Archive for April, 2009

One Big Crime Novel……

April 25, 2009

As I mentioned when I started these April posts, it is almost impossible for the novelist to out-do the real world events going on since the credit bubble collapsed. What happens in the plot of the potential novel “Follow the Money” that seems to be taking shape from these posts? There are millions of real victims, there are several hundred antagonists, hundreds of thousands of villains, there is an actual twisted plot that those following the story are trying to understand – the only element we lack is a protagonist.

As a novelist, I cannot resist attempting to pick a hero who might come along to save the day. Since the focus of the crisis is in the USA, it could be necessary to look first for this individual there. Most politicians and commentators outside the US are in agreement that the cause of the disaster was in Wall Street. Many knowledgeable people inside the US also accept this verdict – even the President. But don’t overlook the culpability of bankers in other places – particularly London.

So the first candidate for hero is Timothy Geithner, the Secretary of the Treasury. Do I hear sniggers in the back row? No one has been impressed by his leadership so far, and it’s widely speculated that the knives are already out for him. Back in 2007 he had the foresight to warn about the instability caused by runaway credit, but never followed up on it. What did poor Tim do wrong? I’ll quote one of the commentators who I follow to make sense of this story –

“Henry C. K. Liu – Asia Times Online April 22nd 2009 http://www.atimes.com/atimes/China_Business/KD22Cb01.html

Many economists are pointing out that the Obama bailout plan for distressed banks is too small for the scale of the problem, that taxpayer money is being misdirected to save banks without adequate control on the banks as to how to use the money to help the injured public, and that it is a hybrid solution that combines the worst aspects of nationalization and the worst aspect of private enterprise without the benefits of either.

A study, “The Pricing of Investment Grade Credit Risk during the Financial Crisis” by Joshua Coval and Erik Stafford of Harvard University and Jakub Jurik of Princeton University suggests that recent credit market prices are “actually highly consistent with fundamentals”, and that bonds and credit derivatives should have experienced a “significant repricing in 2008 as the economic outlook darkened and volatility increased”.

The analysis also confirmed that the “severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing.” The authors conclude that any use of taxpayer money to buy toxic assets “will simply transfer wealth to the current owners of these securities”. This conclusion has been independently reached by a large number of market participants in the past two years.”

More profit for the crooks who caused the disaster? Scratch Tim as our hero. The same goes for Larry Summers and Ben Bernanke – not quite as ludicrous in their tights, prancing across the stage waving plaster swords, but principals in the same disastrous sub-plot that threatens to pile more venality and misdirection of resources on top of the serious downward plunge of the fortunes of the good guys.

The problem with all the measures taken by the US administration – this one and the previous – is that they are all recognized to be hopeless attempts to rescue the crashed bubble economy instead of striking out with real change and a reformulation of the financial structures that caused the problem. No signs of a new model that will safeguard everyone’s future – the US, Britain and Canada fought against that at the G-20. But those failures are not a temporary glitch in the scheme of things – the crash pointed out the existence of fundamental flaws that must be removed before the world financial systems can move forward.

This is the place for a novelist to end a chapter, but I have to give readers a hint of the next direction of our search for the hero we need. I’ll point out that China shows considerable economic strength, suggesting that country could be the first out of the slump. The leaders who insisted at the G-20 that the world financial rules had to be revised before everyone could look for an economic recovery – German, Brazilian, Chinese – are likely to be among our next candidates for hero. Then there are the economists who gave ample warning and were never taken seriously.

Advertisements

The world’s problem – money or …?

April 18, 2009

Before looking at the current utility of money, we’d better look at what it is supposed to be. To quote one college text on economics (probably long out of fashion, but I suspect all the college texts will be replaced very soon) “Money is basically a means by which goods and services are exchanged for other goods and services”. It’s raison d’etre is the simple fact that it is a more convenient means than bartering.

So that raises the question; what is the value of money? Since money is not considered a physical thing, but as a means, it has no fixed value in itself. It may say One Dollar on the paper, but the actual value lies in what it can be exchanged for. The value is said to be proportional to its scarcity, which is why the continual expansion of the money supply has always whittled away at the amount of actual goods and services it can be exchanged for. Doing a little comparison of exchange rates between Britain in – say – 1950 and Canada today, the dollar was worth two pints of top quality ice cream when I was a kid and possibly for half of a meager scoop on a cone today.

The essential problem with money is the fact that people wish to consider it as an absolute fixed measure of value, while the actuality is that over the long term it usually loses value almost as fast as a car once it’s been driven off the lot. To become the solid benchmark that a thriving culture needs it requires stability, and doesn’t have any.

Working people’s pension savings accounts, likely held in mutual funds, have lost half of their dollar denomination in the past six months. Half, that is, if they are lucky and didn’t think they were onto a good thing by letting Bernie Madoff or someone similar look after it. I don’t think they would be reassured in the least if they were told not to worry – that the dollars they lost were not as valuable as the ones they put in. But in actual fact the dollars they lost were only phantom numbers – scratches on a balance sheet – because they were never exchanged for goods or services, and therefore never had a real value.

The toxic securities, the hedged derivatives, the credit default swaps, and all the other fancy instruments on the banks’ balance sheets that they dare not carry at current price are surely an example that proves this. They have no denominational value, being too dangerous to place on the banks’ balance sheets because they would prove all the holders bankrupt. The US government is playing along and pretending that one day they might be worth the same number of balance sheet dollars as the banks initial ledger entry – maybe when today’s dollar is worth 25 cents.

If the apparent legitimacy of this sleight of hand confuses you, welcome to the club. The fellow who devised the original software to evaluate and check on the prices a financial concern should pay for the newly created menagerie of debt and hedging instruments (I’ve lost his name – he is Chinese and back in China, working in a state bank) averred that almost all the high priced financiers who used it to buy the toxic derivatives never understood the mathematics behind it.

More to the point they never grasped the initial assumptions that limited the range of events the system was reliable between. So they all got their million dollar bonuses for doing nothing but run a program they didn’t understand. You could also say that since the debt instruments they were alleged to be safeguarding were never safeguarded, they never performed a service and therefore never had any value.

If you are thinking that the purpose for which the concept of money was initially devised has long been lost in the dust, you’re not alone. Money is no longer what they pretend it is – so what actually is it? To say that is Maya – an illusion – may not be far from the truth, but I’ve run out of space and time and will continue next time.

Down the Drain.

April 10, 2009

As a novelist, I’m beginning to believe that it is a waste of time to blog about made up thrillers when we have a ringside seat at a much more relevant drama under our very noses. Huge corporations that have formed part of the framework of our lives ever since we can remember are on the point of bankruptcy. Who needs fiction?

It seems that a marketing model that has worked for years has finally been revealed to be faulty. Who knew? The only market strategy that always works is the one the tobacco industry followed. Joe Badbreath runs out of smokes; he gets up from the couch and goes out to the car; he drives to the store and buys more – then he comes home and burns them. You can hardly beat that for creating market demand.

Since 1939 aircraft manufacturers have had it made. Until 1945 they increased production beyond any previous dream, moving into every kind of workshop and factory in every corner of many countries. And what happened to the resulting production? A bunch of poor young fellows flew them to the other side of the water where another aircraft manufacturer ran another windfall system where they would turn those aircraft into scrap metal. As long as you weren’t one of the young fellows, you had it made. Since 1945 the system has slowed down some, except where pork barreling can work efficiently, and where the prices compensated by increasing exponentially.

It seems that the solution to maintaining peak production and peak profits is to have an efficient means of eliminating your products. Detroit managed that for years, producing some lemons that people were glad to send to the crusher. Today, people are looking for automobiles that they might like, and which might be worth keeping for many years more than the old sales system can accommodate. Result? Both GM and Chrysler are teetering on the brink – and Ford has an anxious expression if you can catch them when they don’t think you’re looking. They are all trying to find a way to recover the old magic, but the magic bullet is hard to find.

Whatever solution smart engineers come up with they always seem to run into a blank wall whenever money comes into it. They could produce wonderful machines that do 100 mpg, that last a lifetime, that use no oil – either in the motor or in the tank – and are so safe as to be almost foolproof. The only problem is the money.

Millions of working people are losing their jobs, pensioners are losing more than 50% of their pensions, local governments are going broke. Banks are at a loss how to continue separating the public from their wallets, because they’re frightened to lend any money to someone who may just walk away from the debt. Some governments are hiring the very people who got us into this mess to show them how to get us out of it. Talk about putting the foxes in charge of the henhouse – these guys have only succeeded in bailing out their friends so far.

So I puzzled how I could write something that might compete with this blockbuster of a fantastic scenario. I hardly think the most ridiculous Hollywood production company could outdo this epic – audiences just wouldn’t believe it. And what I came up with was the fact that the whole problem is money – actually the very idea of money. Maybe it’s a concept whose time is past. Next time I’ll try to offer some cogent support for the idea.

The UN’s Prime Directive:

April 2, 2009

Fact Sheet No 9 of the Office of the UN High Commissioner of Human Rights begins with the following –

“An objective of the Decade is the promotion and protection of the rights of indigenous people and their empowerment to make choices which enable them to retain their cultural identity while participating in political, economic and social life, with full respect for their cultural values, languages, traditions and forms of social organization.”

Star Trek’s is somewhat more biased – probably an inevitable result of the culture it came from. Take the second sentence of the directive – Such interference includes the introduction of superior knowledge, strength, or technology to a world whose society is incapable of handling such advantages wisely. It doesn’t take much study to see the obvious Western cultural biases in the words ‘superior’, ‘incapable’, and ‘wisely’. The discrimination underlies the well intended words. Anyone judged to have lesser abilities than those with ‘superior’ ones must be protected not just from the Star Fleet but from their own ‘incapable’ selves.

The UN fact sheet offers a more modern perspective – “In 1971, Mr. José R. Martínez Cobo (Ecuador) was appointed Special Rapporteur for the study, which was to suggest national and international measures for eliminating such discrimination. His final report(1) was submitted to the Sub-Commission during the years 1981-1984.

The Special Rapporteur addressed a wide range of human rights issues. They included a definition of indigenous peoples, the role of intergovernmental and non-governmental organizations, the elimination of discrimination, and basic human rights principles, as well as special areas of action in fields such as health, housing, education, language, culture, social and legal institutions, employment, land, political rights, religious rights and practices, and equality in the administration of justice. His conclusions, proposals and recommendations are an important milestone in United Nations consideration of the human rights problems facing indigenous peoples; many are still under consideration and others have been incorporated in resolutions of the Sub-Commission.”

Its language is also somewhat susceptible to value judgements, however. One has to wonder how ‘equality in the administration of justice’ stacks up against the determination of Islamic fundamentalists to increase the scope of Sharia law. This seems to be one of the problems I referred to in my original discussion – that the Iskanders are initiating the progression to a host of modern problems that we haven’t solved.

It is evident that no Prime Directive is applicable to every situation that arises. Perhaps that is why the Star Trek episodes were frequently concerned with situations where it was not observed.

The purport of the UN recommendation is to ensure that the newly discovered culture (on Earth, but extended off-world in a Star Trek or Retrofuturist universe) is not taken advantage of by outside forces. It does not prohibit intrusive contact, as long as the intruders hold to honourable intentions and results. This, I believe, is the broad intention of my Iskanders – always accepting that any enemy action against them results in their striking back. The series also recognizes that the existence of power structures inimical to the good intentions of the Iskanders (or the UN for that matter) will inevitably exist and have to be countered. The UN charter includes the provision for police and peacekeeping actions, but in practice every form of action (eg Kosovo, Korea) except nuclear destruction seems permissible.