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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Why Lehman Brothers was allowed to fail
Date: Thursday, February 25, 2010
Author: Henry Thornton

Andrew Ross Sorkin's book - Too big to fail.  Inside the battle to save Wall Street - has all the raw material.


Rather than build a case item by item, I present here my impressions, and leave it to professional scholars to confirm or deny my conclusions.


Clearly the US financial system was close to chaos as 2008 ground on.


The background is here, as concisely as I can manage,


The CEO of Lehman Brothers, Richard Fuld is portrayed as aggressive to the point of being dysfunctional. As the crisis deepened it seems he repeatedly upset negotiations that held at least some hopes of saving Lehman in some form or other.


His leadership was under attack from within and one suspects the authorities had more reason than in other cases to mistrust Lehman's management and its accounts of the facts of the matter.


One's overwhelming impression is that the board and management of Lehman at no stage had a sensible or realistic view of their situation or prospects.


The US Congress was wary of bailout, with Treasury Secretary Hank Paulson, a Republican, philosophically uneasy asking for approval to commit vast sums of taxpayer's money in 'socialist' rescue policies, even as he was convinced this was needed to avoid catastrophe.


When it came to it, several problems converged - Freddie Mac and Fanny Mae were rescued, then on the fateful weekend of September 13&14, Lehman Brothers, Merril Lynch and American Insurance Group all demanded focussed attention.


Merril Lynch and AIG were rescued, and Lehman Brothers was not.


There is an argument that its status as an investment bank made it technically difficult to rescue, but other legal and institutional difficulties were overcome.


Then there was the international dimension, and it is not unknown for Americans to struggle with their core isolationist tendencies.


US officials thought for some time that the British bank, Barclays, might be part of a rescue but this was vetoed by the UK regulator.  Paulson supposedly said of the British that 'They grin-fucked us.'


My interpretation of this part of the story is that British reserve came up against American superpower assumption that a loyal ally would help out when push came to shove.  It is not only Asians who sometimes say 'Yes' when they mean only 'Yes we understand you.'


Did the Americans do everything possible to secure a deal? 'In the series of hectic phone calls on the morning of Sunday, September 14 2008, neither Paulson or Geithner ever offered to have the government subsidize Barclay's bid, helping reduce the risk for the firm and possibly easing the concerns of wary politicians in Britain.' (Sorkin, p537)


From Congress's point of view, the fact that something like half of Lehman's counterparties were in overseas jurisdictions made it virtually impossible to secure some sort of guarantee.


Clearly all the main players were under extraordinary strain, and perhaps the wonder is that enough was done to prevent a global financial system meltdown.


Sorkin's Epilogue makes some broader comments.


'In the span of just a few months, the shape of Wall Street and of the global financial system changed almost beyond recognition.'


'Wiring tens of billions of dollars from Washington to Wall Street, did not immediately bring an end to the chaos in the markets. Instead of restoring confidence, the bailout had, perversely, the opposite effect: Investors' emotions and imaginations, the forces that John Maynard Keynes famously described as "animal spirits," ran wild.'


Then, far more profound, 'a national debate emerged about what the tumult in the financial industry meant for the future of capitalism ...'.


President Bush sought to counter his critics: The government intervention is "not to weaken the free market.  It is to preserve the free market."


Sorkin buys this point. 'To be sure, if the government had stood aside and done nothing as a parade of financial giants filed for bankruptcy, the result would have been a market cataclysm far worse than the one that actually took place.'


However, 'it cannot be denied that federal officials - including Paulson, Bernanke and Geithner - contributed to the market turmoil through a series on inconsistent decisions.  The offered a safety net to Bear Stearns and backstopped Fannie Mae and Freddie Mac but allowed Lehman Brothers to fall into Chapter 11, only to rescue AIG soon after.  What was the pattern? What were the rules?'


The analysis of what happened, Sorkin concludes, is only important 'if its lessons are used to help strengthen the system and protect it from future crisis.'


This is at one level entirely self-evident, and at another level deeply controversial.


I suspect there will be many more exciting episodes like this to be played out before this issue is settled.


*************************************************************


Further reading


The Age - The Age! - reports that even the Reserve Bank - the RBA! - was trying to understand Lehman Brothers as it headed for its very own Niagra Falls.


And a report of a new book.


'WHEN a 2200-page legal report on the collapse of Lehman Brothers landed with a thud in New York last week, exposing the grand deception the firm used for years to mask its perilous financial situation, many were left wondering how so many of its top executives could have been so bloody stupid. What made them think they were so special that the normal rules of the market, of the law and of common sense did not apply to them?'


Read on here.


A reader says: 'Your comments on "why Lehman Bros was allowed to fail" omits one vital and somewhat personal point, and dates back another 10 years to the Asia crisis of 1998 and the (somewhat) associated failure of the well-connected LTCM. Apart from the somewhat eerie parallels of failed derivatives strategies, LTCM was bailed out by a consortium of Wall St players (having been leaned on by the regulators).

Lehman was on of those leaned on and which initially committed to an LTCM bail-out, but then Fuld reneged when the time came for hands to be put in pockets for the cash required. Perhaps apocryphally, the big Wall St players at the table said "you'll need us some day, and you just lost the chance of sympathy; we've got long memories".

10 years later (almost to the day), Lehman needed help, and the only player willing to even consider helping was British (Barclays) and even then not committed. So Lehman was hung out to dry because they went back on their word 10 years previously....

Plausible, no?


It seems even the experts disagree - here is a report from early September 2010.




Greece, China, financial fallout
Date: Tuesday, July 07, 2015
Author: Henry Thornton

The comrades in Greece are in a very hard place.  This is what happens when a country finds itself burdened by crippling debt, inefficient and uncompetitive industrial structure and hopelessly unfunctional tax and welfare arrangements.  Oh, and an extreme leftist government that lies both to its own people and its creditors. At least the game theory afficiondo posing as a Finance minister has fallen on his butter knife, and his replacement is said to be a mild mannered bloke used to negotiating in good faith. Very difficult to predict what happens from here, but Eurozone central is on the horns of a dilemma. Cut Greece loose sets a bad precedent, but bailing Greece out maybe sets an even worse precedent.


China is a far bigger worry for the global community.  No doubt a slowdown was inevitable after decades of double-digit growth.  No doubt a pivot to consumers had to come soon, plus an attack on rampant corruption. But Australia is the biggest loser, heavily dependant as we are on exports of iron ore and coal to China. Finally the Aussie dollar has fallen to the level wished for by RBA chief Glenn Stevens.  The two-and-a -half years since the powers ignored Henry's proposal to tax capital inflow as a way of restoring a level playing field for many non-mining industries has left us with intractable budget deficits, rising unemployment (far worse than the official statistics, especially for young people) and many kaput businesses that did not need to be lost.


Any attempt to manage currencies is of course fraught with difficulty. At various times strong economies such as Germany (in the 1960s and 1970s) and Switzerland more recently have tried tax and other ways to keep their currencies to a level that keeps their trading businesses viable.  Switzerland eventually gave up trying to restrain its franc and industry seems to be thriving despite a massive revaluation. Germany discovered in the Euro a far more reliable way to keep its industries competitive, linking itself to the weak economies of southern Europe. Among the many disruptive effects of a breakdown in the Eurozone by those weak economies leaving in the wake of a Grexit would eventually leave German industry fighting much harder for success.


Far more worrying after such a fracturing of the Eurozone would be a series of bank failures that left the Eurozone banks with massive debts  So one imagines that Germany will be inclined to bail out Greece with a non-game-playing finance minister in place.  But only time will tell. Whatever happens, Greeks will be a lot worse off than they are now with banks closed, tetering on the edge of bankruptcy, incomes decimated and over 50 % of the workforce unemployed or pretending to work in low paid, or non-paid jobs.


The global financial markets have taken fright and we may be at the start of a substantial correction.  The US Fed may decide yet again to postpone the rise in global interest rates that has been postponed already with the ongoing, largely hidden, global financial fragility.


It will not be a happy day from the RBA board. Australia is in far less dire straits than Greece, of course.  Yet the budget is far from fixed, interest rates are low and expected to go lower, the current account deficit is setting new records (though export volumes are growing strongly, at give-away prices) and unemployment is deeply troubling.  We should have done far more to fix underlying problems while the global economy was looking stronger.


The Abbott government needs help to fix the budget, and the opposition is showing signs of waking up to the fact that opposing necessary fixing will leave it up the proverbial creek with a broken paddle. Monetary policy needs to be normalised as soon as US monetary policy is normalised.


The powers must recognise that at some point a rising dollar will again make great swathes of Australian industry uncompetitive.  However, sufficient industrial reform will stave off the day that we again need to be concerned about that matter. There is plenty of opportunities to reform our still highly inefficient industrial structure. Here is a modest set of recommendations.


Saturday Sanity Break, 4 July 2015
Date: Saturday, July 04, 2015
Author: Henry Thornton

The team at Henry Thornton.com wish all our American friends a successful Independance Day celebration. The mighty machine that is the google search engine will provide lots of anecdotes for readers partaking in July 4 celebrations - eg here.  And we also wish all friends and countrymen and women generally a safe and financially positive new financial year.


The Grexit


The Australian-Greek Finance minister, Yanis Varoufakis, is reportedly a man who practises game theory and who some say has attempted to use it in the current national insolvency case.  Mr Varoufakis is reported to believe that Greece's creditors would ultimately cave in if only Greek continued to behave like any failed bankrupt trying to avoid reality. The Oz reposted a fine Wall Street Journal article on the subject.


'How much of Alexis Tsipras’s tactics over the past five months have been driven by incompetence and how much by conspiracy? It’s a question even the historians may never fully resolve. The Greek Prime Minister said in a televised statement that those accusing him of having a deliberate plan to take Greece out of the eurozone were telling lies. But what is certain is that if Tsipras had set out in January to take Greece out of the eurozone, it is very hard to think of anything he would have done differently'.


More here.


The ultimate question is this: Is it a cock-up or a conspiracy? Most likely a cocked up conspiracy.


Same sex bonking certificate


'Jobs are more important that same sex marriage' is the gummint line. Obviously this is correct, though there may be some modest jobs growth with the rash of same sex marriages that are expected once parliament chews the relevant same sex legistration. But surely the Australian parliament can both walk and chew gum? One way to minimise the disruption and distraction involved in parliament considering a same sex marriage act is to schedule a special midnight session from which the whips are banned from their usual activities of making members attend and vote. 


Those mostly interested in jobs can sleep while the same sex enthusiastics put Australia into the same enlightened national company as Netherlands, Belgium, Spain, Canada, South Africa, Norway, Sweden, Portugal, Iceland, Argentina, Denmark, France, Brazil, Uruguay, New Zealand, Britain, Luxembourg, Finland and Ireland, while Mexico allows the freedom to marry regionally and has  court-directed provisions enabling same-sex couples to share in the freedom to marry. In Slovenia, ...


Read on here, and there is an interactive map to heighten your pleasure. Another gift from the mighty google machine.


Where will it end? Can a threesome be allowed to register their 'marriage'. Or what if someone from a strange religion wants to marry all forty-four of his flock? (Is that 'Polyamory'?) Married to a sheep? Or a hamster?  There are moments in the Thornton household in which Mrs T would undoubtedly prefer to be married to Jack the border collie. These are the possibilities that Australia's multi-talented-Minister the Hon Eric Abetz, Liberal Senator for Tasmania, Leader of the Government in the Senate, Minister for Employment and Minister Assisting the Prime Minister for the Public Service is apparently worried about, spewing forth from Pandora's box.


Here is the great man pontificating. 


Economy


All this fun has diverted Henry's gaze from the constant drip of economic news and views. Gary Morgan has detected another fall in numbers of jobless, from (wait for it) 10.3% to 9.3 %. The current account deficit, $4.1 billion in May, fell to a mere $2.4 billion in June. Retail trade is stagnent. Wages growth is setting new lows. The budget deficit continues to blow out, and the dread words 'Banana Republic' have again been spoken. Things could hardly be better, on the home front, dear readers, and the Treasurer advises you to borrow and spend til it hurts. 


Of course, in lesser nations overseas, the rash of terror attacks, the relapse in the price of iron ore, the financial market's panicked palpitations, likely Grexit (due to excessive alcoholism, perhaps), China's attack of chronic fatigue.  These are nothing but small clouds in an otherwise clear blue sky. Spend til it hurts, comrades.


Footy'n'cricket'futball'n'stuff


Sydney beats Port on Thursday night, but who could be bothered watching? Hawthorn v Collingwood last night was a game for the ages, narrowly won by the Hawks. The two teams plus coaches observing a minutes silence in remembrance of slain Adelaide coach, Phil Walsh, showed there is decency in footy, and the game was played with decency, if just as fierce as always between these two stellar teams.


Caaaarlton! toughed out a hard, low-scoring game against the Western Bullies. Disappointing, but Essendon's flogging by cellar dweller St Kilda was a sign of a vehicle with square wheels and not much motivation.  The Suns came back with a rush to spank the Shinboners, thanks (presumably) to the return of Gary Abbott.  How this footy genius got 30 odd disposals and kicked three goals after almost a year's layoff (interupted by only two games while still injured at the start of the season) is a complete mystery to Henry and his fellow footy tragics.


In the UK, a county side provided stern resistance to the fearsome Aussie bowlers, and Shaun Marsh looks to have won the battle for the allrounder spot from Shane 'Watto' Watson. In late breaking news, Shaun Marsh has had a fingernail broken by friendly fire, which may give Watto the reprieve that his long and effective service demands.


The Aussie Sheilas bowed out of the World cup of Futball with a narrow loss to the Daughters of Nippon.  Next stop the Olympics and we confidentally predict an eventual world cup triumph from this young team.


Tennis is another exciting diversion. Little Lleyton went out fighting, Nick Krygios swore his way through the first two rounds and stormed passed the hapless Milos Raonic (seeded no 8) in the third round. Bernard Tomic unloaded on Pat Rafter and Tennis Australia and complained of 'lack of support'. So sad, especially to see him routed by world No.1 Novak Djokovic. Slammin' Sam Stouser unloaded on herself after being flogged by American Coco Vandeweghe, dropping 12 consecutive games after winning the first two to bow out of tournament 6-2, 6-0.  In late news, Mr Tomic has been told he is no longer needed for duty in the Davis Cup.


Bert Thornton, finding himsel a bit short of the ready, kindly offered to update the index pages to Henry's popular 'News + Views' column for money. The new pages may be accessed here, and you will be able to refresh your minds about the wonderful year just past in your very own Banana Republic.


Image of the week.



Courtesy The Oz


Its the banks, stoopid
Date: Tuesday, June 30, 2015
Author: Henry Thornton

The Greek imbroglio rumbles toward what is looking increasingly. like a 'Grexit' - ie Greece leaving the EU after a default.  The Eurozone overlords seem increasingly annoyed at the cheek of Mr Tsipras, calling a referendum about the Eurozone plan for more austerity and advising the people to vote against it.  And in the meantime asking the overlords to refrain from ringing the bankruptcy bell.  Global equity markets are in a state of apparent alarm but we must always remember that brokers and dealers make money from volatility and are not immune from the temptation of stirring up mud and complaining that noone can see.


A brief SkyNews report from New York, featured an oldtime New York broker wondering why the price of gold is not surging. 'There is something going on here that we do not understand' said the old boy speaking from the floor of the New York exchange, once described as a 'rat pit at full blast'. The Aussie market looks like it will fall further today as the local rodents come out to play.


Alan Kohler reminds us today that 'Greece is a distant thriller, but China is a nearby horror show'.


Here are the main facts supplied by Alan Kohler:
* 'The Chinese stockmarket is a sentiment-driven casino, not a vehicle for investment. Earnings growth of listed companies this year is minus 1 per cent while their aggregate market value has doubled'.
* 'The Chinese economy as a whole is bloated on debt after years of economic stimulation based on debt-funded infrastructure spending by local governments and a roaring real estate boom in the four major cities'.
* 'The fundamental question about the Chinese economy is about the banks and whether they can remain solvent in the event of a double crash of both real estate and the stockmarket'.


In Europe, the main issue is how a Greek default, with or without a Grexit, would impact on the banks. Kohler again: '[In Greece] it’s all about the banks, as it is in China. The Greek Government has done the right thing in closing them -- and they'll likely have to stay closed until the situation is resolved. Will the ECB continue to supply them with liquidity after Tuesday’s default? Will that be enough anyway, given the long queues that are now forming at ATMs?'


If the Greek banks fail, what does that do to the Eurozone banking system?  Not much, one must assume, but what if the other weak nations of Southern Europe were to default and leave the Eurozone?  This will be the major issue in Europe, as it may become in China. Gold will then become the ultimate safe haven asset, and gold bugs everywhere will have their day in the sun.


Saturday Sanity Break, 26 June 2015
Date: Friday, June 26, 2015
Author: Henry Thornton

The presumed Grexit (or non-Grexit) rumbles on. The Germans seem to be getting sick of the whole saga, and who could blame them. The issues holding up a bailout involve an increased pension age and other economic reforms. Great hardship is the prospect whatever the outcome.  'Alexis Tsipras refuses euro zone compromise offer' was yesterday's headline. Today ...


Tony Abbott looking good and its Bill Shorten's turn to slide down the slippery slope of voter dislike. Of course the ABC's Killing Fields must be a sizable reason - thank you ABC - but Mr Shorten's attempt to be Mr No seems to have also been influential.  Here is a scary thought for Labor. Perhaps Mr Abbott's 'Nyets' were more in tune with Australian feelings than Comrade Shorten's.


But we must also give some credit to the newly energised, potentially more responsible, Green Party. By agreeing to the pension reform, while Labor was fighting to protect millionaires from losing some or all of their pensions, the Greens have shown themselves to have been on the side of good sense for the first time that Henry can recall.  Labor is showing signs of joining the reform parade, stumbling reluctantly to the truth that saying 'nyet' to sensible budgetary reform is not a winning strategy.


And in distant (thank God) Syria


Gor blimey Comrades! Heads will roll, or should roll, at the ABC and from deep within the Victorian Liberal Party. In the one case for the Lefty mutual smoozing club, for having a demented crypto-terrorist on Lateline, and allowing him to be generally offensive. Then apologising but replaying the show without excising the offensive bit. 'Free speech' is the defence, despite the apology, but there are limits to the causes the ABC should give support to.  Which as a disproportionate taxpayer, Henry objects to.


The VicLibs took the opportunity to solicit funds by invoking the terrorist threat.  Also an exercise of 'Free Speech' in action but distasteful and also unacceptable to most of the Liberal membership base. One hopes.


In any of the terror outposts, equivalent acts would already have been punished by an actual beheading, or by lowering the 'guilty' person into a swimming pool in a cage or by beating and starvation.  Surely no sane person can prefer the terror administered parts of the world to a free country where stupidity or offensive statements are tolerated?


Then there is the sad case in which the presumed widow of a presumed dead terrorist and her 5 kids might be allowed to return to our freedom loving shore. Richo, not normally a Liberal lover, yesterday discussed the problems involved should that unfortunate group wish to return.  Primarily, perhaps, who would want their kids to sit next to kids who have held up heads recently separated from bodies on global television or who have presumably been well and truly brainwashed in terror tactics and attitudes.  The most telling obstacle, however, might be from the terrorist rulers.  The females in the family can be sold as wives, or sex workers, while the males can be trained up as fully qualified terrorists.  These sad people are valuable booty, and will surely not be allowed to leave.


Read on here.  


Kulture


Fiona Prior visits another magical performance by Bangarra Dance Theatre and encourages Henry's readers to catch this wonderful company as it tours Australia with Lore: dance stories of land and sea.



Footy'n'futball'n'cricket'n'stuff


Freo disposed of a brave Collingwood team on Thursday night, and thus retains top spot on the AFL ladder.  Caaaarlton! play the suns tomorrow, when Henry will be glued to the Teeve with fingers crossed.  Thank goodness Gary Ablett is not playing, as it would be horrible to see him flung onto his bung shoulder in the first 30 seconds, like our star recruit from Collingwood in one of the first games of the season.


Despite the steady stream of initiatives to make the game safer for players, there seems to be a growing tendency for the stars of the game to be taken out. Perhaps there should be a new rule - anyone who is implicated in an injury that is not a simple accident that keeps an opposing player out of the game should be suspended until the injured player returns to the game. Just a thought.


The Matildas play the sisters of Nippon Sunday morning, and a win will greatly boost their claims for a fairer go in the income stakes. It has been noted that the Aussie futball sheilas are paid a lot less than the blokes with greater success in international futball to their credit. Win against the Nippoese sheilas, and Henry will support your cause, ladies.


Young Henry Thornton, perhaps a distant relative, continues to thrive.  Latest milestone is a chance to play for NSW after starring in a youth ODI series and  a test match against young poms.  ('Thornton was the equal highest wicket-taker during the Youth ODI series against England with 13 scalps at 13.46, and finished the one-off Test with match-best figures of 6-108.')


More here on Henry and other promising young aussie cricketers.


Image of the week



Policy reform or economic failure
Date: Thursday, June 25, 2015
Author: Henry Thornton

The International Monetary Fund (IMF) has reportedly said that: 'Economic growth glory days are over, Australia should rack up more debt'. Or, if you prefer the Newscorp version: 'Reform or good times will be gone'. Economists and newspaper 'lines' are meant to be different depending on who you talk to/read.  But the IMF spreads its views around like confetti, and this time the message is quite consistent.


As the Newscorp article said, is what was apparently a direct quote from James Daniel, head of the IMF's current mission to Australia: "We see Australia's outperformance ending, meaning Australians' income and living standards will grow significantly more slowly than they have been used to".  Henry half overheard a radio report that one of the big consulting firms has said that one third of Australia was now experiencing recession.  Kids trying to get jobs in Melbourne are still struggling, if the experience of young people in Melbourne's leafy eastern suburbs is typical. Gor Blimey, comrades, what is the world coming to?


The Greek crisis continues to worry pundits, and investment markets gyrate from day to day according to whether a Greek exit (Grexit) from the Eurozone is expected to be a triumph or a catastrophe. Mrs T, with characteristic dispassion, said last night 'I hope the Greeks do exit, as it will be very interesting to see who is right about its effects'. More here on the potential Grexit consequences.


No doubt the IMF's position is the same as it is for Australia, if a bit more alarmist - 'Reform or you're stuffed!'  Also on ABC we hear today that Martin Wolf is preaching global gloom and doom. The link to a relevant interview is available on the ABC website if you have the right browser, which Henry does not. A recent article in the Financial Times provides a scary summary.


'The outbreak of the first world war was, we are told, greeted with confidence and jubilation by the peoples of Europe. Something similar seems to be happening after years of economic crisis and political turmoil in Greece. A growing number of people feel that enough is now enough. The strident views expressed in these pages by the Italian economist, Francesco Giavazzi, are shared by many in high office. Meanwhile, Alexis Tsipras, the Greek prime minister, accuses Greece’s creditors of “pillaging” his country'.


Read on here, dear readers, assuming you are, like Henry, a subscriber to the pink paper.


We live in interesting times. As we said some time ago, there are a number of scary scenarios about.  Be cautious with investments, encouraging to kids seeking jobs and please write to your favourite MP about the need for economic reform.


Sunday Sanity Break, 21 June 2015
Date: Sunday, June 21, 2015
Author: Henry Thornton

The debate about citizenship rages on.  I'm with the Coalition backbenchers.  Let's find a way to deprive anyone who goes to join the terrorists of Australian citizenship. The UK does this, surely its plan should be good enough to adopt here. But if we need our very own scheme, here is an idea. Any Australian travelling to the Middle East must seek valid exit approval in advance.  This would be as streamlined as possible but reason for travel must be clearly stated and supported by documentation from whomever the travellor is planning to visit.  Anyone who is found to have violated the stated reason and is found to have joined a terrorist organisation will immediately have his or her passport cancelled. Duel citizenship or not, such people will presumably be accepted within their terror organisation of choice. And if not, why should we care?


Mrs T is more concerned than Henry about the principal of judicial oversight. 'Let the courts decide, but with the law providing a mandatory life sentance - no possibility of parole -  for anyone proved to have fought with terrorists against Australians or, for that matter, committing an act of terror in Australia'.  Henry's concern is the inefficiency of Australia's legal system and the scope for multiple appeals, easy freedom on bail and weak sentances. But there can be no doubt that the law needs to be strengthened and penalties increased. Ideally involving the death penalty when Australians are injured or killed, although one supposes the soft lefties would fight that with ferocity.


The debate about the economy had nothing much to sustain it in the week just past. The official view is that the Australian economy will gradual pick up steam, the housing bubble will slowly deflate, unemployment will peak in 2015 and then begin to fall.  The 'clowns, fools and wreckers' who doubt this scenario are ignored. If things are materially worse than the official view, no high official will lose his job, though the Treasurer might. 


 The Economist discussed prospects for the world economy last week, and there is plenty of cause for concern there. Here is the basic comment: 'Few economies have ever gone as long as a decade without tipping into recession—America’s started growing in 2009. Sod’s law decrees that, sooner or later, policymakers will face another downturn. The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today'.


Of course, I hear you cry, Australia is the poster child for the opposite view, with 22 or is it 23 years without recession. That result comes from the the Hawke-Keatings government's economic reform, the Howard-Costello government's wise management and the fact that China's economy underwent a nearly unique 30 years of double-digit growth.  Sadly that left us with double-digit cost overhang.  After the waste and mismanagment of the Rudd'n'Gillard'n'Rudd'n'Swan governments Australia is now approaching the state of other developed governments, with little fiscal or monetary firepower available if there is need of stimulus in the years ahead.


We must hope for the best while preparing for the worst. Here is Henry's 'Dreamtime' plan for a quick fix.  Some people think that the base problem is lack of confidence, 'negative Animal Spirits'.  This may well be true, and if so there is an example of how this can change almost in a heartbeat. The Caaaarlton! footy team.


Henry today has some good news about an article his editor wrote with Australia's leading historian Geoffrey Blainey. Over 40 years ago this was rejected by 5 economic journals, but now a serious UK publisher has requested permission, which has been given, to include it in a book about Keynesian economics.  Here is a link to said article.  (Memo Michael Moore - is this the work of 'Keynesian' economists?)


Kulture


Fiona Prior spends some time with the Church of Scientology by viewing Alex Gibney’s newest documentary  'Going Clear: Scientology and the Prison of Belief' and finds it just as creepy as suspected.


Footy'n'cricket'n'stuff


Three weeks after Caaaarlton! sacked its supercoach Mick the Merciless Malthouse, the team is playing with flair and dash. Yesterday the team warmed the cockles of Henry's late middle age heart by twice dashing away from Port Adelaide then twice defending grimly when the Porters came back, to win eventually by 4 points. This was the margin for 10 or 15 excruciating minutes at the end when the game was there to be won or surrendered.


Like the NSW state of origin Rugby League team in mid-week, the Caaaarlton! Blues had the benefit of some controversial decisions, but then perhaps even referees have lapses and these usually even out over a game or a season. Anyway, I hesitate to predict of Caaaaaarlton! that 'They know we're coming' but we can reasonably expect some better performances in the rest of the season.  As a result of the upset win by the NSW Blues in Melbourne (go figure) we have the decider to be played in Brisbane in two week's time.


Then there is the cricket to look forward to.  The Poms have reportedly unearthed a fast left-handed opening bowler, who will presumably give our open batters a decent workout, but the key question is can he bat well and field brilliantly, like the Australian tailenders.


We must not forget the Aussie sheilers' futball team, facing the might of the Brazilian sheilas early Monday morning our time.  'Go girls, go' is Henry's admonition, the use of the word 'girls' haveng been creeping into polite conversations in old Melbourne town.


For many years, Henry has been a regular watcher of Insiders. He has accepted the clear lefty in order to learn about lefty bias and to cheer the occasional conservative counter attack. But today's Insiders was just a bridge too far. Bill Shorten as the guest pontificator, about the allegations he is appearing at the Royal commission to answer.  Three complacent lefty panellists cheering for Labor, sneering at the government, totally self satisfied about their views.


Image of the week



Courtesy The Economist


Modern Greek Tragedy
Date: Thursday, June 18, 2015
Author: Henry Thornton

'Greece-EU debt row hots up'. This is the state of play and has all the signs of becoming a real Greek tragedy. The standard of living of ordinary Greek citizens is already suffering with massive shortage of jobs and opportunity to build an acceptable life. Many Greek citizens are wondering if things could get worse. Perhaps sadly, 'yes' is the answer.


But before outlining a possibly sad future if the Greek government cannot find a way out of bankruptcy within the EU, what are the relatively benign possibilities?  The fact is that usually bankrupt nations get bailed out in one way or another.  For example in the Latin nation debt crisis in the 1990s Latin debt was bundled up and sold to the highest bidder. Some of these debt bundles were sold for 20 cents in the dollar, and later onsold for much higher prices, proving that capitalism can make a market in just about anything, like the betting shops were doing so vigorously during the State of Origin game last night.  Meanwhile governments of the previously bankrupt Latin nations were eventually able to borrow fresh funds and life gradually got back to normal.


In the case of Greece (and other weak EU nations of Southern Europe) their weakness is keeping the Euro weak, far lower for than it would be if the nations of Northern Europe were the only nations to be using the Euro.  Ergo, there is more than normal incentive to let Greece exit the EU ('Grexit') as that exit would mean the new-Drachma (or the 'Tsipras' or whatever the new,  greatly devalued (relative to the Euro) Greek currency) would be called. If Greece cuts and runs, other Southern European basket cases might take the same path, each defection raising the value of the Euro until (gasp!) Germany and other Northern Europe nations would be battling to trade with a far higher Euro to deal with.


Widespread defection from the Euro might create even far bigger problems for the solvent nations of Europe. Banks in the defecting parts of Europe might have assets in new (greatly depreciated) currencies and liabilities in Euros, and would immediately be bankrupt. How this would work out is impossible to say, and it is certain that no-one in the commanding heights of the Eurozone wants to find out.  Naturally, one imagines that the European Central bank (ECB) has run the relevant simulations, and the results of these are presumably understood by extremely nervous global central bankers.  My guess is that there is no way the global banking system could withstand the loss of the banks of southern Europe, followed by the banks of northern Europe, ... (Fill in your own banking disaster scenario.)


Keeping the EURO tamed and avoiding widespread bank failures together make the basic case for keeping Greece limping along within the Eurozone, tied to the modern 'cross of gold' as the global currency was sometimes called during the heyday of the gold standard.  (Given the apparent modern Greek liking for leisure over work, the modern description could be 'tied to a bed of euros'.)


On the other hand, leaving the Euro would remove the bonds to the bed for Greek citizens. They could, absent other bad things such as a global banking crisis, arise and go back to work.  A lower new-Drachma currency would make Greece immediately more competitive in global markets.  Greece would no longer be tied to the approximation to 'free trade' as practised within the Eurozone. Greeks would all be working hard collecting firewood, growing vegies, milking cows and in fact doing a lot of things done by non-Greeks in the days of unrestricted free trade. Expensive imported cars, for example, would no longer be able to be imported, and Greeks would learn to make do with increasingly ancient cars.  Eccentric old men would run repair shops for aging cars and others would specialise in fixing dishwashers, DVD machines, televisions,fridges, and so on. Smuggling would again flourish, and the native Greek ingenuity previously stifled would begin to reemerge. Before long, most Greeks would again be gainfully employed and so long as the Greek central bank was able to print new-Drachmas quickly enough a subsistence economy with merely internal specialisation would emerge.  


I suspect most Greeks would be happier than they are now, though the brightest young people would find passage to the free trade zone of Europe in otherwise empty smugglers' boats on their home run.  Many Greeks would in fact find the new order a golden age, as it was remembered from the days of their youth, with hard work, hard drinking (after work), women largely limited work to work in the home and a regular sense of self-sufficient independance, at least for Greek men.


Tourists will be encouraged to experience a self-sufficient culture modelled on the 1950s, as well as old ruins from millenia past.


Again I hear the cry of 'you're dreaming Henry', but that is too bad, dear readers. Unrestricted free trade and a currency higher that the nation can stand has ruined the Greek economy.  There will be a backlash from these ideals of economists, and the current Eurozone crisis may trigger it.  If a return to the past works for Greece, and other Southern nations follow Greece's example, this would very likely trigger a major crisis of capitalism.


This comment appeared shortly after this article was posted.


 


Fast fix or slow?
Date: Tuesday, June 16, 2015
Author: Henry Thornton

'THE struggle has been long and arduous. But gazing across the battered economies of the rich world it is time to declare that the fight against financial chaos and deflation is won. In 2015, the IMF says, for the first time since 2007 every advanced economy will expand. Rich-world growth should exceed 2% for the first time since 2010 and America’s central bank is likely to raise its rock-bottom interest rates'.


Of course, the future is shrouded by the standard fog of uncertainty.  How will the Greek crisis end? Will there be further terror attacks on the capitalist heartland? Will China's slowdown get even worse?  Is the American recovery in trouble?  When the Fed finally begins raising cash rates, will asset prices crash? One can easily enough find reasons to be cautious, if not downright pessimistic. 'It is only a matter of time before the next recession strikes. The rich world is not ready', warns the venerable mag.


The Economist, from whose sources the opening quotes are borrowed, this week provides a typically polished overview. In brief:
* 'The good news comes mainly from America, which leads the rich-world pack. Its unexpected contraction in the first quarter looks like a blip, owing a lot to factors like the weather (see article). The most recent data, including surging vehicle sales and another round of robust employment figures, show that the pace of growth is rebounding. 
* 'In other parts of the rich world things are also looking up. In the euro zone unemployment is falling and prices are rising again. Britain’s recovery has lost a bit of puff, but strong employment growth suggests that expansion will continue. Japan roared ahead in the first quarter, growing by 3.9% at an annualised rate. A recovery so broad-based and persistent is no fluke'.
* 'Emerging economies, which accounted for the bulk of growth in the post-crisis years, have seen better days. The economies of both Brazil and Russia are expected to shrink this year. Poor trade data suggest that Chinese growth may be slowing faster than the government wishes'.


The big problem is that there is not much room to move should economies enter recession any time soon.  Fiscal policy was used to the max during the global financial crisis. Cash interest rates are almost everywhere close to zero, and will be raised, the US Fed assures us only 'gradually' in the immediate future. 'The logical answer is to get back to normal as fast as possible. The sooner interest rates rise, the sooner central banks will regain the room to cut rates again when trouble comes along. The faster debts are cut, the easier it will be for governments to borrow to ward off disaster. Logical, but wrong'.


Monetary policy can remain easy while regulators use so-called 'macroprudential policy'. Trouble, such policies have hardly been tried, or have been tried and failed. Nevertheless, 'Regulators have the ability to let the air out of asset prices by tightening rules on leverage and liquidity. An economy at full employment and with a healthy level of inflation will be better positioned to withstand a bout of financial instability than one that is flirting with deflation'.


And, despite debt to GDP ratios that are uncomfortably high, governments can do more. 'There has still been shamefully little growth-boosting investment in infrastructure. ... Growth is better than austerity as a policy for bringing debts under control. Governments should instead direct their energies towards overdue reforms to product and labour markets. Open product markets encourage enterprise. The freedom to hire workers under flexible contracts is the best way to keep people out of unemployment. Both reforms make an economy better able to cope with the next [adverse] shock'.


So there you have it, dear readers. Continued near zero cash rates, but macroprudential policy to contain asset prices. Fiscal reform to reduce budget deficits, but more spending on infrastructure. Plus 'Overdue reforms to product and labor markets'.


Two cheers for the Economist. The unanswered question is whether fast return to fiscal and monetary policy normality would produce a faster return to overall economic normality. (So far as this writer is aware this is an issue barely touched by the economics profession.) The unambiguous two cheers are for product and labor market reforms, two issues that are hard for any government. It usually requires a serious economic crisis to get such reforms.  Yet it is best to fix a roof while the sun is shining, and surely this approach applies to economic reform also.


Despite this point, here is an example of 'Dreamtime economics', a fast fix plan for Australia.  The Economist's gradual reform approach will undoubtedly keep voters happier than an attempted fast fix. What a pity there is no convincing research, or actual example, of an economy pursuing a fast fix.  But wait! Does anyone know what happened in Iceland after the PM advised people things were dire, and they had better take up fishing again?



Courtesy The Economist


Saturday Sanity Break, 13 June 2015
Date: Monday, June 15, 2015
Author: Henry Thornton

'Get a job that pays well' said Treasurer Joe Hockey. This has been widely lampooned as stating the obvious.  A cruel prescription for the many battlers who cannot find any job, let alone one that pays well.  The Australian has been featuring people who went to live in Tamworth, or in a suburb distant from the CBD in one of our boomtime cities. And on the issue of stating the obvious, Henry has also been accused of that particular sin.  His answer is 'I do sometimes do state the obvious, which is necessary as most people don't'.


Curiously, smokin' Joe's advice is the same as that offered by Henry all those years ago, in early 2000.  Here are Henry's 'Six rules for building wealth'. Here is the link to the whole discussion, which grandparents have sometimes passed on to their grandchildren.


1. Earn well. Obviously the more you earn the more you can salt away. It pays to think hard at an early age about the importance of money in one's life, as it will be frustrating to end up as a highly respected Professor of Classical Greek (for example) if you really wanted to be able to take your annual vacation somewhere in the asteroid belt.


I choose the example of Classical Greek because it seems unlikely that such an occupation will allow lucrative consultancy opportunities. But in most academic jobs nowadays it is possible to earn well beyond the basic academic salary in a variety of ways. The recent stock market float of Melbourne IT is one startling example.


It is also increasingly possible to change direction more than once in a career Twenty years as a poorly paid (but influential) public servant can be followed by time as a highly paid corporate executive. Business executives sometimes become venture capitalists, or start an innovative business as the principal shareholder. [Now experts say it is necessary to change jobs and areas of expertise, perhaps six times in a lifetime. Henry has made 4 such changes.]


Some people do it the other way round - first accumulating wealth in commercial activities and then spending their autumn years as an influential academic or politician. President Reagan is one prominent example.


[I must confess that, given the current dire state of Australia's labor market, this advice can, like Joe Hockey's, can sound excessively cheerful. All I can do is to aplogise and urge parents to do all they can to instill the desirability of a well paid job into their children's characters, and help them in their search.]


Other rules are as follows:
2. Save strongly. Given income, the biggest single potential influence on wealth is what economists call the propensity to save. ...
3. Avoid the twin temptations of fear and greed. ...
4. Invest wisely. This is a difficult subject, since investment wisdom is obvious mostly in hindsight. ...
5. Get good advice. ... [Not from a dud Financial Planner.]
6. Have fun. Earn a lot, save a lot, spread your risks and don't try to be too clever at picking individual investments or changes in market sentiment. The rules so far may seem rather old-fashioned, even boring The saving grace is that there is one final rule that makes the others bearable - have fun. ...


The housing debate.


Treasury Secretary John Fraser has said Sydney and 'parts of Melbourne' are experiencing a housing bubble. RBA chief, Glenn Stevens has said Sydney house prices are 'crazy'.  Both these eminent economists are presumably 'clowns, fools and wreckers'. But whatever the merits of the case, it is refrehing to see these worthies speaking their minds for a change.  Another fine economist, Australia's Mike Porter once said 'the answer to a leak is a flood'. The traditional levee of official secrecy has been breached.  Let's read the RBA board papers with our breakfast, let's hear more often what the Head of Treasury really thinks.


Alan Kohler in today's Oz lays out the case with the sort of graphs undoubtedly used in presnetations to the RBA board.  Is it a bubble or merely high prices requiring government policy to boost supply of housing?  This is the sort of question pondered in the better science fiction books, but Mr Kohler makes a point that is solidly based in economic history.  We'd better hope it is a bubble, because the bubble will burst and high prices will be fixed.


Here is the link, dear readers, but you'll need the fish'n'chips version where the graphs are easier to read.


Dennis Shanahan provides some political analysis, but though Henry is a lifetime subscriber to the Oz, the link to Shanahan is unreadable because of an offensive ad by Origen Energy.  Outrageos, we've already paid for the privilage of reading Mr Shanahan online, but then we cannot.


The citizen issue


Des Moore has weighed in with a blockbuster that deserves careful reading.  It is posted here with Mr Moore's gracious permission.


Here is the link. 


Kulture


Fiona visits Sicily's mafia in an unlikely romantic comedy The Mafia Kills only in Summer



Cricket'n'footy'n'futball'n'stuff


Steve Smith has made merry against the hapless Windies, whose captain compounded their troubles by only allowing his Wes Hall-like quick a few overs when he had the Australian batters on toast.  After his unbeaten 130 in the first innings, it was sad to hear Mr Smith was dismissed for 199 runs in the second dig.  But all is not lost for the Windies.  As well as that tearaway, they seem to have found a man with a mystery ball, like Australia's Shane Warne.


Onward to the pestiferous Poms (PP), team Australia. The PP groundsmen are doctoring the pitches as we write, dear readers, so keeping the Ashes will be no mere stroll in the park. We shall of course be polishing the cliches for reporting on the titanic tussle to come.


Richmond beat Freo in the west.  Since Richmond only just beat the Blues in the opening match of the year, the Blues appear to have little to fear when they face top of the table Freo. 'Que?' I hear you say. 'Footy is not transitive'.  Amen to that piece of folk wisdom.


The Aussie shielas fought the mighty American futballers and held them to a one all draw in the first half.  Sadly, our shielas faded in the second half and must saddle up (another useful cliche) against Nigeria, whose players are descended fron Zulu warriors, and who in the futball world outrank shielas descended from convicts and other sweepings of London's grimy eighteenth century streets.


And we learn from the sporting pages that an Aussie lad from Australia's hot and dry interior has siezed his chance in the NBL finals to show what a gritty aussie battler can achieve. Chip Le Grand reports: 'Dellavedova plays basketball like a red heeler. His uncompromising approach hasn’t endeared him to all basketball fans but, in Dellyborough, they’ll tell you it is the way he has played since he was a kid running around for the Maryborough Blazers U12s.


'Brady Neill, who played alongside Dellavedova in Maryborough and Bendigo teams, says he lost count of the times he had to pick his undersized point guard off the floor — just as Cleveland star James LeBron has done so often in this best-of-seven series, which is now locked at 2-2. “People used to complain that he was too phys­ical,’’ says Neill, who coaches the Blazers U16 boys team. “Because he was one of the better ones they would try to target him a fair bit.” '


More here.  


Image of the week



Courtesy The Oz


Long weekend Sanity Break, 6-8 June 2015
Date: Saturday, June 06, 2015
Author: Henry Thornton

The contradictions of the Australian economy continue to confuse us all. Slow wages growth and low retail sales are effects of uncertainty and fear that jobs will be lost. But with national income falling, household saving is falling from the post-GFC high even to maintain low levels of household spending.  Meanwhile falling mining investment and feeble non-mining investment adds to the gloom. A massive $3.9 billion current account deficit (CAD) sparks memories of the trigger for the 'Banana Republic' crisis of 1986.


Those of us who are concerned by these facts are labelled 'clowns, fools and wreckers'. It would be interesting to help Glenn Stevens drink a bottle of Grange and ask him if the glass was half full or completely empty when he'd finished. Or to get his private thoughts about where we are and what is needed to put Australia back on the road to prosperity in a post-GFC, post-China boom world. Henry's 'Dreamtime Economics' provides some ideas.


Calls for a broader and higher GST are increasing, most surprisingly from David Marr on last week's 'Insiders'. It will be interesting to see what the White Paper on tax reform says. About as much as the information paper on what to do about citizens who fight against Australians. If they are overseas, cancel their passports. If in Australia, send them to Port Arthur. Henry is with government backbenchers on this one.


Vale Joan Kirner and Alan Bond.  Both notable Australians in very different fields of endeavour, but we are poorer for their passing.


Kulture 1


Fiona Prior lets the light-meister James Turrell play havoc with her optic nerves and imagination.



image: courtesy of the artist James Turrell


Kulture 2


Gary Scarrabelotti offers some sage political advice Tony Abbott, with its core a feature of an important culture group in this great South land.


 Footy'n'futball'n'cricket'n'stuff


Wonderful to see Mark Murphy and his Blues finally put up a good show against a quality team. Murphy himself starred along with most of the team.  Very sad to see Juddie carried off with what looks like it could be a career-ending knee injury. And we cheered Richmond last night as the walloped Freo in Perth. Is there light at the end of the tunnel for two old-fashioned teams of battlers in suburban Melbourne?


On the wider global scene of futball, FIFA President for life, Sep Blatter, has resigned, or plans to resign as the American plod close in. One hopes FIFA finds a honest bloke or woman to clean the stables. Lots of anger at the handball that favoured France in a World Cup.  What about the dodgy penalty kick that kept Australia out of the finals of another World Cup?


The rampaging Aussie cricket team belted the Windies in three days, helped by a century on debut by Adam Voges. How such an accomplished player was overlooked for so long is just one of the mysteries of sport at the top level, Let's hope Mr Voges gets a fair suck of the sausage selection in future. The Pestiferous Poms have had a better preparation playing New Zealand and this may make the coming Ashes series worth watching.


“Ewwwww! No! No! No! We ... are staunchly opposed to armpit hair (on women), nose hair, ear hair and toe hair.”


More here for fans of actress Jemima Kirkes.


We wish our loyal readers a safe and happy Queen's Birthday weekend.  Long may she rein as it is hard to see such affection for King Charlie, even if we still get a holiday.


Image of the week


Still searching - please send your favourite weekend cartoon.


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