Monday, September 24, 2007

President Sarkozy calls for increase in European Central Bank key interest rate!!!

French President Nicolas Sarkozy has been baiting his compatriot Jean-Claude Trichet, European Central Bank President in recent months to cut interest rates and give politicians a greater role in ECB decision making.

Ten years ago, they crossed swords when Sarkozy was Budget Minister and Trichet was President of the Banque de France.

The above headline is a joke because it would never happen.

Former Federal Chairman Alan Greenspan says in his book The Age of Turbulence (click for excerpt):

The Federal Reserve's pre-1979 track record in heading off inflationary pressures was not a distinguished one. In part, that earlier history was a consequence of poor forecasting and analysis, but it also reflected pressures from populist politicians inherently biased toward lower interest rates. During my eighteen-and-a-half-year tenure, I cannot remember many calls from presidents or Capitol Hill for the Fed to raise interest rates. In fact, I believe there was none. As recently as August 1991, Senator Paul Sarbanes, in response to what he considered intolerably high interest rates, sought to remove voting authority on the FOMC [the board that controls the federal funds rate, the primary lever of monetary policy] from what he perceived were the "inherently hawkish" presidents of the Federal Reserve banks. Interest rates declined with the 1991 recession, and the proposal was shelved.

I regret to say that Federal Reserve independence is not set in stone. FOMC discretion is granted by statute and can be withdrawn by statute. I fear that my successors on the FOMC, as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress, if not from the White House. As Fed chairman, I was largely spared such pressures because long-term interest rates, especially mortgage interest rates, declined persistently throughout my tenure.

It's a great argument for central bank independence to keep in mind that politicians would never call for higher rates despite the justification.

Sarkozy tells ECB to follow Fed and cut rates; Merkel and Trichet strongly defend the central bank's independence

Friday, September 21, 2007

Hedge Fund Managers, Cold Sweats and Soothing Words from a Psychologist

The American writer Tom Wolfe termed bondtraders "Masters of the Universe" in his 1987 novel Bonfire of the Vanities.

It was the year of the Black Monday market crash and also one where another work of art had a big impact on the attitude of the public to business - Michael Douglas playing asset-stripper Gordon Gekko in the movie Wall Street. (see his famous "Greed is Good" address to shareholders.)

Fast -forward 20 years and the hedge fund manager has replaced the bondtrader as a Master of the Universe - or so they think!

Top 25 hedge fund earners raked in more than $14 billion in fees in 2006 - equivalent to the GDP of Jordan or Uruguay

The big cats get lots of cream and today, the Forbes magazine list of the top 400 richest Americans has more than half who are hedge fund or private equity managers.

Not all the Mr 20%'s are plutocrats (the deal apart from most of their earnings being treated as capital gains, resulting in people like Warren Buffett's secretary paying a high tax rate - Buffett calls hedge fund managers "helpers - gives managers 20% of profits or more, together with fund fees of 2-5%.

What has been striking in recent years is that average returns are far from jaw-dropping compared with general market returns.

This week the New York Times had a story on the reaction to hedge fund losses in August when the general market advanced. Many readers must have enjoyed the schadenfreude.

A Times report said that after years of eye-popping returns, sudden losses can be wrenching. Aware of the psychological impact that high-pressure trading can have, several funds have retained psychologists to counsel stressed managers.

“It has been a very challenging period for these people,” said Jonathan F. Katz, a psychologist who works with large hedge funds. “I have seen people shaken, their confidence eroded. They are upset and depressed.”

The writer noted that such anxieties become all the more acute when taken with the boundless spending habits developed at the height of the hedge fund bubble.

As an example, Katz cites a client who, in the middle of the market turmoil in August, found himself closing on an expensive apartment in Manhattan.

“All of a sudden, two or three of his major positions were down,” Katz said. “He was on an emotional roller coaster. He had put himself out there, and now he felt horrible because he had lost his firm tons of money.”

The Times says such distress can result in what some call a social contagion, as hedge fund executives let their woes at work affect their personal lives. Investors have said that their golf scores soar, that they lose their appetites and wake up in the middle of the night in a cold sweat!

To be sure, many investors are cool headed enough to not let inevitable setbacks derail them. But others find it hard to keep their sense of self insulated from losses.

“Some people are debilitated by it,” said Ari Kiev, a psychiatrist who works principally for SAC Capital, the hedge fund founded by Steven A. Cohen. “You can’t sleep; you can’t eat; you have catastrophic thoughts about losing your house.”

The Times says that a prominent hedge fund investor, who like the other executives who discussed their anxieties asked not to be identified, spoke of a crisis of confidence. “

"It’s an intellectual destabilization,” he said. “All of a sudden, your funds are down 5 percent and the S.& P. is down 1 percent. Once you were master of the universe, but the market makes you humble.”

Humble for how long?

Some people are debilitated by it - yes indeed - such as those at the bottom of the pyramid who are subject to foreclosures.

Friday, September 14, 2007

Pious Platitudes and Climate Change

View of rising Earth about five degrees above the Lunar horizon, taken on December 22, 1968 - - This is one of the more famous images of the Earth from the Apollo program, taken by the Apollo 8 astronauts as they became the first humans to circumnavigate the Moon.

The rising Earth is about five degrees above the lunar horizon in this telephoto view taken from the Apollo 8 spacecraft near 110 degrees east longitude. The horizon, about 570 kilometers (250 statute miles) from the spacecraft, is near the eastern limb of the Moon as viewed from the Earth.

On the earth, the sunset terminator crosses Africa. The south pole is in the white area near the left end of the terminator. North and South America are under the clouds. The lunar surface probably has less pronounced colour than indicated by this print. Photo: NASA -
US National Aeronautics and Space Administration

The issue of climate change is very important but the danger of misguided good intentions has been illustrated this week by the impact that the encouragement of biofuel production will have on food prices, in particular for the poor in developing countries and also the risk of damage to the environment.

A report prepared for a ministerial meeting by the Organisation for Economic Co-operation and Development (OECD) said governments should end subsidies for biofuels, as the demand for grain for the alternative energy industry result in surging food prices and the potential destruction of natural habitats, including rain forests.

The European Union target for 2020 that 10% of energy used in the EU should come from plants, has been called into question.

Brice Lalonde, the head of the Organisation for Economic Co-operation and Development’s round table on sustainable development, said on Wednesday that it may not be possible to hit the target using “sustainable” methods, as called for by European Union leaders in March.

Lalonde, a French former environment minister, said: “The message was to be careful and take a long hard look at the issues. Several people were very blunt in saying that you cannot ask nature to do everything. You cannot feed people and soak up carbon and protect biodiversity and fuel cars.”

Forest burning puts Indonesia in the third rank of greenhouse gas emitters after the US and China. It is ramping up palm oil production for biofuels and the huge Kalimantan rainforest peatlands are under serious threat. When the forests are cleared the natural carbon sink that is rich in methane gas combusts and much of South-East Asia gets covered in smog.

There are many very big challenges to address in relation to climate change.

It was for example reported this week that Opec countries' demand for oil is growing prodigiously - it is rising at 2½ times the global average rate - reducing the amount they can supply to the rest of the world.

Jeff Rubin, chief economist of CIBC World Markets in Toronto, said oil cartel Opec countries and other oil producers like Russia and Mexico were "cannibalising" their own production. According to the International Energy Agency, the rich countries' energy watchdog, Opec accounted for 22 per cent of the roughly 8m barrels a day increase in world oil demand between 2000 and 2006.

Ireland of course is a small fry when it comes to climate change and our principal role is to comply with EU plans.

Minister for the Environment and Green Party leader John Gormley TD said last month that a cabinet sub committee on climate change, which will be meeting this month, will have a central role in formulating and implementing Government policies and initiatives in this area.

"The establishment of a special cabinet sub committee, which includes the Taoiseach, is an indication of the priority this Government is attaching to addressing climate change," Gormley said. "The committee and the Government have an ambitious and challenging programme of work ahead in tackling the climate change issue, in both the shorter and longer term."

The Minister said, "I envisage that by the end of the year there will be a number of positive initiatives on reducing emissions in Ireland. These include proposals for rebalancing VRT and motor tax, the establishment of a climate change commission, and ambitious new energy efficiency targets for new homes."

Gormley's comments on policy so far have been confusing.

He opposes incineration as an alternative to landfill and says that alternative technologies, such as Mechanical and Biological Treatment, built on a smaller scale, provided much better scope for reducing reliance on landfill. However at the same time, he says that European and national standards need to be set for these technologies to ensure they can operate to the highest possible standards.

Gormley said he would be issuing directions to local authorities "to ensure that local authorities do not introduce any measures to effectively skew the market in favour of either landfill or incineration by directing or guaranteeing waste streams to such facilities."

The Minister said on September 3rd that an independent international review of regional waste plans would be carried out, which will examine the potential contribution of technologies such as Mechanical and Biological Treatment.

Simply, Gormley has said what his policy is but at the same time will get an independent international review to produce a report that may well contradict it.

"In the context of this review I will also consider increasing the landfill levy from its current low rate of €15. As part of this I will also examine whether it may be necessary to extend the levy to include municipal incinerators. I do not see why incineration should not be subject to the same financial regime as landfills," Gormley said.

This is duplicity cloaked in the veneer of reason.

As an incineration plant requires significant capital investment, the message Gormley is sending is that he will ensure that such ventures are doomed. He is Minister for the Environment of a country that sends 70% of its hazardous waste overseas for incineration!

It's very much in the Irish political tradition of self-back slapping for taking "moral" stands while we export our problems. In a similar vein, we can use the import route as for example in taking electricity from the UK - which may or may not be produced via nuclear power.

It is at least something at least that the Green Party leader gives even selective credence to scientific evidence even though he has decided the issue in davance!

On Friday, his government's Chief Scientific Adviser highlighted the sharp divergence between the scientific evidence and public perceptions of GM foods. However, as with incineration, Gormley is at his best also following the anti-GM crowd.

"Minister Gormley said he was open to hearing from everybody in this debate on whether landfill levies should be increased and whether an incineration levy should also be introduced," a press release noted.

Later in September John Gormley will address a UN meeting on climate change in New York. He should use the opportunity to thank other ministers for their countries support in burning Irish hazardous waste!

When Gormley cannot provide a coherent policy for this country, God help the rest of the world!

Forest countries seek carbon credits; Indonesia's Rain Forest Peatlands

OECD report calls for end to biofuel subsidies; Food price surges and damage to the environment consequence of current policies

Rising global greenhouse gas emissions will cost more than $200bn a year to return to today’s level of emissions by 2030

About 50% of the increased demand for energy services in the 26 International Energy Agency member countries was met through increased energy use, and the other half through improvements in efficiency in the period 1990-2004

Report launched on Key Meteorological Indicators of Climate Change in Ireland

Gormley Opposes Incinerators in Ireland but Supports Export of Irish Hazardous Waste for Incineration

Extreme weather the norm across globe; Temperatures highest since 1800

Saturday, September 08, 2007

Freeloaders to reduce Air Travel in interests of Planet! Like hell they will!

Dipak Patel, former Zambian Minister of Commerce, Trade & Industry - - The Irish brought 21 civil servants to Hong Kong - more than five times Patel's trade division staff total and the Irish had little of substance to do. Some of the 40-person Irish delegation, were there to "represent" the poor of the developing world.

In December 2005, 30 Members of the European Parliament (MEPs) flew to Hong Kong to "monitor" progress in the Doha trade talks, where they demanded almost daily updates from Peter Mandelson, EU Trade Commissioner, despite the fact that as parliamentarians they had no role in the negotiations. The total of trips by official parliamentary delegations in 2005 was 43.

It's easy to be generous to yourself, with business class travel and top-notch hotels, when someone else is paying.

Three Irish Ministers brought an entourage of 21 civil servants to the same meeting.

The 24 Irish officials were joined by 16 other Irish freeloaders from lobby groups such as IFA (farmers) and IBEC (business) and representatives from groups working for the world's poor.

Conor Lenihan, then (Junior) Minister for Overseas Development, was there also to "defend" the interests of the poor of the world while the Minister for Agriculture Mary Coughlan was there to ensure that Mandelson would not concede anything to developing countries that would damage the interests of Irish farmers.

It must have been some donnybrook with Ireland one of the149 member countries of the World Trade Organization with delegations there and we had 40 from a country of 4 million people.

A French chef who worked at the Saudi State Guest House in Jeddah in the early 1990's, told me that Pakistan' then Prime Minister Benazir Bhutto had brought 85 freeloaders on a trip to Saudi Arabia with her.

However, not everyone can play that game.

Dipak Patel, Zambian Minister of Commerce, Trade & Industry in 2005, who was the Chair-Co-ordinator for the Least Developed Countries WTO negotiations Jan-Dec 2005 has said: "...the Financial Times has a bigger trade team than our entire trade division."

The FT's Alan Beattie, in an article titled: Dipak and the Goliaths (unrestricted), wrote in December 2005: It is late at night in a bar by the Zambezi river when Dipak Patel, trade minister from the impoverished southern African state of Zambia, finds the perfect way to illustrate how hard his job is. “So how many people does the Financial Times have covering trade?” he says. Well, I say, there’s me (the world trade editor), a reporter in Geneva who spends most of her time on trade, someone in Brussels, someone in Washington, and of course our bureau chiefs and reporters around the world spend a fair amount of their time writing about it. “God,” Patel says, contemplating the rows of luxury cognac bottles behind the bar, waiting for the rich tourists. “The FT has more capacity to do trade policy than we do.”

When asked on RTE's Morning Ireland what all the Irish were doing in HK - the reality of course was sfa - Conor Lenihan provided an example of his endeavours for Ireland (besides the poor of the world of course). He had ran into a man from China who had expressed a desire to invest in Ireland!

Three Irish officials at most would have sufficed for the trip to HK and the staff at the Consulate could have been on hand to roll out the red carpet.

So in an age of concern about climate change, don't be foolish and expect anything to change even with the appendage of the Green Party at the Cabinet table.

A press release issued last month by the Department of Environment stated: Minister Gormley, at the request of the Taoiseach, will be travelling to the UN in New York next month to represent Ireland and address a heads of State meeting which will be discussing climate change.

There will also be heads of government at the meeting, we assume!

How many bag carriers will Ahern and Gormley bring to New York?

In true Hollywood style, the Government will buy compensatory carbon credits - a salve-conscience routine that is the modern equivalent of the poor box.

So most of the 185 heads of government or State will drone on about climate change in an almost empty chamber, but the serious work will be at the UN climate change conference in Bali in December, which aims to lay the groundwork for a treaty to replace the Kyoto Protocol on curbing emissions.

Progress in Bali will not be helped by hordes of the usual freeloaders/hangers-on scrambling to get to the island.

Meanwhile, on Friday, the Irish Independent carried a report on a super-junket by Irish local politicians.

Years ago, to reduce the opportunities for corruption, councillors were left with one real power - land rezoning!

Besides their involvement in creating an artificial scarcity of land for development, in a country that is 4.0% urbanised, Irish councillors are also well known for their overseas 'fact-finding' missions.

A few decades ago, a local government conference in Brighton in Southern England had 150 attendees and about 120 were Irish.

The Independent reported that a group of 25 county councillors are on a 'secret mission' to investigate landslide fencing in Austria.

The Mayo councillors flew out Thursday from Dublin Airport for a four-day trip which is shrouded in mystery.

Mayo county secretary John Condon refused to reveal how many councillors were on the trip or what its purpose was.

"I don't have time because I have more important business to attend to. Next week you'll get all the information you need," he said, before hanging up.

However, the Irish Independent said that the purpose of the trip is to visit a factory in Austria which supplied the council with €900,000 of landslide barriers.

They are also scheduled to visit Salzburg, the historic town where the 'Sound of Music' was filmed.

The 'fact-finding' mission to Austria has accounted for 25 of the county's 32 councillors, as well as local authority officials and local newspaper reporters.

Some of the councillors are also believed to have been on a delegation sent by Mayo County Council to Argentina last March.

They attended ceremonies to commemorate the 150th anniversary of the death of Admiral William Browne, the Mayo-born founder of the Argentinean Navy.

The newspaper reported that it is understood that Mayo County Council organises a 'fact-finding' mission to Europe every year, with recent trips including a walking tour in England.

So expect lots of actionless action on climate change issues ahead but don't expect freeloaders in Ireland or elsewhere to imperil the global aviation and hotel industry.

Saturday, September 01, 2007

The Irish Media and Economics

Professor Michael Buckley

My attention was recently grabbed by the news that Michael Buckley former Chief Executive of AIB Bank, has been appointed as adjunct (an associate or assistant of another - one of the definitions in Merriam-Webster) Professor of Economics at University College Cork.

I had 35 lecturers during my six years at UCC and only two were not cures for insomnia. Bryan McMahon, son of renowned Listowel writer Bryan McMahon was one of them as then lecturer in European law and the other was a non-academic, Richard Haslam who was then Limerick County Manager. As a lecturer in the subsidiary subject of Public Administration, Haslam had the ability make subjects like the Public Health Act of 1878 interesting. As for the rest, one of them, a lecturer in economics, who had a style not that different from my father when he stumbled on something interesting in The Cork Examiner and began reading aloud, told me on one occasion that he had given up on economics years before. His speciality was microeconomics - exciting stuff of course like the elasticity of demand curves.

I saw Buckley once on television being interviewed on BBC's Newsnight by Jeremy Paxman after news of the Rusnak currency fraud scam broke. Resembling in appearance, the late brilliant Scottish actor Alastair Sim, Buckley is no Cicero but it would be some change if a former Irish bank CE provided an honest appraisal of Irish public policy issues rather than the default role as well-fed yesmen on company boards. Buckley started his career as a civil servant becoming Chef de Cabinet to the President of the European Court of Auditors, Luxembourg between the years of 1977 and 1981 and subsequently was a senior official in charge of public expenditure at the Department of Finance.

Economists have become more ubiquitous since I graduated and in the private sector most positions are in financial services. Basically that role is a hybrid of public relations and economics. If you cannot glean a silver lining from the darkest cloud, your career prospects would be pretty limited. The long term horizon for such economists is two to three years at most.

"Although the media are doing their best to put the fear of God into consumers by talking about a huge slump in the economy over the next couple of years, the underlying fundamentals continue to suggest that, outside the housing sector, things are still going well," said Bloxham Stockbrokers Chief Economist Alan McQuaid according to the Irish Independent.

Yes indeed! Haven't we heard of "fundamentals" for six months from the time the subprime crisis broke last February? The line from the vast majority of financial industry spokespeople was that there would be no contagion from a relatively small segment of the US mortgage industry. Now undaunted by having been proved so wrong and with their bonuses on the line together with their company stockholdings at risk, the clarion call is for the Fed to cut rates steeply again - which had some unintended consequences the last time the course of action was taken in 2000 and 2001.

The main Irish media organisations have economists who generally provide a balanced presentation on economic events. There are of course scary headlines at times but what should be expected in a democracy when the countervailing force is often self-interested spin from politicians and industry folk with an eye on their wallets.

The principal problem is that economics is a niche area and journalists without a knowledge or interest in the area, are manna for the spin of politicians and others.

The stamp duty debate, which began a year ago this month when the new leader of the Progressive Democrats Michael McDowell proposed its abolition or reform in respect of house purchases, as a measure to alleviate pressure on the "coping classes," is a great example of how the media fell for the spin.

The Sunday Independent had most of its columnists write about the pernicious system over several weeks. What was so bizarre about the debate was that the related issue of the VAT tax of 13.5% on the cost of new houses (there is no VAT applied in the UK) was ignored as was the corrupt land development system that makes multimillionaires of farmers near Irish towns.

Is the resultant cost for house buyers a direct tax and the inflated cost of roadbuilding because of a sweetheart deal with farmers, an indirect tax?

Michael McDowell later presented another wheeze on RTE Radio 1's Morning Ireland programme. The old age pension would be raised to €300 per week during the lifetime of the following government.

He spoke of course about pensioner poverty but wasn't asked about the causes of such poverty - the fact that almost a half of the workforce have no occupational pensions compared with the gold-plated ones for his then profession should have been raised.

As most journalists are economically challenged or have limited interest in the area, spin still wins out despite the pleas of the spinners about negativity in the media.

A postscript to the stamp duty debate is that economist Marc Coleman who promoted stamp duty reform in his last months as Economics Editor at The Irish Times, has moved to The Sunday Independent.

He is unlikely to have the same freedom in his new perch at The Sunday Independent and last Sunday offered some crumbs of hope to the spinners in an interview on a forthcoming book: "As I said I'm an optimist and although I have no problem talking sense into the economy, I never talk the economy down like some others do. Last week ECB President, Jean Claude Trichet, intervened to steady nerves just as financial markets were losing their grip. In my own small way, I think of myself as doing the same for the Irish economy. Commentators have to remember that someone else's job may sometimes depend on what they say."

I wish these people had the cojones to name the baddies who "talk the economy down."


Irish Economy - Many short-termists silent on likely challenges in medium to long-term