Tag Archives: financial crisis

News & Politics

Return of the financial crisis

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Last week has been a very exciting time for anyone with any money in the stock markets. The KLCI plunged to lows not seen since the depths of the financial crisis of 2008, then strongly rebounded over the next couple of days. Anyone who had bought SP Setia’s warrants early in the week practically saw their money doubled following the takeover announcement by PNB. This week looks set to be a continuation of the rollercoaster ride though the overall trend remains bearish. I personally expect the markets to edge down for at least the next few months, though there will certainly be plenty of technical rebounds along the way.

The pundits are calling this the return of the financial crisis. For those in the US, it feels more like the crisis merely took a breather and is now back with a vengeance. For middle-class Americans in particular, it has already been a lost decade echoing what happened to Japan. With no end in sight for the European debt crisis and with the Americans set for a rematch between the Republicans and the Democrats over the raising of the debt limit in November, things look certain to grow worse before they can get any better.

What galls me the most however is the fact that this rerun of the crisis is almost entirely due to political factors rather than fundamental economics. Yes, America’s budget deficit looks bad and their debt is growing at an unsustainable pace. But that is really a long-term problem and in the short and medium term, the US debt is perfectly fine. US bond yields are laughably low and there is no prospect of them going up any time soon. With inflation low as well, the US government still has plenty of scope to use fiscal policy to stimulate the economy.

Over the long term, the US debt problem can be attributed almost entirely to healthcare costs. They need to do a fundamental rethink of how much right their citizens have to healthcare and how to distribute those costs. They need to either accept that there is a certain point beyond which each extra month of life that they can give a dying patient isn’t worth the money or to accept that taxes need to raised significantly to pay for the healthcare costs of the elderly. Everything else is a sideshow that buys a bit of extra time but will never resolve the problem until they confront this choice head on.

As for Europe, I agree with The Economist in that the EU needs to man up and draw a line between insolvent and illiquid countries. Greece is insolvent. Everyone knows this no matter how fervently EU authorities deny it. Portugal may or may not be insolvent depending on the next few months. Every other country in the EU currently under pressure in the bond markets is merely illiquid. Insolvent countries need to have their loans restructured, essentially imposing losses on creditors. This would destabilize the EU banking system. So be it. Let bank shareholders eat the losses until their equity is gone, then use public money to recapitalize the banks and rebuild the financial system as necessary. Basically, the EU should bail out banks as institutions, but not their shareholders and not insolvent countries.

In the meantime, illiquid countries need to be given unlimited backing by the rest of the EU. This will increase borrowing costs for safe countries like Germany and the Netherlands, but their public needs to accept this as the cost needed to save the EU.

Naturally, none of this will happen because the political costs are too great. In the US, the Tea Party has successfully sold to the general public the idea that deficits must be cut immediately and savagely without any care of how much damage this would cause to the economy and no politician will dare to say otherwise. Similarly, no politician in the US will dare to tell American citizens that sometimes a tiny incremental improvement in healthcare isn’t worth the massive costs it would incur.

In the EU, singling out Greece would be too humiliating to contemplate and the more often Sarkozy and Merkel declare their infinite support for Greece, the harder it will be to do the right thing no matter how much more worse Greece gets. And of course, any northern politician who dares to tell his voters that they need to pay a bit more tax to help out the southern countries will be cleaned out at the polls in election season, even if this means everyone will be better off in the long run.

This means that both the US and the EU will continue to limp on, kicking the can down the road as far as they are able. Sometimes it sucks to be a democracy.

News & Politics

European hypocrisy in Greek crisis

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So Greece is getting a bailout amounting to 750 billion Euros despite Angela Merkel swearing up and down that it wouldn’t happen. At least she’s getting some serious heat in Germany over it and it looks as if her days in political office are numbered. Apparently she gave in because she did not want to go down in history as the Chancellor who caused the Euro project to fail.

In the meantime, American commentators, such as Paul Krugman, have been talking up the disadvantages of the European currency union, which seems a bit mean spirited, unless you recall that the Europeans made similarly snide remarks about the health of American capitalism in the wake of the sub-prime mortgage blow up. What a difference a year makes!

More fun stuff:

  • Remember when the ratings agencies were blamed for the financial crisis and accused of conflict of interest issues due to rating CDO products too leniently? Now, they’re being blamed for rating European sovereign bonds too harshly. The rationale given is that the agencies are American, hence they must hate Europe.
  • European leaders have been outdoing each other attacking speculators for bringing about the current crisis in the first place, yet the Belgian finance minister has boasted that his country would make a profit on the loans it would make to Greece due to the spread between the rates Belgium pays for loans and the rates Greece needs to pay. As The Economist notes, it looks like speculation is not evil so long as governments are the ones doing it.

I’ve been previously been of the opinion that unified currencies are great. They should reduce cross border transaction costs and free central banks from government meddling. The corollary however is that governments then lose access to the toolbox of monetary policy to influence the economy. This should be okay, provided that governments are able to responsibly use the fiscal p0licy tools still available to them but I guess asking that governments be fiscally disciplined is too much of a pipe dream. This is why governments are forever hooked on the easy ways out of problems by playing with interest rates and devaluing their currencies.

Science

Recent Interesting Science Articles (May ’09)

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I haven’t had as much on the Internet as I’d have liked this month, so apologies for having only two articles this time. The first one is an odd feature from New York Magazine that doesn’t really count as a real science article at all, but is relevant enough that I think merits inclusion. The article mentions in passing research by Kathleen Vohs of the University of Minnesota’s Carlson School of Management on how just the act of thinking about money influences how people act and behave.

In one experiment, she found that it was possible to influence how much people were willing to collaborate on group efforts simply by switching screensavers. Eighty percent of the group who had been given screensavers of floating dollar bills to stare at chose to work alone. Eighty percent of those who were given screensavers of exotic fish chose to work together with others. The article goes on to make some not entirely scientific generalizations about how the current recession can be seen as being a plus for changing people’s priorities and making them better people, but the initial point alone is good food for thought.

The second article appeared in The Economist and explores the link between creativity and the experience of living abroad. It covers research by William Maddux of INSEAD and Adam Galinsky, of the Kellogg School of Management in Chicago who used a simple test to determine the level of creativity of their test subjects and linked that to whether or not these people had any experience in living abroad. They found that sixty percent of those who had overseas experience managed to solve the problem compared to only forty two percent of those without that experience.

A follow up experiment aimed at measuring the participants’ ability to come up with creative solutions to difficult negotiating positions also turned up similar results, suggesting that it is the experience of living abroad opens minds to new possibilities and expands their creativity. One easy criticism is that their stated problem may not be a good test of creativity, especially the sort of creativity that is associated with writers and artists like Rudyard Kipling, Pablo Picasso and Ernest Hemingway, but my personal instinct is that they’re probably right and that living abroad should tend to open up the minds of young people and enable them to think out of the box. It would particularly interesting to see student exchange programmes being organized on a widespread and systematic basis to take advantage of this but that would likely be too expensive.

News & Politics

Private banking is for suckers

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I read with some amusement today’s article in The Malaysian Insider on plans by the Royal Bank of Scotland to target rich women in Singapore as clients for its private banking arm. Granted, I’ll never have enough money to even be considered as a client for a private bank, so I’m open to charges of writing out of spite and envy, but in general, my impression is that private banking is getting a lot of bad press at the moment.

Continue reading Private banking is for suckers →

News & Politics

Index funds in Malaysia

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Since I got into, well, not exactly an argument, but at least a rather heated discussion over this topic on the LYN forums, I thought it might be interesting to write down a summary of my posts there and also what I’ve learned from that thread. Please note that all of this mostly applies only to Malaysia.

Now I’m just a neophyte investor and I don’t make any claims to exceptional knowledge or skill. But I do take care to read through the basics and try to educate myself in whatever it is I’m getting into. One of the most basic and well known ways to invest your money is through the stock market. You can either do it yourself, picking stocks that you personally believe will do well and pray, or you can entrust it to “professional” mutual fund managers and pray. I’m guessing that most working people don’t have the time or inclination to actually do their own research and will opt for the latter. That’s what I did and this is where things get interesting.

Continue reading Index funds in Malaysia →

News & Politics

Is Atlas Shrugging?

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I meant to post this earlier but my net connection, along with it seems that of a large number of other Malaysians, was down for the better part of Friday and Saturday. Here’s a link to an amusing article that I read on The Economist. Apparently one unexpected side effect of the current financial crisis has been a boom in the sales of books by Ayn Rand. The publication finds that there is a correlation between announcements of government intervention in the markets and spikes in the sales of Rand’s magnum opus, Atlas Shrugged.

The apparent cause is that current news seems to be echoing events in the novel, with Alan Greenspan’s admission of a flaw in the financial system being particularly seen by Randites as a cowardly capitulation reminiscent of a character’s rejection of reason in favour of faith in the book. More significantly, there seems to be a phenomenon called “Going Galt” going around in the U.S., named after John Galt, a major character in the novel.  The idea is that taxpayers should stop subsidizing the government’s wasteful bailout policies and opt out of the financial system by simply choosing to produce less wealth than they could or even choosing not to work at all or closing down their businesses.

For what it’s worth, even though I call myself a libertarian, I don’t identify with this movement at all. Tax increases are to be avoided whenever possible, but in this case are absolutely necessary for the long-term health of the U.S. economy. I’m never happy with bailing out failed businesses or borrowers who took on more liabilities than they could comfortably handle, but I cannot agree that the U.S. government should simply do nothing. I’d have preferred for example, that the U.S. government went ahead and nationalized any banks that are found to be insolvent, but it’s pretty obvious that this is going to entail an extremely large increase in short-term government expenditure that will eventually need to be paid for in the form of higher taxes. I certainly won’t pretend that doing it my way would be any cheaper.

One thing about this movement particularly irks me is that many of them don’t seem to understand the concept of marginal tax rates. There are stories, for example, about people going around finding ways to make sure their income doesn’t exceed US$250,000 because they seem to believe that the higher tax rate for that bracket would be applicable towards the entirety of their income, rather than just the specific amount that exceeds the ceiling. Not very smart for a bunch of folks claiming to espouse rationality and reason.

News & Politics

What was once the happiest place on Earth

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I meant to post this last week but work got in the way and I never got around to doing it. This is a link to a piece on Iceland, arguably the single greatest casualty of the financial crisis. Since it’s written by Michael Lewis of Liars’ Poker fame, it’s unsurprisingly very insightful and well-written. Some choice quotations from the article:

“You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”

As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.

They understood instantly, for instance, that finance had less to do with productive enterprise than trading bits of paper among themselves. And when they lent money they didn’t simply facilitate enterprise but bankrolled friends and family, so that they might buy and own things, like real investment bankers: Beverly Hills condos, British soccer teams and department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.

One thing I found almost shocking is how unapologetically scathing Lewis is towards the Icelanders. It’s clear that he thinks that the Icelanders have no one but themselves to blame for their mess. Much of the media coverage I’ve read had a tendency to portray Iceland as an unfortunate victim of the excesses of U.S. capitalism.