We’re now in the point-the-finger phase of the present financial crisis. The G7 says its all the banks’ faults, and wants to increase their capital adequacy requirements. The banks say its nobody’s fault, and want governments to bail them out. Many economists say its Alan Greenspan’s fault for cutting rates so low and for so long in 2001-2006. Alan Greenspan says its risk managers’ fault.
Here’s my two-pence-worth, from an amateur market-observer with no economic qualifications: beware new markets.
When you look at the great speculative bubbles of the last 20 years, they almost always occur in new and untested markets, markets that have never gone through a downturn, so there is no investor knowledge of their upper limit, and little regulator awareness of the frauds or legal loopholes that investors can exploit.
Thus the Russian financial crisis of 1998 was, among other things, a new market, in which investors had no experience of a crash. That helped drive the euphoria and risk-appetite of local and foreign investors.
The dotcom bubble in the same period was also a new market, based on ‘new economy’ stocks, which seemed so new that analysts and investors threw away their scepticism and convinced themselves these stocks would only go up and up.
The California power crisis of 2001 was also a new market, created by the deregulation of the power sector in that county. The newness of the market meant regulators had not fully got to grips with how the market worked or how unscrupulous investors could exploit the system. Enron, masters of financial innovation and wizardry, were quick to find the loopholes in the untested regulation, and they made a killing at the expense of California, which faced rolling blackouts as greedy traders took electricity out of the county, then brought it back in at double the price.
And the CDO boom of the last six years is another new and untested market, which neither regulators nor banks’ senior management fully understood. Regulators didn’t understand the risks involved. Bank senior management didn’t want to understand, as long as the traders putting together these deals kept bringing in the money.
The moral is that risk managers, and regulators especially, should be wary of new markets that start to grow exponentially quickly. It probably means that investors have found some way of making money which they think is full-proof, and they’re taking dangerous risks.
Yes, fresh from bringing peace to Northern Ireland and dodging snipers in Bosnia, Hillary Clinton is planning an amazing feat – she’s going to make the US energy independent, switch to renewables, and make energy prices cheaper for working class Americans.
“I told you I wanted to have a conversation so I asked you to send me your questions and concerns,” she tells us in her latest ad, before reading a letter from Tammy Bright of Cherryville, North Carolina. Tammie makes truck parts for a living and is a Republican (seemingly).
“We in NC are feeling the crunch of rising gas prices,” writes Tammie. “It’s harder for working families even to afford to drive to work. What are your plans on reducing the rising price of gas?”
“Well Tammie, I hear this everywhere,” replies the Senator. “People like you, and everyone else, are paying way too much at the pump. We need to reach energy independence and the only way we’ll do that is to stop buying oil from over there and start creating alternative renewable energy over here.”
Thank god for Hillary. And for the fact that she’s somehow still going to be President, despite losing the primaries. Or something. Next up, at NCAskMe.com, you can have your cake, and eat it too.
The Ug99 strain of the killer wheat fungus (stem rust), which recently infected wheat farms in western Iran, is a serious threat to global food security, agricultural scientists have warned. They have said the fungus may affect additional wheat-producing countries.
Mahmoud Solh, director-general of the International Centre for Agricultural Research in the Dry Areas (ICARDA), was quoted in a 20 March ICARDA press release as saying that he and his fellow scientists were convinced that Ug99 would quickly spread beyond Iran and that, with the long distance travel of rust spores, Ug99 would soon affect farms in the Middle East, Central Asia, South Asia and East Asia.
Richard Brettell, director of the Biodiversity and Integrated Gene Management Programme at ICARDA, told IRIN on 26 March that halting the spread of the stem rust spores is difficult since they are dispersed by the wind. “The fungus can to some extent be controlled by the application of fungicides [as a spray]; however, these need to be applied at an early stage of infection before the disease takes hold,” he said.
Brettell said the most effective way of controlling the disease is to grow resistant varieties. But he warned: “The problem is that almost all the wheat varieties grown in West and South Asia are known to be susceptible to Ug99. It will take time and coordination to replace them with resistant varieties.”
Australia’s PM Kevin Rudd – who as David noted is “surely the wonkiest head of state ever” – continues to charm the pants off everyone he comes across.
While Gordon Brown manages to annoy everyone with his foreign policy equivocations (FT: “He will not be going to the opening ceremony of the Beijing Olympics, but that should in no way be construed as a boycott. He receives the will-o’-the-wisp Olympic flame at 10 Downing Street but lets it be known that he did not touch it.”), Kevin achieves the opposite: he goes to Beijing, wags the finger on human rights, and leaves his audience purring.
Here’s an excerpt from his Beijing speech last week:
This year, as China hosts the Olympics, the eyes of the world will be on you and the city of Beijing. It will be a chance for China to engage directly with the world, both on the sports field and on the streets of Beijing. Some have called for a boycott of the Beijing Olympics because of recent problems in Tibet. As I said in London on Sunday, I do not agree. I believe the Olympics are important for China’s continuing engagement with the world.
Australia like most other countries recognises China’s sovereignty over Tibet. But we also believe it is necessary to recognise there are significant human rights problem in Tibet. The current situation in Tibet is of concern to Australians. We recognise the need for all parties to avoid violence and find a solution through dialogue. As a long-standing friend of China I intend to have a straightforward discussion with China’s leaders on this. We wish to see the year 2008 as one of harmony, and celebration – not one of conflict and contention.
So obviously that would lead to swift condemnation from the Chinese press for ‘meddling’, together with vociferous outrage from students, nationalists and other hotheads, right? Er, not quite. The Australian newspaper polled some of the audience afterwards:
Although Mr Rudd’s comments about “significant human rights problems in Tibet,” might draw ire from his hosts Premier Wen Jiabao and President Hu Jintao, China’s top students appeared unfazed. Many went so far as to agree with Mr Rudd that handling ongoing unrest in Tibet peacefully and through dialogue was the best way to resolve the issue that has placed China’s communist leaders under the global spotlight for nearly a month.
“I agreed with what he said,” Li Yang, a graduate student in environmental sciences, said following the speech. “The Tibetan issue should be resolved without violence and through dialogue, this is correct.” Although Mr Rudd’s speech touched on many such sensitive issues, he also received praise for voicing intentions to become a friend in the true Chinese tradition, who can “offer unflinching advice and counsels restraint”.
And of course, it can’t have hurt that the whole speech was delivered in flawless Mandarin:
“His Chinese is very good, he speaks Chinese very well,” said Hong Ziyun, a first year law student. “He really understands Chinese history and culture.”
Meanwhile, China Daily had this to say: “Australian Prime Minister Kevin Rudd enthralled his audience at Peking University with an intimate grasp of China affairs and a thorough understanding of global politics yesterday.”
Top marks to Rudd for diplomatic deftness. But also a clue, maybe, as to what kind of approach towards dealing with current concerns over Tibet is likely to have most influence…
A couple of weeks ago, Martin Wolf penned an FT op-ed proclaiming that the rescue of Bear Stearns “marked liberalisation’s limit”. We should remember Friday March 14th 2008, he said, for it was “the day the dream of global free- market capitalism died”:
For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over.
If the dream’s already over in financial services, food may be next. Here’s Javier Blas in the FT yesterday:
Governments are racing to strike secretive barter and bilateral agreements with food-exporting countries to secure scarce supplies as the price of agricultural commodities jump to record highs, diplomats and cereal traders say.
Wheat traders said yesterday that Ukraine was close to an agreement with Libya to devote up to 100,000 hectares of its own land to grow wheat for the north African country. Kiev-based analysts questioned the feasibility of such an agreement after the former Soviet republic restricted its cereals sales earlier this year.
The discussions follow a barter contract signed between Egypt and Syria in which Cairo agreed to supply Damascus with rice in exchange for secure wheat cargos. The Philippines also sought unsuccessfully last month to reach a deal with Vietnam to secure a large supply of rice.
Abdolreza Abbassian, an expert at the Food and Agriculture Organisation in Rome, said: “The use of bilateral agreements is on the rise.” Diplomats also say that the recent bilateral and barter contracts signal a broader trend.
Meanwhile, import substitution is back too. Just look at the Philippines, one of the world’s largest importers of rice – where prices have risen by up to 70 per cent over the last year. As the Manila Times set out last week, most of the Philippines’ rice comes from Vietnam, plus a little from Thailand – both countries that have reduced export levels as prices have shot up. The result: the Philippines’ equivalent of the FBI is raiding warehouses looking for rice hoarders, and political tension is rising.
As Roel Landingin reported in the FT a couple of days ago, part of the backdrop to the current situation is that the World Bank strongly encouraged the Philippines to place its trust in world markets for rice:
Less than a year ago, the authors of a World Bank paper on agricultural spending in the Philippines posed a question that now looks prescient: “Can the world market for rice be trusted?” Yes, was their unequivocal answer. And so the authors urged Filipinos not to worry too much about their reliance on rice imports…
Leocadio Sebastian, executive director of the government-run Philippine Rice Research Institute, said recent events had shown that the reasoning behind the World Bank’s recommendation “may not be true any more”. The World Bank study argued that rice production and prices were now more stable and that governments in rice exporting countries could not easily restrict foreign sales.
So much for that plan, as they say. Now, the talk in Manila is of self-sufficiency – within three years, no less: quite a reversal. And while this is not the sort of agenda calculated to gladden the hearts of economists at the Bank, it does appear to have the approval of the UN’s Food and Agriculture Organisation, whose advice to poor countries yesterday was to “rely more on local produce to cut food import bills and provide subsidised inputs to boost production”, according to ReliefWeb.
