Let me start a new annual tradition to present 10 projections about 10 years in the future.
October 20, 2019.
1. The biggest source of anxiety in the whole world is bewilderment at how quickly the world is changing all around everyone. Bewilderment and feeling disconnected from the future of the world becomes the "mother-of-all-fears" that show itself in more extremist activities rooted in nationalism, religion and economic grievances.
2. Action against climate-change becomes a money-spinner, vote winner and source of national pride. The public came around to realise that those who pollute stays poor and governments also learnt that they always gets blamed for poor environment that leave their people sick. The biggest new boom industry is "Clear Industries" which involves scrubbing and filtering technology to produce clean water and clean air. And the winner in this turn-around game (so far) is ... China.
3. The world is in a new financial crisis driven by bursting of an economic bubble in China after 10 years of loans growth, real estate boom and unfettered investment. The economies of the US, Europe and Japan are not strong enough to compensate, while most of the rest of the developing world is, by now, wrapped in reliance on the Chinese economy. Chinese youths - reared on a diet of "China-never-makes-a-mistake", being unfamiliar with self-reflection and coping with disappointments - behaves in volatile and dangerous ways increasing regional tensions. China responds with policial reforms but finds it hard to manage expectations.
4. The biggest source of social and regional instability comes from environmental degradation especially lack of access to water. Tensions breakout into violence and wars in Africa, Middle-east, Indian-subcontinent, Central Asia and within China amongst people who are trapped by poverty or national borders from shifting life sustaining resources.
5. India promises but sputters as age old divisions (and sheer numbers of population growth) stayed ahead of growth. Intense dislocation and "bewilderment" within its massive, under-educated and traditionally conservative population creates a volatile domestic and international situation with politically motivated clashes with China. Indian politicians vie to become the new global spoilers as the standard bearer for the "have-nots" against the global economy which China and the US champions.
6. Iran - the ancient civiliation of Persia - flowers after reformist factions takes power after overthrowing the reactionary elements. The economy is in shambles but politically, together with Iraq, it tries to be a model of "The Shiite Way" of a modern Islamic nation that combines piety, traditions with modern progress. Meanwhile, Egypt and Saudi Arabia slides towards anarchy as the state falters in botched political successions.
7. America gets to a point of reckoning if it will retain its pre-eminent military power which it can no longer afford, or reorientate to rebuild its economy to cope with an ageing population, global competition and gross inefficiencies (despite the best of efforts in 8 years of the Obama Presidency) in its healthcare, infrastructure, education and governance systems.
8. Thailand starts to remind people of the Philippines. Philippines begins to remind people of Zimbabwe. Malaysia becomes more like Thailand with a succession of weak governments, stronger civil society and resulting in a lost generation. Vietnam is the stunner which trumps them all with the most vibrant economy in Southeast Asia. Indonesia thrives on diversity and finally show its promise but also rearing its heads with regional ambition. Singapore roars ahead and settles into a comfort zone like Danmark. Brunei has trouble with over-population which nudges closer and closer to 1m. Sri Lanka becomes the economic dark horse and tries to join ASEAN.
9. Mass and conspicuous consumption becomes unfashionable as the average age of the "haves" in the world gets older (but the world's "have nots" gets younger). Shopping malls become a place associated with the lower classes. Instead, people spend more time and money on creative arts, health, experiences and investing in human relationships. The health, vacation and education industry keeps booming. The quest for authenticity in experiences of nature creates stress on world's cultural and natural heritage leading to persistent tension between the "haves" and "have-nots".
10. Brazil finally becomes the global power it always had the potential to be but never did. Vast new energy resources, unrivalled prowess in farming, prolonged political stability and (finally) social reforms and stronger rule of law creates a new force in the world equal to Japan and EU and below that of only US and China. The main driver for Brazil's rise came from Brazil's strategic economic partnership with China (also Australia) where Brazil is both a source of raw materials and a new 400m people market for China in Latin America.
Showing posts with label Finance and Economy. Show all posts
Showing posts with label Finance and Economy. Show all posts
Wednesday, October 21, 2009
Tuesday, June 23, 2009
Our Time in the iPhone
In my view, the one product that best captures and symbolises the age we are in is the iPhone. For sure is a brilliant little product but I see it as something that excapsulates so well so much of the breathtaking difference as decade or so makes in our lifestyles.
Less than 10 years ago, photographs are taken with cameras and printed on paper - not any longer!
Less than 10 years ago music is something on a CD or a tape - not any longer!
Less than 10 years ago a cell phone is for voice only - not any longer! (And less than 20 years ago, there was hardly ANY cell phone at all!)
Less than 15 years ago, hardly anyone had an email - not any longer!
Less than 15 years ago, people have just discovered using the HTML and linking different documents together with "links" you can click on ... the internet was an exotic realm limited to research institutes - not any longer!
Less than 10 years ago, the dot-com boom went bust and people were declaring the party to be over and the internet is dead - not any longer!
Less than 10 years ago, international phone calls were extremely expensive - not any longer ! Moreover you can do that now for free and with streaming video from anywhere!
Less than 10 years ago, people still buy encyclopedia in the book form - not any longer!
Less than 5 years ago, people were surprised to find little cameras on their cellphones - not any longer!
Less than 5 years ago, to open a page on the internet you needed to w.a.i.t. for it to load - not any longer!
Less than 10 years ago, Google was newly founded (in 1998)
Less than 5 years ago, you can only access the internet on a computer...and always with a wire - not any longer!
Less than 5 years ago, broadband was unusual and costs a lot - not any longer!
Less than 5 years ago, WiFi were rare and exotic - not any longer!
Less than 5 years ago, the idea of watching endless choice of smooth-streaming video online was far-fetched - not any longer!
Less than 2 years ago, one cannot carry around their entire digital library (of creation, documents, photos, music...) on a sliver of silicon the size of their finger nail - not any longer!
Less than 2 years ago, you won't expect your auntie to invite you to be their friend on Facebook - not any longer!
The list can go on but physically the iPhone is nothing more than a piece of glass, pieces of circuitry on silicon and plastic, a battery and a think metal back. Thoughout most of human history, it is not something that would have worth much at all.
Its magic and power lies in the unseen and the intangible. This is the sign of our times that its power came from the power of thought and intellectual energy that made up the software and its value lay in the connection of thought that it opened up; by linking up the collective knowledge and the energies of human creativity. The value of the device is no longer in the physical, it is all intellectual - unseen, intangible, everywhere and nowhere in particular.
Once we consider how our entire collection of photographs, music and recorded knowledge can disappear into the gigabits of memory that appear to be little more than dust and ether; one is reminded that ultimately the universe is only energy - even mass is a energy according to Einstein and quantum physics - "everything" is just but a thought, a pool of energy, both-existing-and-non-existent, limitless, transforming, transient, abundant, all-powerful and all-present.
If we consider how the device came about, I can see vast chains that stretch across the world and across time only to meet at certain points in time and space.
On the most tangible level, I see the global supply chain of the millenium decade. Into mega production bases in Southern China came product designs streamed from Apple in California. In came microchips from the US, Korea and Taiwan. Countless other materials were sourced from all over China and the rest of East Asia. In came software codes written by brilliants minds drawn from California, India, Japan, Russia and any number of other places in the world. In China, all those ingredients met young workers from Sichuan, Guangdong and Zhejiang who assembled them iPhones and loaded them into containers in Hong Kong ... or into FedEx aircrafts that swarm like bats across the oceans and land only in the middle of the night. Along the way, they were read by hundreds of lasers as they move from containers to bins to boxes and all the way to the shelves in a thousand cities in the world.
There, another thousands of paths converge - those leading back to the people who turned a thingy into a product (marketing), the technical support team in India, journalists who wrote the reviews in the magazines, the youngsters who man the stores, the guys who designed the theme music for the advertisement campaigns, the girl whose art work adorned the store display, the thousands of programmers who hoped to strike it rich creating online applications, the corporate boardrooms who demanded an iPhone "platform" for their services, the technicians who upgraded supplied the cellphone network and finally the consumer - who would in time blogged about her new iPhone to her friends on facebook.
Out of a network, a chain and out of a chain and into another network, and then another. It is globalization in action both the actor as well as the result.
On another level that if often unseen, the risks of all such ventures were financed, underwritten, exchanged, insured, collaterialised, packaged-and-sold-on by bankers in New York and London. We can see the lawyer who decided to add another punctuation mark on the intellectual property agreement. On one side of the world, a trader executed a trade for AAPL and covering it with an option; and on the otherside of the globe a retirement fund manager attended a Macworld event sitting next to a hedge fund manager and next to a venture capitalist all thinking different thoughts but all linked to how what Steve Jobs was about to show will do to the money under their control.
But that is before we got to the power of the device itself. In its innards, we see the cumulative knowledge of generations of scientific genii and pioneers all the way from the beginning of science in ancient Greece, to medieval engineers in China, mathematicians in India and Persia, ancient mechanical designers in Rome and Egypt. We see them through the foundations of modern science that stretched from France, Geneva, Florence, Vienna, London during the Enlightenment, and all the way to the labs of MIT, Cambridge, Stanford and Caltech where their brilliant decendants - whether they come from America, Russia, Europe and Asia create breakthroughs and spilled out into their garages and start-ups in Silicon Valley and elsewhere.
And in its memories - those same dust and ether that store information - we see the cumulative creative energies from time immemorial that live on in ideas, in our music, in the written and spoken word, in images, in art and design, in all the richness of the creative arts and in all the richess of life that populate the human civilization - so long as anything can be digitised.
And that is how, I see our time in the simple little iPhone.
Less than 10 years ago, photographs are taken with cameras and printed on paper - not any longer!
Less than 10 years ago music is something on a CD or a tape - not any longer!
Less than 10 years ago a cell phone is for voice only - not any longer! (And less than 20 years ago, there was hardly ANY cell phone at all!)
Less than 15 years ago, hardly anyone had an email - not any longer!
Less than 15 years ago, people have just discovered using the HTML and linking different documents together with "links" you can click on ... the internet was an exotic realm limited to research institutes - not any longer!
Less than 10 years ago, the dot-com boom went bust and people were declaring the party to be over and the internet is dead - not any longer!
Less than 10 years ago, international phone calls were extremely expensive - not any longer ! Moreover you can do that now for free and with streaming video from anywhere!
Less than 10 years ago, people still buy encyclopedia in the book form - not any longer!
Less than 5 years ago, people were surprised to find little cameras on their cellphones - not any longer!
Less than 5 years ago, to open a page on the internet you needed to w.a.i.t. for it to load - not any longer!
Less than 10 years ago, Google was newly founded (in 1998)
Less than 5 years ago, you can only access the internet on a computer...and always with a wire - not any longer!
Less than 5 years ago, broadband was unusual and costs a lot - not any longer!
Less than 5 years ago, WiFi were rare and exotic - not any longer!
Less than 5 years ago, the idea of watching endless choice of smooth-streaming video online was far-fetched - not any longer!
Less than 2 years ago, one cannot carry around their entire digital library (of creation, documents, photos, music...) on a sliver of silicon the size of their finger nail - not any longer!
Less than 2 years ago, you won't expect your auntie to invite you to be their friend on Facebook - not any longer!
The list can go on but physically the iPhone is nothing more than a piece of glass, pieces of circuitry on silicon and plastic, a battery and a think metal back. Thoughout most of human history, it is not something that would have worth much at all.
Its magic and power lies in the unseen and the intangible. This is the sign of our times that its power came from the power of thought and intellectual energy that made up the software and its value lay in the connection of thought that it opened up; by linking up the collective knowledge and the energies of human creativity. The value of the device is no longer in the physical, it is all intellectual - unseen, intangible, everywhere and nowhere in particular.
Once we consider how our entire collection of photographs, music and recorded knowledge can disappear into the gigabits of memory that appear to be little more than dust and ether; one is reminded that ultimately the universe is only energy - even mass is a energy according to Einstein and quantum physics - "everything" is just but a thought, a pool of energy, both-existing-and-non-existent, limitless, transforming, transient, abundant, all-powerful and all-present.
If we consider how the device came about, I can see vast chains that stretch across the world and across time only to meet at certain points in time and space.
On the most tangible level, I see the global supply chain of the millenium decade. Into mega production bases in Southern China came product designs streamed from Apple in California. In came microchips from the US, Korea and Taiwan. Countless other materials were sourced from all over China and the rest of East Asia. In came software codes written by brilliants minds drawn from California, India, Japan, Russia and any number of other places in the world. In China, all those ingredients met young workers from Sichuan, Guangdong and Zhejiang who assembled them iPhones and loaded them into containers in Hong Kong ... or into FedEx aircrafts that swarm like bats across the oceans and land only in the middle of the night. Along the way, they were read by hundreds of lasers as they move from containers to bins to boxes and all the way to the shelves in a thousand cities in the world.
There, another thousands of paths converge - those leading back to the people who turned a thingy into a product (marketing), the technical support team in India, journalists who wrote the reviews in the magazines, the youngsters who man the stores, the guys who designed the theme music for the advertisement campaigns, the girl whose art work adorned the store display, the thousands of programmers who hoped to strike it rich creating online applications, the corporate boardrooms who demanded an iPhone "platform" for their services, the technicians who upgraded supplied the cellphone network and finally the consumer - who would in time blogged about her new iPhone to her friends on facebook.
Out of a network, a chain and out of a chain and into another network, and then another. It is globalization in action both the actor as well as the result.
On another level that if often unseen, the risks of all such ventures were financed, underwritten, exchanged, insured, collaterialised, packaged-and-sold-on by bankers in New York and London. We can see the lawyer who decided to add another punctuation mark on the intellectual property agreement. On one side of the world, a trader executed a trade for AAPL and covering it with an option; and on the otherside of the globe a retirement fund manager attended a Macworld event sitting next to a hedge fund manager and next to a venture capitalist all thinking different thoughts but all linked to how what Steve Jobs was about to show will do to the money under their control.
But that is before we got to the power of the device itself. In its innards, we see the cumulative knowledge of generations of scientific genii and pioneers all the way from the beginning of science in ancient Greece, to medieval engineers in China, mathematicians in India and Persia, ancient mechanical designers in Rome and Egypt. We see them through the foundations of modern science that stretched from France, Geneva, Florence, Vienna, London during the Enlightenment, and all the way to the labs of MIT, Cambridge, Stanford and Caltech where their brilliant decendants - whether they come from America, Russia, Europe and Asia create breakthroughs and spilled out into their garages and start-ups in Silicon Valley and elsewhere.
And in its memories - those same dust and ether that store information - we see the cumulative creative energies from time immemorial that live on in ideas, in our music, in the written and spoken word, in images, in art and design, in all the richness of the creative arts and in all the richess of life that populate the human civilization - so long as anything can be digitised.
And that is how, I see our time in the simple little iPhone.
Friday, February 13, 2009
Thinking in Trillions
The US economy is a multi-trillion dollar train-wreck. President Obama said it correctly last Monday during his news conference when he explained that it is not your usual recession. As a matter of fact, his Q&A - thanks to the precision and power of his thinking - makes an impressive education to the layman of what is going on and his logic for the stimulus package.
And I have been tempted for sometime to explain how that is so based on my understanding of economics. Here I shall try.
The total financial asset of the US economy is about US$55 trillion ("T"). That is the aggregate value of all homes, fixed assets, corporations, personal savings, stock, bonds, real estate etc. Think of that as total net worth.
The US economy produces US$14T of GDP a year. That is approximately 23% of the global GDP which makes the global GDP to be about US$60T. Think of that as income.
The US Federal Government makes up US$2.9T of the GDP, which is the amount it spends. To fund it, in 2008 it collected US$2.6T in taxes. The rest US$0.3T is the deficit funded through borrowings.
The total US Federal Government debt is nearly US$11T, which has risen US$5T within the last 8 years.
The stimulus package will add US$500bn of new spending (the remaining US$300bn will be tax cuts) in the next two years. Pro-rated to US$250bn of new spending a year means adding 8.3% to the federal budget annually. If the entire stimulus - both spending and tax cuts - were to be totally debt funded (which is likely), it will add 7.2% to the US Federal Government debt.
The stimulus spending of US$250bn per year is half the defense spending (38% if the running costs of wars in Iraq and Afghanistan are included); which is about the same as the amount for debt service (in 2008); which is about 40% of Federal expenditures on Medicare and Medicaid.
Now, lets consider the first of four crises, the mortgage crisis.
The total value of US home mortgages is about US$10T. Banks holds those mortgages as "assets" both through direct mortgage lending as well as an investor in mortgage derivatives.
And I have been tempted for sometime to explain how that is so based on my understanding of economics. Here I shall try.
The total financial asset of the US economy is about US$55 trillion ("T"). That is the aggregate value of all homes, fixed assets, corporations, personal savings, stock, bonds, real estate etc. Think of that as total net worth.
The US economy produces US$14T of GDP a year. That is approximately 23% of the global GDP which makes the global GDP to be about US$60T. Think of that as income.
The US Federal Government makes up US$2.9T of the GDP, which is the amount it spends. To fund it, in 2008 it collected US$2.6T in taxes. The rest US$0.3T is the deficit funded through borrowings.
The total US Federal Government debt is nearly US$11T, which has risen US$5T within the last 8 years.
The stimulus package will add US$500bn of new spending (the remaining US$300bn will be tax cuts) in the next two years. Pro-rated to US$250bn of new spending a year means adding 8.3% to the federal budget annually. If the entire stimulus - both spending and tax cuts - were to be totally debt funded (which is likely), it will add 7.2% to the US Federal Government debt.
The stimulus spending of US$250bn per year is half the defense spending (38% if the running costs of wars in Iraq and Afghanistan are included); which is about the same as the amount for debt service (in 2008); which is about 40% of Federal expenditures on Medicare and Medicaid.
Now, lets consider the first of four crises, the mortgage crisis.
The total value of US home mortgages is about US$10T. Banks holds those mortgages as "assets" both through direct mortgage lending as well as an investor in mortgage derivatives.
The home mortgages are collateralized against the value of homes. The aggregate value of US homes peaked at US$13T in 2006 and has fallen to about US$8T - 8.5T, meaning US home mortgages as a whole is US$1.5-2T under-water. The "wealth" destroyed by this asset-deflation/bursting-of-the-bubble is bourne by both homeowners and banks.
Which brings us to the second crisis, the financial crisis.
The total capitalisation of US banks is about US$0.6T.
As the banks' asset value which were held as mortgages (or mortgage derivatives) decline, that will need to be written-off against the bank's capital base. Assuming that homeowners take the first hit (because banks tend not to lend 100%) the exposure of banks are still between US$0.5T - US$1.0T ... and growing by US$0.1T for every additional 1% fall in house prices. At this rate, US$0.6T in total capital base can disappear quite quickly and that's how banks become insolvent.
Hence the US has been under a financial crisis (at least since March 2008) because as banks are straddle with bad assets and fighting against insolvency, the ability of the US financial system to keep functioning comes under threat.
Which brings us to the third crisis, the credit crisis.
Banks are just one of many players in the financial sector. At any given time, financial transactions take place between any combination of counterparts: brokerages, insurance companies, pension funds, investment funds, credit card companies, trade credit, hire-purchase, car loans, student loans, commercial credit lines, consumer pre-payments, notes/bonds (issued by governments, local governments, municipalities, corporations, public bodies etc.). They all have one thing in common: credit i.e. people parting with their monies because they believe they have enough trust the counterpart to get the money back.
Since September 2008, many of these markets are in different degrees of dysfunction. However, due to aggressive intervention by the Fed in September and October, the worst did not come to pass. Nonetheless, there is still a significant contraction in the amount of credit available within the financial system (e.g. the commercial paper market shrank from US$2.2T in mid-2008 to US$1.6T in Feb-2009) and any that is available is a higher cost.
Which brings us to the inevitable - the economic crisis.
The economic crisis is not about the wealth of the US economy rather it is income (remember, the US$14T a year).
Imagine the US economy as a human body (as we will discuss later, it is not even a particular healthy one). It just encountered (1) a huge trauma - lets say it has a seizure from partying for 72 hours running [the mortgage crisis] - which reduced the blood flow to the heart causing (2) a heart attack [the financial crisis] which caused (3) a sudden (but thankfully temporary) fall in the blood flow to around the body [the credit crisis], which unsurprisingly caused (4) massive cell damage leading to organ failure [the economic crisis].
However, the US economy itself is the only thing that can fix all its other crises - and over time, there is no doubt it will because the US economy has structural advantages such as favourable demographics to push growth along. For as long as the US economy keep going, it will generate US$14T of economic output a year to slowly plug the hole from lost asset value from the mortgage crisis, to recapitalize the financial system, to generate cash flow to pay and reassure creditors ... and ultimately to make the economic wheel go around again i.e. maintain the productive capacity* of the economy to generate the next US$14T or more of economic output.
What has been fuelling the productive capacity of the US economy has been personal consumption - 72% of the GDP - partly debt fueled. Personal consumption in the US has been on uninterrupted growth since 1978. With the fall in house, equity value and pension funds, the total fall in US personal net wealth in 2008 was almost US$9T - coupled with the tightening of the credit market - personal consumption is falling drastically.
The current estimate is that the US economy at current rate will fall US$1T below its productive capacity annually for the next 2 years i.e. a -7% contraction in GDP. The stimulus package @US$0.4T annually will not make up the entire shortfall.
The total capitalisation of US banks is about US$0.6T.
As the banks' asset value which were held as mortgages (or mortgage derivatives) decline, that will need to be written-off against the bank's capital base. Assuming that homeowners take the first hit (because banks tend not to lend 100%) the exposure of banks are still between US$0.5T - US$1.0T ... and growing by US$0.1T for every additional 1% fall in house prices. At this rate, US$0.6T in total capital base can disappear quite quickly and that's how banks become insolvent.
Hence the US has been under a financial crisis (at least since March 2008) because as banks are straddle with bad assets and fighting against insolvency, the ability of the US financial system to keep functioning comes under threat.
Which brings us to the third crisis, the credit crisis.
Banks are just one of many players in the financial sector. At any given time, financial transactions take place between any combination of counterparts: brokerages, insurance companies, pension funds, investment funds, credit card companies, trade credit, hire-purchase, car loans, student loans, commercial credit lines, consumer pre-payments, notes/bonds (issued by governments, local governments, municipalities, corporations, public bodies etc.). They all have one thing in common: credit i.e. people parting with their monies because they believe they have enough trust the counterpart to get the money back.
Since September 2008, many of these markets are in different degrees of dysfunction. However, due to aggressive intervention by the Fed in September and October, the worst did not come to pass. Nonetheless, there is still a significant contraction in the amount of credit available within the financial system (e.g. the commercial paper market shrank from US$2.2T in mid-2008 to US$1.6T in Feb-2009) and any that is available is a higher cost.
Which brings us to the inevitable - the economic crisis.
The economic crisis is not about the wealth of the US economy rather it is income (remember, the US$14T a year).
Imagine the US economy as a human body (as we will discuss later, it is not even a particular healthy one). It just encountered (1) a huge trauma - lets say it has a seizure from partying for 72 hours running [the mortgage crisis] - which reduced the blood flow to the heart causing (2) a heart attack [the financial crisis] which caused (3) a sudden (but thankfully temporary) fall in the blood flow to around the body [the credit crisis], which unsurprisingly caused (4) massive cell damage leading to organ failure [the economic crisis].
However, the US economy itself is the only thing that can fix all its other crises - and over time, there is no doubt it will because the US economy has structural advantages such as favourable demographics to push growth along. For as long as the US economy keep going, it will generate US$14T of economic output a year to slowly plug the hole from lost asset value from the mortgage crisis, to recapitalize the financial system, to generate cash flow to pay and reassure creditors ... and ultimately to make the economic wheel go around again i.e. maintain the productive capacity* of the economy to generate the next US$14T or more of economic output.
What has been fuelling the productive capacity of the US economy has been personal consumption - 72% of the GDP - partly debt fueled. Personal consumption in the US has been on uninterrupted growth since 1978. With the fall in house, equity value and pension funds, the total fall in US personal net wealth in 2008 was almost US$9T - coupled with the tightening of the credit market - personal consumption is falling drastically.
The current estimate is that the US economy at current rate will fall US$1T below its productive capacity annually for the next 2 years i.e. a -7% contraction in GDP. The stimulus package @US$0.4T annually will not make up the entire shortfall.
And critically, consumption - unlike investment - does not by itself grow the productive capacity of the economy. If we think of the productive capacity of the economy as cells in the body. During injury or illness, cells tend to die, even-though the body needs to have them in order to recover. Anytime a worker is laid off, investment is reduced, production is cut, technology/R&D is cut, the productive capacity of the economy is reduced. For the US economy, the body has been keeping itself alive (or even look outwardly robust) mostly through junk food that merely kept the body going but did nothing to keep it healthy or growing. What this also means is that the productive capacity of the US economy has not been growing at a self-sustaining manner through a positive return-on-investment. Instead, it has been growing in a zero-sum-game through consumption which do not have a return.
Any visitor to the US expecting to see 21st century infrastructure or technology would in most case be disappointed. Airports, highways, telecommunication systems, public transport are often 25 years or older. In fact, many date back to the Works Progress Administration projects by FDR as his stimulus program to bring the US out of the Great Depression.
That is both a challange as well as opportunity for the Stimulus Package. Because so little investment has been taking place the return on investment should be pretty robust - every $ invested may yield a large multiplier of economic effect - which in turn will expand the economy's productive capacity. That is important because there is no point to an economic recovery by merely going back to where it was before. To recoup the costs of the Stimulus Package - plus the much larger costs of recapitalizing the financial system and restore the wealth lost to the mortgage bubble - the US economy need to grow to have more productive capacity than what it had earlier. That is the key: because every 0.1% in additional growth in the GDP will over 25 years painlessly recoup the costs of the Stimulus Package ... and doing so in the right way by growing the productive capacity.
So I believe it is right that Obama included billions in what he called "down-payments" for his goals to invest in other areas for economic reforms: alternative energy, energy efficiency, health care reform, education, scholarships and infrastructure. If anything, I hope he will use this as a springboard to reform and reinvest in those critical areas of the economy even more in the months to come.
Investing in structural reforms of the economy stands to repay the short-term spending many fold in the years to come. It is true they are not the purist view of stimulus for stimulus-sake because they take longer to implement and so the effects are slower but the return-on-investment - from structural changes to the economy - is potentially huge. They are the catalysts to shape the "creative destruction" of the current economic model as it evolve into one hope to be a larger, stronger and more sustainable one. For example, US$2T of annual US economic output comes from the most wasteful healthcare system in the world. If reforms means the US spends as much per capita as Canada (who does not seem to be doing too badly) that is US$1T a year of additional lift to the US economy - and lesser drag on the competitiveness of US corporations for whom employees' healthcare is part of payroll costs. Likewise for energy and transportation infrastructure.
It is a dillemma that policy choices during a downturn is often counter-intuitive and contradictory to the longer term choices. Whatever the virtue of cutting personal consumption, if it keeps falling too drastically that is a lot of productive capacity to be lost making recovery even harder. So personal consumption has to be brought to a soft-landing, particularly stimulus spending can double as a social safety net targeted at maintaining the health, shelter and food needs of the unemployed and for his family. In the US, if you lose a job, you lose healthcare for the whole family and without the income you may lose your home, and the downward spiral beckons. Whatever the arguments for and against a welfare state, there is a social and economic cost to ignoring anyone to lose his health or his home or not being able to feed himself. What is broken often takes longer to fix and by ignoring his plight society makes it harder for him to be productive again. So this component of the Stimulus Package cannot be ignored.
Lastly, it should not be forgotten that in the US, most public services are provided by the States through their own budgets raised from local taxes. Because of their heavy reliance on property tax and sales tax, state budgets are decimated by the economic crisis. What is making it much worse is that most states have a balance-budget-requirement in their constitutions; i.e. when tax revenue falls they are legally obliged to cut their expenditure accordingly. So what gives? State and local level taxation maintains the school system, public hospitals, funds public transport, funds the police, paramedics, fire service and local services like parks and libraries ... which is just about all the most important services that underpins a civilized society. The Stimulus Package allows the States to get an infusion of Federal money for the State's portion of Medicare and Medicaid obligations (which often consumes the largest share of the budget - and in a recession this can only go up as more people fall into poverty), thus cushioning the amount of cuts that will be required on other areas.
One often forgets the difference between a civilized society and the uglier faces of capitalism (think of how many cities where the rich live behind walls keeping crime and squalor outside) comes down to public services that maintain a minimal quality of life for everyone. The impact of cutting one public bus line, or closing the local park, or letting crime go up, or cutting funding for schools means a lot to society. I read in St Louis that as the city considers which bus route to cut, hundreds worry about having having no means to get to work, seniors cannot get to the hospital etc. For others, these are jobs: bus drivers, policeman, librarians etc.
Going back to our patient, its been said in cardiology that "time is muscle". The faster you treat a heart attack, the less the muscle damage and the better the chance for recovery. What has been done so far only stablizes the patient: the Fed provided emergency blood transfusion (The Fed and FDIC flooding the market with US$trillions in funds and guarantees) and the Stimulus Package provides shot of drugs to keep the heart pumping and stimulate tissue-repair. Unless policy makers act quickly to save the destruction of the heart muscle (i.e. the productive capacity of the economy undermined through job-loss, good companies going bust, investments pulled), it would be very difficult to fix the heart attack [financial crisis] and to allow the body to recover from the trauma [mortgage crisis].
So I see the Stimulus Package as the necessary first-shot in a multiple-course treatment. Collectively as a society, asking to borrow and spend 3% of the annual income or 0.7% of the total wealth to keep the economy and society from crashing, it is small money especially when compared to the scale of the challenges and compared to the potential for pay-back. It is a small start to a long and expensive treatment that will continue with finding the US$1 - US$1.5T to recapitalise the financial system ... and eventually to structural reforms that will require US$20T to fund the health care and retirement of the US baby boom generation ... and move to a alternative energy economy .... to educate the largest number of school age children in US history.
---
This article is partly inspired by a marvellous must-read article in the NYT. The Big Fix - The Real Economic Challenge for Barack Obama
Tuesday, October 28, 2008
Strong Rebounce from Hang Seng
Hang Seng Index, after 13% drop yesterday, rebounded 1,580 or 14.35% to 12,596, with a volume of HKD 66 billion.
This is the largest single day rise since Oct 29, 1997. The index's super heavyweight HSBC jumped 20%.
The rebounce offers a short term relief after days of bloodbath in the stock market. It is still too early to say if the fall yesterday has touched the bottom.
This is the largest single day rise since Oct 29, 1997. The index's super heavyweight HSBC jumped 20%.
The rebounce offers a short term relief after days of bloodbath in the stock market. It is still too early to say if the fall yesterday has touched the bottom.
Monday, October 27, 2008
Hang Seng Plunged to 11,015
Black Monday in Hong Kong.
The Hang Seng index plunge 1,602 to 11, 015.
The index has lost 65.5% from its previously peak on Oct 30, 2007. It has surpassed all records except that in 1973 where Hang Seng lost more than 90%.
The index's No.1 heaveyweight HSBC, dropped almost 15% to just HKD75. The price earning ratio in Hang Seng Index is now in single digit.
In stock market, fundamental just reign and it is the emotion that rule.
Dow Jone closed at 8,378 last Friday and likely to open lower given that there was no good news over the weekend.
Sit very tight.
The Hang Seng index plunge 1,602 to 11, 015.
The index has lost 65.5% from its previously peak on Oct 30, 2007. It has surpassed all records except that in 1973 where Hang Seng lost more than 90%.
The index's No.1 heaveyweight HSBC, dropped almost 15% to just HKD75. The price earning ratio in Hang Seng Index is now in single digit.
In stock market, fundamental just reign and it is the emotion that rule.
Dow Jone closed at 8,378 last Friday and likely to open lower given that there was no good news over the weekend.
Sit very tight.
Friday, October 24, 2008
Currency Crisis soon or now?
After the thaw of credit crunch, are we heading to a currency crisis soon, or now?
Thanks to Alan Greenspan who confessed he made mistakes. That sends a powerful chill down the spine everywhere.
The Asian stock markets reacted very nervously to the Greenspan's admission. The Tokyo Nikkei Index drops by 9.6% to7,649.
The Hang Seng Index sunk by 1,142 point to 12,618, a hefty drop of more than 8% in a single day, representing 60.5% fall from its previous peak of 31,958 on Oct 30, 2007.
This fall is close to the last record held in 1998 following the Asia's financial crisis. The Index reached 16,820 on August 7, 1997 and sunk to 6,545 on August 13, 1998, a 61.1 drop in about a year.
Does the market hits the bottom? Maybe not yet.
If Greenspan is right, this is going to be worse than 1929 crash. We can expect more bad news.
Sit tight....
Thanks to Alan Greenspan who confessed he made mistakes. That sends a powerful chill down the spine everywhere.
The Asian stock markets reacted very nervously to the Greenspan's admission. The Tokyo Nikkei Index drops by 9.6% to7,649.
The Hang Seng Index sunk by 1,142 point to 12,618, a hefty drop of more than 8% in a single day, representing 60.5% fall from its previous peak of 31,958 on Oct 30, 2007.
This fall is close to the last record held in 1998 following the Asia's financial crisis. The Index reached 16,820 on August 7, 1997 and sunk to 6,545 on August 13, 1998, a 61.1 drop in about a year.
Does the market hits the bottom? Maybe not yet.
If Greenspan is right, this is going to be worse than 1929 crash. We can expect more bad news.
Sit tight....
Thursday, October 9, 2008
Blacker October - Why?
If September is black, October now looks definitely blacker.
Following the Dow Jones plunging to 8,579 on Oct 9, the Hang Seng Index sunk to 14,796 on Oct 10, representing 39.4% and 53.7% drop from their respective historical height last October. Stock markets almost everywhere saw severe beating.
This is notwithstanding the US's USD 850 billion bail-out and several major countries coming to the rescue by hefty interest rate cut, state guarantee to bank deposits and other measures. It is obvious from the stock market performance, from Jakarta to Moscow, that the investors confidence continues to sink to new low.
To many including Francis Fukuyama, this is but evident of "the Fall of American Inc". http://www.newsweek.com/id/162401/page/1.
The current credit crisis, stemmed from financial deregulation, a key aspect of Reaganism for economic growth is now being blamed by the Main Street. Fukuyama calls it - what was once fresh ideas have hardened into hoary dogma.
Most agrees that it is obscene and inequitable that the Wall Street drew out the fat cheque during the good time and the players largely escape any responsibility (recall Lehman Brothers CEO Dick Fuld who claims "it wasn't my fault") when the time is bad. The bail-out bill now lies squarely with every helpless tax payers who mostly make disproportionate gain, if any, during the good time. No wonder, Communism has fans up to this day!
Unrestraint capitalism or indeed unfettered freedom or uncontrolled democracy are all open to exploitation. Everything has an aspect of a yin and a yang. Making the right decision in a particular condition at a particular time is both the art and the science we human race got to constant make. This time is no different.
Let's persevere in this financial meltdown! After all, what goes down will come up. Did I not say yin and yang?
Following the Dow Jones plunging to 8,579 on Oct 9, the Hang Seng Index sunk to 14,796 on Oct 10, representing 39.4% and 53.7% drop from their respective historical height last October. Stock markets almost everywhere saw severe beating.
This is notwithstanding the US's USD 850 billion bail-out and several major countries coming to the rescue by hefty interest rate cut, state guarantee to bank deposits and other measures. It is obvious from the stock market performance, from Jakarta to Moscow, that the investors confidence continues to sink to new low.
To many including Francis Fukuyama, this is but evident of "the Fall of American Inc". http://www.newsweek.com/id/162401/page/1.
The current credit crisis, stemmed from financial deregulation, a key aspect of Reaganism for economic growth is now being blamed by the Main Street. Fukuyama calls it - what was once fresh ideas have hardened into hoary dogma.
Most agrees that it is obscene and inequitable that the Wall Street drew out the fat cheque during the good time and the players largely escape any responsibility (recall Lehman Brothers CEO Dick Fuld who claims "it wasn't my fault") when the time is bad. The bail-out bill now lies squarely with every helpless tax payers who mostly make disproportionate gain, if any, during the good time. No wonder, Communism has fans up to this day!
Unrestraint capitalism or indeed unfettered freedom or uncontrolled democracy are all open to exploitation. Everything has an aspect of a yin and a yang. Making the right decision in a particular condition at a particular time is both the art and the science we human race got to constant make. This time is no different.
Let's persevere in this financial meltdown! After all, what goes down will come up. Did I not say yin and yang?
Thursday, October 2, 2008
Credit Crisis - 1 Oct 2008
This is a historical moment for the global economy. It is anyone's guess how long this story will run and what the ending will be.
But here are some foods for thought.
Firstly, in a time like this, I cannot think of a more independently credible, knowedgable and clearer-minded guide than Warren Buffet. This is a great interview to watch, learn from and share with others who seek to understand what is going on.
http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett
The NYTimes article below - also from October 1, 2008 - is a very good summary of what the US economy is facing.
But first, this is another article which deserves reading because it tells what the financial system, policy makers and players experienced on the days of 17 - 18 September 2008. It makes a riveting read. http://www.nytimes.com/2008/10/02/business/02crisis.html?hp
Apart from anything else, moral of the story is that it pays to have good people at the central banks. And at this time, thank goodness for Ben Benanke and Henry Paulson.
But first, this is what I learnt from the past day or so. The crux of the crisis is not the stock market but the credit market. Banks simply do not want to lend because they do not know if they will get their money back. Banks and financial institutions are pulling their credit lines from other banks creating a knock on effect.
In the past 2 weeks business and consumer credit is drying up. Qualified borrowers find their loan offers rescinded, and even then home mortgage applications for the last 2 weeks of September fell 16% from already low levels previously. Consumer credit (car loans, appliance loans, credit cards) are hard to get approved even for prime customers so people simply cannot buy even if they want to. The credit crunch is felt in car sales for September which fell 16%, 35%, 35% for GM, Toyota and Ford respectively.
More critically, businesses find their limits on overdrafts and trade credits reduced or cut. This is the time of the year when retailers stock up for the Christmas season but banks are not extending trade credits expect for the largest stores. The effects on especially the smaller businesses will be dire because without credit they cannot take delivary of inventory. For many, the only way out is to pay out of cash flow meaning they need to cut on expenses, which for most means staff retrechments.
Major retailers are reportedly cutting year end orders by 30%. Expect to see cancellations of orders to cascade and hit factories and manufacturers in China and elsewhere because the supply chain is 6-8 months long. They simply cannot unwind the orders and with their margins being so low many manufacturers will go under. Arguable, the credit crisis may eventually cause more unemployment and hardship in China than even in the US.
----------------------------------------------------------------------------------
NYTimes October 1, 2008
Economic Scene
Lesson From a Crisis: When Trust Vanishes, Worry
By DAVID LEONHARDT
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.
All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.
It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.
Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.
Let’s give it a shot, then.
Why are we talking about the Depression, anyway?
Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.
But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.
At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.
In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.
“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.
As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.
The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.
Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.
The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.
The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?
There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.
The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.
In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.
The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.
Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.
But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.
“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”
But here are some foods for thought.
Firstly, in a time like this, I cannot think of a more independently credible, knowedgable and clearer-minded guide than Warren Buffet. This is a great interview to watch, learn from and share with others who seek to understand what is going on.
http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett
The NYTimes article below - also from October 1, 2008 - is a very good summary of what the US economy is facing.
But first, this is another article which deserves reading because it tells what the financial system, policy makers and players experienced on the days of 17 - 18 September 2008. It makes a riveting read. http://www.nytimes.com/2008/10/02/business/02crisis.html?hp
Apart from anything else, moral of the story is that it pays to have good people at the central banks. And at this time, thank goodness for Ben Benanke and Henry Paulson.
But first, this is what I learnt from the past day or so. The crux of the crisis is not the stock market but the credit market. Banks simply do not want to lend because they do not know if they will get their money back. Banks and financial institutions are pulling their credit lines from other banks creating a knock on effect.
In the past 2 weeks business and consumer credit is drying up. Qualified borrowers find their loan offers rescinded, and even then home mortgage applications for the last 2 weeks of September fell 16% from already low levels previously. Consumer credit (car loans, appliance loans, credit cards) are hard to get approved even for prime customers so people simply cannot buy even if they want to. The credit crunch is felt in car sales for September which fell 16%, 35%, 35% for GM, Toyota and Ford respectively.
More critically, businesses find their limits on overdrafts and trade credits reduced or cut. This is the time of the year when retailers stock up for the Christmas season but banks are not extending trade credits expect for the largest stores. The effects on especially the smaller businesses will be dire because without credit they cannot take delivary of inventory. For many, the only way out is to pay out of cash flow meaning they need to cut on expenses, which for most means staff retrechments.
Major retailers are reportedly cutting year end orders by 30%. Expect to see cancellations of orders to cascade and hit factories and manufacturers in China and elsewhere because the supply chain is 6-8 months long. They simply cannot unwind the orders and with their margins being so low many manufacturers will go under. Arguable, the credit crisis may eventually cause more unemployment and hardship in China than even in the US.
----------------------------------------------------------------------------------
NYTimes October 1, 2008
Economic Scene
Lesson From a Crisis: When Trust Vanishes, Worry
By DAVID LEONHARDT
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.
All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.
It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.
Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.
Let’s give it a shot, then.
Why are we talking about the Depression, anyway?
Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.
But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.
At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.
In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.
“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.
As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.
The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.
Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.
The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.
The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?
There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.
The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.
In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.
The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.
Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.
But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.
“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”
Tuesday, September 23, 2008
Black September
How will September 2008 be remembered?
It maybe too soon to write anything with another 7 days to go before the month is over. What is clear is that what happens this month clearly show how precarious the state of financial health everywhere and of everyone.
It is never too soon to record what had happened last week for most of us who are in the 30s who have had a first decent saving and are likely to have invested and lost in the stock. Last week was a black week, said the Economist, and that we ought to remember.
Last week marked the collapse of Lehman Brothers and quickly followed by the buyout of Merrill Lynch and the USD 85 billion bailout of AIG.
Stock markets everywhere took a severe plunge. Hang Seng Index fell 44.8% from the height of 31958 on October 30, 2007 to 17632 on September 18, 2008. The intra day low was 16283. In the approximately corresponding period, Dow Jones fell from the height of 14280 to 10403 on the same day.
All these happened in very quick succession with the American government take over of Fannie Mae and Freddie Mac earlier in the month.
The anxiety is somewhat eased over the weekend with several central banks injecting billions of USD to increase the liquidity in the banking systems. The American government is now tabling a unprecedented US 700 billions rescue plan at a special Congress session to stem the continuous Wall Street meltdown.
As it is still unfolding, the debate over the rescue plan as well as the American presidential election is now all about Wall Street and Main Street with the Washington stucked right in the middle arguing over how the Wall Street is to be regulated and how the Congress could have oversight over the rescue plan, i.e. the Washington.
Whatever the alleged cause of the crisis, be it the credit crunch, be it the sub prime, be it CDS (credit-default swap), they are all contagious in an inter-connected world of finance. What underpinned all these excesses and busts are definitely inadequate oversight and inadequate transparency. The question is thus - will more oversight, more transparency and better regulation the panacea?
The answer is nope.
Yet, we are still asked to keep faith in the capitalistic system of finance in boom and hmmm, the socialist one in bust. What an irony of modern finance!
Subscribe to:
Posts (Atom)