turn me back into a beautiful princess, I will stay with you for one week." The boy took the frog out of his pocket, smiled at it, and returned it to his pocket. The frog then cried out, "If you kiss me and turn me back into a princess, I'll stay with you and do ANYTHING you want." Again the boy took the frog out, smiled at it and put it back into his pocket. Finally, the frog asked, "What is the matter? I've told you I'm a beautiful princess, that I'll stay with you for a week and do anything you want. Why won't you kiss me?" The boy said, "Look, I'm an economist. I don't have time for a girlfriend, but a talking frog is cool."
Q:Why did God create economists ?

A:In order to make weather forecasters look good.

Two economists meet on the street. One inquires, "How's your wife?" The other responds, "Relative to what?"

(Best Economist Joke Award #2) Economists have forecasted 9 out of the last 5 recessions.

FEUDALISM: You have two cows. Your lord takes some of the milk.

PURE SOCIALISM: You have two cows. The government takes them and puts them in a barn with everyone else's cows. You have to take care of all the cows. The government gives you as much milk as you need.

BUREAUCRATIC SOCIALISM: You have two cows. The government takes them and puts them in a barn with everyone else's cows. They are cared for by ex-chicken farmers. You have to take care of the chickens the government took from the chicken farmers. The government gives you as much milk and as many eggs as the regulations say you should need.

FASCISM: You have two cows. The government takes both, hires you to take care of them, and sells you the milk.

PURE COMMUNISM: You have two cows. Your neighbors help you take care of them, and you all share the milk.

RUSSIAN COMMUNISM: You have two cows. You have to take care of them, but the government takes all the milk.

DICTATORSHIP: You have two cows. The government takes both and shoots you.

SINGAPORE DEMOCRACY: You have two cows. The government fines you for keeping two unlicensed animals in an apartment.

MILITARIANISM: You have two cows. The government takes both and drafts you.

PURE DEMOCRACY: You have two cows. Your neighbors decide who gets the milk.

REPRESENTATIVE DEMOCRACY: You have two cows. Your neighbors pick someone to tell you who gets the milk.

AMERICAN DEMOCRACY: The government promises to give you two cows if you vote for it. After the election, the president is impeached for speculating in cow futures. The press dubs the affair "Cowgate".

BRITISH DEMOCRACY: You have two cows. You feed them sheep's brains and they go mad. The government doesn't do anything.

BUREAUCRACY: You have two cows. At first the government regulates what you can feed them and when you can milk them. Then it pays you not to milk them. After that it takes both, shoots one, milks the other and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows.

ANARCHY: You have two cows. Either you sell the milk at a fair price or your neighbors kill you and take the cows.

CAPITALISM: You have two cows. You sell one and buy a bull.

HONG KONG CAPITALISM: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with associated general offer so that you get all four cows back, with a tax deduction for keeping five cows. The milk rights of six cows are transferred via a Panamanian intermediary to a Cayman Islands company secretly owned by the majority shareholder, who sells the rights to all seven cows' milk back to the listed company. The annual report says that the company owns eight cows, with an option on one more. Meanwhile, you kill the two cows because the Feng Shui is bad.

ENVIRONMENTALISM: You have two cows. The government bans you from milking or killing them.

FEMINISM: You have two cows. They get married and adopt a veal calf.

TOTALITARIANISM: You have two cows. The government takes them and denies they ever existed. Milk is banned.

POLITICAL CORRECTNESS: You are associated with (the concept of "ownership"is a symbol of the phallo-centric, war-mongering, intolerant past) two differently-aged (but no less valuable to society) bovines of non-specified gender.

COUNTER CULTURE: Wow, dude, there's like... these two cows, man. You got to have some of this milk. Far out! Awesome!

SURREALISM: You have two giraffes. The government requires you to take harmonica lessons.

JAPANESE DEMOCRACY: You have two cows. You give the milk to gangsters so they don't ask any awkward questions about who you're giving the milk to.

EUROPEAN FEDERALISM: You have two cows which cost too much money to care for because everybody is buying milk imported from some cheap east-European country and would never pay the fortune you'd have to ask for your cows' milk. So you apply for financial aid from the European Union to subsidise your cows and are granted enough subsidies. You then sell your milk at the former elevated price to some government-owned distributor which then dumps your milk onto the market at east-European prices to make Europe competitive. You spend the money you got as a subsidy on two new cows and then go on a demonstration to Brussels complaining that the European farm-policy is going drive you out of your job.

EASTERN EUROPEAN DEMOCRACY: You have two cows. You sell the milk (diluted with some water) at a high price to the neighbors or to anyone at the open-air market. If somebody asks for receipt, you charge for a two times higher price, so nobody will request an invoice. For concerned families with small babies you claim that the milk is "bio", though you collect the grass for feeding at the side of the highway and you keep the milk in plastic barrels used previously as containers of dangerous chemicals. Later, your neighbor or anybody from town will steal the cows and will buy their meat for a high price, and if you ask for a receipt, you will be charged for a two times higher price.

FINNISH SOCIALISM: You have two cows. Soon you have to kill one of them because in the Netherlands there is an overproduction of milk and the European Union rules say so. When you do so, you realize that it was not necessary, only the system was too slow in getting you the up-to-date news. From the stress, you get an ulcer in your stomach so you go to a doctor. The doctor realizes that this ulcer is a serious one, so you need an urgent treatment. Therefore, you soon get a call to the local hospital. The call's date is for 3 months later, because there is a queue with more urgent cases. Then your ulcer becomes even more serious because you remember that 40 percent of your income is taken for social tax.

An economist is someone who gets rich explaining others why they are poor.

"I'd rather be vaguely right than precisely wrong."

- J.M.Keynes

Seven habits that help produce the anything-but-efficient markets that rule the world by Paul Krugman.

1. Think short term.
2. Be greedy.
3. Believe in the greater fool
4. Run with the herd.
5. Overgeneralize
6. Be trendy
7. Play with other people's money

p/s photos: Tiffany Lee Loong Yee

Pounding The Pound

The fall in value of the British pound is a problem for mainland Europe and will be added to regular talks on exchange rate issues when G7 finance ministers meet in February. In the past year, sterling has lost around 30 percent versus the dollar, 20 percent versus the euro and more than 40 percent versus the yen. Late Wednesday, the pound bounced back to $1.3977 after slipping to a 23-year low of $1.3618. The British pound has fallen to a 7-year low against the US dollar and a record low against the Japanese Yen.

Bank of England Gov. Mervyn King on Tuesday night signaled that the central bank was set to seriously consider buying up a range of assets in coming weeks in an effort to jumpstart stalled lending to businesses and households. He also outlined potential "quantitative easing" measures that could be used to boost the money supply, or effectively print money, in the face of a steep contraction that threatens to take inflation below the central bank's 2% inflation target. The market is afraid that the UK will turn into the next Spain or Greece. Over the past few months, they have been working overtime to inject more stimulus into the economy, but the more that they spend, the worse impact it has on the UK’s fiscal position. Deteriorating public finances has been the primary motivation for the recent downgrades of sovereign debt ratings by Standard and Poor’s. The FSA has dismissed this rumor but that doesn’t mean that the UK can’t be put on credit watch negative which would be one step before a downgrade.

Investors are selling now and asking questions later because a downgrade would mean more losses for the British pound. Whenever a country loses its AAA rating, funds that are mandated to invest in only AAA assets need to liquidate and shift their positions elsewhere. We have seen this with Spain and could see it again with the UK.

Data from the U.K. labor market showed December jobless claims rose by 77,900, while November claims were revised up to show an increase of 83,100 from an initial estimate of 75,700. The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy.investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest.

Investors worry that Britain could end up fully nationalizing more of its banks, adding more pressure on its balance sheet. It already owns 43% of Lloyds and 70% of Royal Bank of Scotland and nationalized lenders Northern Rock PLC and Bradford & Bingley PLC last year.

After a steady weakening in value for most of 2008, it looks like the British pound will be in for continued weakness for at least the first half of 2009. The problems with UK are very similar to the US. But the similarity ends there - pound got trashed but the USD found strength. They both had the unholy economic trinity of problems - high debt, property prices, an overvalued currency. However, the thing that puts the UK on a different plane:

a) UK property prices has been on a more massive over-valuation compared to the US property

b) at least the USD is a reserve currency still, a luxury buffer the British pound does not have

c) the UK is not using the euro, which may offer some protection by being in a grouping, there is very little incentive for any groupings to help out the pound, in fact the entire chain of events may make the UK to hasten the process to adopt the euro... you didn't want to adopt the euro before because of the perceived strength of the pound and the need to have monetary independence, now in extreme weakness, the UK may have little choice but to take on the euro to replace the increasingly decimated value of the pound

d) in terms of debt, US consumers have loaded up on property financing and credit card debts, the situation is not dis-similar in the UK

e) the credit crisis which decimated banks capital in the US is reflective of many UK institutions as London rivals New York in terms as international finance centers, hence the mode of operations and exposure are very similar as well

All said, the British pound should make new lows in the coming weeks and months. Nationalising of banks will be a hot topic in both US and UK. Talks of adopting the euro and dumping the pound will take on greater fuel.

p/s photos: Elanne Kong Yuk Lam

Thursday, January 22, 2009

Depressing Economics

Edward Chancellor is the author of Devil Take the Hindmost and a senior member of GMO’s asset allocation team.

Governments around the world are resorting to extreme measures to stave off deflation and depression. Fiscal and monetary stimulus on a grand scale is prescribed by Keynesian and monetarist economists alike. But there’s a danger that such moves could hinder the cleansing process of the bust. Although the contraction may be mitigated, the result of depression economics tends to be weak economies overburdened with government debt. (There are now clearly two sides in the field, one is Keynesians who believe fiscal and monetary stimulus will be necessary and appropriate to revive the economy. The other side are the conservatives who believe that markets must be allowed to correct on its own accord, that bad companies must be allowed to fail. By intervening, it is usually borne by the government/taxpayers and reward shareholders and excessive risk takers. If we allowed Citi, Bank of America and AIG to fail, I shudder to think of the follow on effects. If that happens, the conservatives and market purists will not speak a word. If that happens, the US unemployment rate could have ballooned to 12% or 13% by now. If that happened, we can be damn sure that we will be dragging the entire global economy into a deep depression. Bailouts may be argued as necessary because of how the global economy is structured nowadays. No big bank failure will be localised. The nature of the defaults are different from 1930s or 1970s because it involves derivatives and very high leverage on capital. If we did not have the latter two components, yes, I think bad companies should be allowed to fail, better to use the supposed bailout funds to start new banks. But its not the case here, or will it ever be the case in the future.)

It’s common nowadays to dismiss the notion that an economy needs purging after a boom. This, after all, is what president Herbert Hoover’s Treasury secretary, Andrew Mellon, recommended in the early 1930s. "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," Mellon is said to have declared. "Values will be adjusted, and enterprising people will pick up the wrecks from less-competent people." To give such advice today would be political suicide.

Doing nothing in the face of a credit bust, according to conventional wisdom, is to replicate Hoover’s misguided policy. In fact, Hoover never followed Mellon’s advice. In his book, America’s Great Depression (1963), economist Murray Rothbard describes how Hoover prided himself on being the first American president to use all available tools to combat a depression.

After the 1929 stock market crash, Hoover persuaded business leaders to maintain wages. He instituted policies to support agricultural prices and halt farm foreclosures. Immigration was restricted to preserve jobs for Americans. Interest rates were lowered and government spending increased. In 1932, Hoover’s last year in the White House, the federal deficit was 4.7 percent of GDP, slightly higher than it was in 1933 after president Franklin Roosevelt took the helm.

Rothbard concludes that during Hoover’s presidency, "for the first time, laissez-faire was thrown boldly overboard, and every government weapon was thrown into the breach." Yet the main consequence of Hoover’s anti-depression policy was to bolster real wages in a time of severe deflation. As a result, American labor became uncompetitive, thereby damaging employment, business profits and investment.

Conventional wisdom holds that the depression was vanquished by Roosevelt’s New Deal. In fact, unemployment remained high, and the economy didn’t properly recover until after the U.S. entered World War II. Economist Gene Smiley, like Rothbard an adherent of the free-market Austrian school of economics, provides a cogent critique of the New Deal in his book Rethinking the Great Depression (2002). Acting under the erroneous belief that the depression was created by excessive production and too little consumption, Roosevelt’s National Recovery Administration embarked on an ambitious attempt to fix prices and output. The NRA was a flop. By the end of 1934, unemployment was 21.7 percent. Later, Roosevelt engaged in a "soak-the-rich" tax policy and instituted an "excess profits tax." The decade from 1930 to 1940 is the only one in U.S. history when corporate investment declined. Smiley concludes that the New Deal created a "depression within a depression."

At least the policies adopted after the bursting of Japan’s "bubble economy" in the early 1990s prevented a severe depression and deflation. Government spending soared as a massive public works program covered the country with cement. Yet Japan also prevented the bust from performing its role of creative destruction. Businesses were reluctant to shed workers and renege on their lifetime employment guarantees. Japanese authorities encouraged banks to supply new credit to weak companies. This served to worsen the bad-debt problems within the banking system, which came to a head in the 1997 financial crisis. Academic research suggests that the increasing dominance of certain industries by so-called "zombie" firms tended to depress job creation and lower productivity. Product prices in zombie industries were low because of excess competition. Low prices and high wages reduced profits and discouraged new investment.
( I was working for Nomura, the biggest Japanese securities firm then from 1988-1991, and I can say that Japan did one thing right: government spending increase. They did many things wrong which was what dragged the recession into a stagflation period for over ten years: they did not force bad banks to fail; the worst was allowing banks to not act on bad debts thus keeping technically insolvent businesses alive for years; the life-time employment culture caused many companies not to restructure; not allowing the banks to seek foreign investment to replenish their capital; not allowing foreign ownership of banks and most other companies which would have restructured many of them and given them much needed capital. Hence for the writer to use the Japan experience to somehow link it to the futility of what the US government agencies are doing is flawed, very flawed. The bubble was deflated in stocks and property, stocks crashed because its a relatively open market with foreign participation, property died slowly as there were too many regulations preventing foreign ownership.)

Depression economics can also trigger a growing dependency on government life support. As a result, it becomes difficult to normalize policy. The economy is vulnerable to crash when taxes are raised to reduce the deficit or when monetary policy is restricted to avoid inflation. This happened after Roosevelt instituted a fiscal and monetary tightening in 1937. Japan’s economy also collapsed in 1997 after the government increased consumption taxes. After two decades, Japan’s monetary authorities haven’t succeeded in normalizing interest rates, and economic growth has never approached its prebubble level.

So what are the dangers of our current anti-depression policies? The greatest risk is that they interfere with the clearing process, or liquidation, which is necessary for economies to regain equilibrium. Households in the U.S. and the U.K. have consumed too much and saved too little in recent years. This has to be reversed. Yet the recent decision to cut British consumption taxes doesn’t help. The era of low interest rates stimulated excessive home construction and auto purchases. If the downturn is to work its cure, it makes little sense for Washington to bail out Detroit or put a floor under home prices. If General Motors Corp. becomes a zombie, then American employees of Japanese car manufacturers are likely to suffer.
Now that banks around the world are receiving injections of public money, it’s inevitable that the authorities will play an increasing role in the allocation of capital. They are likely to do an even worse job than the Wall Street casino. Governments will pressure banks to lend to households and businesses even when it makes little business sense. The French government has offered money to its banks if they increase their lending next year. Immediately after the British government took control of the Royal Bank of Scotland, the bank announced a moratorium on mortgage foreclosures. Anti-depression policies are also in danger of stoking economic nationalism. French President Nicolas Sarkozy has proposed a €20 billion ($27 billion) fund to support national champions. Government support for stricken industries, whether in Detroit or elsewhere, conflicts with the principles of the World Trade Organization.

It’s well known that the Great Depression was exacerbated by tariffs, exchange controls and competitive currency devaluations. But that doesn’t mean modern politicians won’t repeat this disastrous course. Russia recently announced import duties on used cars, while India raised tariffs on steel and soybean oil.
Last but not least, the massive fiscal and monetary bailout threatens to destabilize government finances. At the latest count Washington’s commitments to fight financial fires amounted to some $7 trillion, according to Bloomberg. The British government is proposing a budget deficit equivalent to 8 percent of next year’s GDP. Whitehall is also supporting banks whose loan book is a multiple of Britain’s economic product. Monetarist economists, such as Federal Reserve Board chairman Ben Bernanke, have long promised that monetary policy has the right tools to deal with any threat of depression. Yet Iceland’s recent flameout shows what happens when the financial problems of a bust exceed the government’s available resources. ( Yes, deficit spending will shatter US balance sheet, but not doing it will leave a US economy grappling with social unrest, massive unemployment, and debilitate one of their most important industry, banking and international finance. Yes, the moves undertaken by the US will ensure a long but sure death for the USD, which is the way to penalise the US, by moving more and more US assets to foreign ownership. There will come a time when most US banks and even the IBMs, Procter & Gamble will be majority owned by foreign investors, and it will come sooner than you think. Unless the government go on a super diet of savings and increased productivity after this crisis is over, the US will be only a shadow of its former self in economic might in 5 years time.)

p/s photos: Sharon Chan Mun Chi