Food prices: where to get briefed

by | Mar 2, 2008 | Climate and resource scarcity, Economics and development

[Last updated: May 30th] 

Now that food prices are moving fast up the agenda, you might want to check out some of the wider briefing available on the web.  Here are some sources worth a look:

Finally, a couple of plugs on stuff that I’m involved in:

  • I’ve published a briefing paper (April 2008) on why prices are rising and what it means for development as part of a joint CIC / Chatham House project that I’m leading on international implications of rising food prices.  Chatham House also has a major research project underway on UK food policy in the 21st century, and released a set of scenarios for UK food supply in May. 
  • And of course, we’ll keep tracking the issue closely here on Global Dashboard – we’ll file everything we do on this under the Food Prices section.

Rocks for brains?

by | Feb 26, 2008 | Global system, UK

‘Clueless’. That’s how the financial press is summing up our politicians’ understanding of financial markets.

The ignorance of most politicians about the basics of financial markets was cruelly exposed, say both IFR and Euroweek (two of the City’s leading organs), by the furore in the Houses of Parliament over the fact that Northern Rock had securitized around 40% of its mortgages in an off-balance sheet special purpose vehicle called Granite.

David Cameron has confronted Gordon Brown with the existence of Granite, as if it was some dark and terrible secret which has only just come to light. He said: “We found out at 10 minutes to midnight that half of the mortgages, the best half, are owned by somebody else [Granite]. Why are you covering it up?” The media have been equally sensationalist. The Guardian claimed to have ‘exposed’ the existence of Granite in a front-page ‘investigation’. Patrick Wintour et al informed us that: “The existence of Granite was first brought to public attention by the Guardian last November.”

These ‘revelations’ come as a big surprise to the financial press, who have been writing about the existence of Granite for several years. It is one of the best known issuers in the securitization market, and its existence is openly acknowledged in Northern Rock’s accounts, and is registered with the SEC.
(more…)

Financial meltdown: your 12 step guide

by | Feb 11, 2008 | Global system

Time to remind ourselves that while we’ve all been cooing over Obama and fretting over NATO cohesion, the small matter of the security of the world’s financial system has continued to smoulder.  At dinner with a group of hedge fund analysts last week, it was abundantly clear that just because the issue has disappeared from the front pages for a time doesn’t mean it’s gone away: au contraire, one analyst was bluntly stating that all we’ve seen so far has been no more than the trailer.

Nouriel Roubini, bearish as ever (though let’s remember that he’s been consistently right so far), asks the big question:

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting. 

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

So to cheer you on your way on a foggy London morning in February, here’s Roubini’s 12-step “‘nightmare’ or ‘catastrophic’ scenario that the Fed and financial officials around the world are now worried about” – which “has a rising and significant probability of occurring”. Here’s the executive summary for those of you too lazy to set up a free subscription to read the whole thing:

1. This is already the worst housing recession in US history; prices will fall 20-30% from their peak. That would imply about 10 million homes in negative equity.

2. Financial system subprime losses are now estimated at $250 to $300 billion; and now spreading to near-prime and prime, through the same lax lending criteria: “this is a generalized mortgage crisis and meltdown, not just a subprime one”.  And don’t forget all the off-balance sheet Structured Investment Vehicles etc., and the fact that “because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global”.

3. “The recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans.”  All of which makes the credit crunch even more severe – and takes it from large banks through to smaller banks.  [Loan companies are already scrambling to tighten up lending criteria in the UK, as the FT set out over the weekend.]

4. “While there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up.”  As a result, their debt rating will probably get downgraded; which will lead to large losses for funds that invested in them, and another sharp drop in US equity markets.  [For more background, here’s a story about monolines from last week that made the front page of the FT.]

5. Next, “the commercial real estate loan market will soon enter into a meltdown similar to the subprime one”, thanks to – guess what? – similarly reckless lending criteria.  So, “the housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns”. [FT last week: outflows from UK commercial property up 76 per cent from third quarter.]

6. It’s entirely possible that a large regional or even national bank will go bust. “The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions.”  [Sound familiar?]

7. Bank losses on leveraged loans are already large, and rising – “leading to a freezing up of the CDO market and to growing losses for financial institutions”.

8. “Once a severe recession is underway a massive wave of corporate defaults will take place.”  Roubini adds, “in a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%.”

9. The “shadow financial system” – non-bank financial institutions – will shortly get into serious trouble.  And unlike proper banks, “these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions”.

10. Stock markets in the US and abroad will start pricing in a severe recession rather than just a slowdown.  Roubini notes that “in a typical US recession the S&P 500 falls by about 28%”.

11. Liquidity in financial markets will dry up all over again; the easing pf the liquidity crunch after central banks’ massive interventions in December and January will reverse.

12. “A vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction”.

All in all:

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch…

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article [here] – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article – that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

FCO briefs against DFID. Sigh…

by | Feb 7, 2008 | Cooperation and coherence, Economics and development, UK

While we’re on the subject of Sue Cameron’s awesome Whitehall gossip network, note also her piece yesterday about DFID (or ‘Difid’ as she enchantingly calls it) – which bears all the hallmarks of hostile briefing from King Charles Street. 

Could the horror engulfing Kenya change the balance of power in Whitehall? I am told that questions are being asked at the highest levels about Britain’s “limp-wristed” response to the Kenyan crisis. Senior Foreign Office people blame their colleagues at the Department for International Development for not realising that Kenya was, as one put it, “about to blow”. Difid is now the major arm of British policy in Africa because it has all the money for development.

Yet I am told its people are unwilling to discuss abuses of aid – which are widespread – and have little idea about good governance and how to bring it about. Now there are inquiries as to why pressure was not brought to bear on the Kenyan government. Why was aid not restricted? Why were Kenyan politicians – such as vice-president Stephen Kalonzo, now in London – not banned from visiting? We have spinelessly allowed him in even though Kenya has just declared Sir Edward Clay, our former high commissioner to Kenya, persona non grata. The outspoken Sir Edward once attacked “the massive looting and grand corruption” of Kenya. He accused Kenyan officials of behaving “like gluttons” and “vomiting on the shoes” of donors. His successor Adam Wood, a Difid man, has been more emollient. But change may be coming. Two months ago Mark Malloch Brown, Africa minister, said: “We have a development policy for Africa; is it time that the UK also has a foreign policy for Africa?” David Miliband, foreign secretary, shares this view. Difid’s ascendancy, which owes much to Gordon Brown’s influence, may be ending.

Now I’m not saying donors have their approach a hundred per cent right in Kenya. I’m unconvinced, for example, by arguments that Kenya was a suitable country for direct budget support; and I think donors have a lot of work to do to set out a clearer theory of how they work in developing countries that, like Kenya or Nigeria, could go either way – lift-off or basket case – especially given that such work has more to do with the quality of influence and political engagement than with the amount of aid spent.

But if it is indeed the case that DFID staff are “unwilling to discuss abuses of aid”, as the article charges, then it’s a bit of a stretch to see how bringing the debate to the diary column of the Financial Times is likely to coax DFID into a franker discussion.  What kind of idiot thinks that this sort of approach will lead to policy coherence between the two departments?

The great majority of officials at FCO and DFID understand that their ability to work together is of paramount importance to their closely overlapping – if still distinct – missions.  But in each department there are still a fair few old-fashioned turf warriors who know exactly which buttons to push in the other department to guarantee a rise. 

Each time they press those buttons – especially in public – it makes life a bit harder for those officials who understand the need for the two departments to cohere with one another, by confirming the old stereotypes as to why you can’t trust DFID / FCO [delete as applicable]. 

Briefing stuff like this to the FT might be fun, but it does nothing to advance either department’s mission.  The handful of turf warriors at each end of St James’s Park need to grow up.

This year’s big issue at Davos

by | Jan 29, 2008 | Climate and resource scarcity, Influence and networks

Last year’s big issue at Davos was climate change – unsurprisingly, given that it was the first time the WEF crowd had convened since the Stern Review was published and An Inconvenient Truth was released.  This year, for all the worry about meltdown in financial markets, the big issue was by all accounts scarcity.

Gideon Rachman, writing his weekly column in yesterday’s FT, agrees:

Without a big short-term crisis to distract them, the international politics crowd were able to look at longer-term trends. They too are trying to understand the consequences of globalisation. But while the bankers grapple with the top end of the process – the movement of billions of dollars around the world financial system – the political analysts are increasingly preoccupied by the way globalisation is affecting people at the bottom of the pile.  The costs of food and energy are rising fast. The availability of water is also becoming an issue, from Australia to Africa. The struggle for these three basic commodities – food, energy and water – came up repeatedly in Davos.

And he’s not only worried about the problem.  Just as much of a concern is whether the world’s institutions and policy elites have the capacity to manage it:

Soccer crowds in England like to abuse match referees by chanting: “You don’t know what you’re doing.” If protesters had been able to get near the World Economic Forum in Davos last week, they could justifiably have aimed the same chant at the world leaders who assembled in the Alps.

These people are meant to be the “masters of the universe”: presidents, prime ministers, bankers, billionaires. If anybody can make sense of world events, it should be them. But the air of confusion in Davos was both palpable and alarming.

Update: rising food prices also got a mention in President Bush’s State of the Union yesterday…