The Euro and None-Euro members who won?

via Flickr”]The powerful European Central Bank [ E C B ] i...

Should we keep the Euro or let it die a slow and painful death?

These days I think we should count our selves (the Danes) as lucky. In the financial turmoil in Europe we get to have the best of two world. We are linked very closely to a very big currency that is ‘still’ recognised as one of the worlds most powerful and second we do not have to participate and contribute when things starts to go down hill.

In a interview with Jean-Claude Trichet the European Central Bank all these benefits became very clear.  When asked about if the Euro was at the brink of an abyss

“But let me sum up some of my present observations. First, we have a credible single currency, which over the last 12 years has kept its value in terms of price stability in a remarkable way in comparison with the previous national currencies in the last 50 years. The solidity of the currency itself is not disputed and our fellow citizens all over Europe are calling on us to continue preserving price stability. Second, the euro area, taken as a whole, is in a better position from a fiscal standpoint than other economies. In 2011, the public finance deficit of the euro area should be around 4.5% of GDP, while in the United States or Japan it will be about 10% of GDP. But we had a very serious weakness in terms of economic and fiscal governance inside the euro area, which has been revealed by the global crisis.”

While these figures might be true and one have to remember that the deficit in Denmark was 2.9% well under the rest of the Euro countries and on top of that have a historical low unemployment rate. In Sweden who has made the choice to have their currency flow compared to the Euro actually had no budget deficit and a relative high growth rate. While it is at the expense of a high unemployment rate it does show that these is still some merit to having a independent economic policy.

One of the big issues we keep coming back to is the structural problems in Italy, Spain and Greece. In Italy the criticism from the ECB have sparked a uproar as it is seen as meddling in the country’s internal affairs.

“The view of the Governing Council was that the market turmoil at the beginning of the month required a message to be sent to the Italian government. We were seeing a progressive weakening of investor confidence and we felt it would be useful to share with the Italian authorities our thoughts on the most appropriate measures to help restore market confidence.” Jean-Claude Trichet replied.

Markets these days seem to be all about the lack of or the abundance of confidence and short-term investors are fleeing around the field as soon as somebody yells wolf. It is good to see that some of the institutional investors have kept their cool and have shown that they can remain loyal to their long-term strategies. However, there is no doubt that there are some structural unhealthy elements within the states in the EU and Euro counties but these are not unmanageable. They are difficult and will require a lot of political will and sacrifice in all of the countries but the issues are known even to the general population that have to pay the price of their governments lack of constant care in relation to the issues at hand.

All of the governments who said yes to the Euro knew that some of them had issues, which would not go away over night. Some of them did not even get close to meeting the targets for acceptance. But some of the politicians were so keen on getting the show on the rad that they forgot to do their due diligence and take a deep breath before committing themselves to a road that was very difficult to get of again.

Among the countries that did not put their economies in the hand of Italian, Spanish, Irish and Greek and Kosovo politicians were the Scandinavians and the British. While the UK governments have serious issues with unemployment and a banking sector in ruins it is nothing compared to the issues they would have had to face if they had to feed the poorly governed Euro countries. The Danes said no to the Euro not because their politicians said that they should but because they were sceptical about putting all their eggs in one basket together with countries that dwarfed their own economy. While the Swedes had the opportunity to enter the Euro when they joined the EU they said thanks but no thanks mainly due to the lessons learned through the 90’ties were they experienced a major economic crisis and had to let their kronor flow freely, something that they would not be allowed to if they adopted or linked their currency to close to the Euro.

In conclusion it look like that the countries outside the Euro will be better of having their independence but still able to take collective action through the EU. I do not see any reason why any country that is outside the Euro would join now or anytime in the near future. Joining would be like committing economic hara-kiri.. very noble and honourable but not very sane.

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Watch out for the Chinese dragon she is about to burst

China, China, China it seems to go on and on but what about the rest of Asia? Research done by the China Briefing found that if you are looking for low labour costs there are actually better places to set up shop in the neighbourhood.

The research was done on 15 countries in the region comparing minimum labour and mandatory welfare costs to business. As the there is no established norm for minimum wage in China the average was calculated using 40 cities across the country.

 Asia_wage_overview

The results are quite surprising as China comes in on third place just after Malaysia and Thailand. It is surprising as the china is a manufacturing country exporting for some 1,58 trillion USD in 2010. (That is 1,580,000,000,000,000,000 USD for those weak on math) and having uncompetitive wages could cause problems for China in the long run, especially if they are unable to control their own growth. The up-side is for the rest of us that Chinese consumers will experience a growth in purchasing power being able to spend more on luxury consumer goods of which some are produced in Europe and the US.

And it is actually the growth issue that I’m concerned about and I see signs that there is a massive bubble building in China which could create problems for the whole world when it bursts.

First, there is massive housing projects going one all over china that are only being build for investment purposes. Whole cities are empty of people even though all the homes have been sold. As we have see in the US and Europe where we had housing bubbles before can investing in a “ever” growing housing market create a house of cards that when they fall take much of the financial institutions with them. One of the questions that they need to be faced is how much of this is real growth due to supply and demand and how much is pure speculation. In Beijing the real-estate price is 22 time the disposable income while it was only 6,4 when the bubble cracked in the US. Furthermore is the lack of transparency in the Chinese financial (because of multiple financial systems working at the same time) making it impossible to know how fare we are from the edge. 

Second, the Chinese have not been able to control growth it seems. Some cities have reported growth as high as 30 %. Especially one thong about this that concerns me is that much of the local economy is being very tight with local business. 

“Many governments are hand in hand with local businesses, especially developers, with both in tandem striving to make large returns,” Chris Devonshire-Ellis, principal of Dezan Shira & Associates, points out. “Much government investment is actually tied up in commercial activities, especially property, and many gains being made are recognizable on paper only. Property prices are being driven up yet many of them still lie empty. Old habits die hard, and while the Central Government has for nearly twenty years focused on GDP growth, an entire mechanism has developed that is only really capable of feeding theoretical growth and lacks any real resale value or flexibility to manage growth in any other way. China is going to have a tough time in taking down a reporting and target structure that is increasingly in part looking to having encouraged the building of castles in the air.”

Third, there is a huge gap between the poor and the extremely wealthy and it is expanding at an explosive rate. At this time there are some 130 billionaires in China compared to the 359 in the US and there are some 825,000 Chinese people who have a net worth of over 1,5 million USD. Compared with the table above they seem to be living in different worlds. When things go from good to worse and finally to “big problems” there will be very strong tensions in the Chinese society that will be released with devastating effects.

A fourth problem is corruption as one commentator, Chen Pokong, put is “Loud words, little action. This is typical of the central government. Not only do they lack the determination, they also have no intention to fight corruption at all. A year ago, a survey showed that 90 percent of the public wanted the government to require officials to publicize their wealth, but 97 percent of the officials were against establishing such a requirement.” Nothing has happened in terms of legislation on corporate and governmental transparency so there is no reason to think that the issue has become even slightly smaller.

With an economy run amok and nothing to stop it, in terms of responsible government at all levels of society the Chinese are in real trouble. There is however no indication that any serious steps are being taken to counter this forth coming disaster.

The financial crisis – too big to manage

The financial crisis Inquiry report have been published and it though reading. For many of us the biggest question about the crisis has been WHY did this happen? And as it actually did the second question is HOW could it be avoided?

The financial Crisis commission has worked since 2009 and has come up with a series of answers to some of these essential questions. The report itself is about 660 pages so I have just taken some of the conclusions and comments that they have come up with.

We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted.”

There were plenty of signs and I do not think that anybody thought that the crisis was avoidable the real question was who would “blink” first? As the money kept pouring in and stocks rocketed, we all knew that at some point it would all cave in and the ones that were left behind would be the ones who sat with the bill. Most people in government and the finance are reasonable intelligent people, but they were caught up in their own arrogance and willingness to gamble with big money, like the people at Citygroup and others.

“The CEO of Citigroup told the Commission that a $40 billion position in highly rated mortgage securities would “not in any way have excited my attention,” and the co-head of Citigroup’s investment bank said he spent “a small fraction of 1%” of his time on those securities. In this instance, too big to fail meant too big to manage.

We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves.

Yet we do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it.

And where regulators lacked authority, they could have sought it. Too often, they lacked the political will—in a political and ideological environment that constrained it—as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.”

We have come to expect that we to some degree are protected from the full force of capitalism. But apparently this is not the case actually is both the government and financial institutions littered with free-market ideologues that rather see millions of people lose their jobs and leave their home than admit that they were wrong. I do not consider myself a socialist, not by fare, but there seem that in 2007 and 2008 there were no middle ground. The motto of the neo-liberals was “Either you are with us or you are against us” it would seem.    

We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis. There was a view that instincts for self-preservation inside major financial firms would shield them from fatal risk-taking without the need for a steady regulatory hand, which, the firms argued, would stifle innovation. Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding.

Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences.”

Reminds me of the dear mister Gordon Gekko from the movie Wall Street and the famous quote “Greed, for lack of a better word, is good”, well maybe he was wrong after all. The captains of corporate finance have turned out to be greedy, willing to gamble with other people lives and money and to certain extend can be categorized as just plain evil.

 “We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.

In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly.”

By the end of 2007, Lehman had amassed $111 billion in commercial and residential real estate holdings and securities, which was almost twice what it held just two years before, and more than four times its total equity.”

We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.

…key policy makers—the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York—who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008.

While there was some awareness of, or at least a debate about, the housing bubble, the record reflects that senior public officials did not recognize that a bursting of the bubble could threaten the entire financial system.”

We conclude there was a systemic breakdown in accountability and ethics. The integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of our nation. The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency. In our economy, we expect businesses and individuals to pursue profits, at the same time that they produce products and services of quality and conduct themselves well.”

I think that this point pretty much covers my whole perception about the background of the financial crisis. The systematic and disregard of common sense, when people live in a world where nothing is hard, where every mistake can be covered up in packaged systems of your own design, that you yourself do not understand then you lose your grip of reality.

“We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly.”  

The partners in crime and the body we thought we could trust as a third party that could validate our investment strategies. But they did not understand the system that they were meant to give the rest of us advice on and the consequence was that we all too some degree suffered.

I have only taken a snapshot of all the conclusions in the inquiry report and you will properly find more interesting details buried in there somewhere. I would be the first to admit that I to ignored the signs and did not understand the complexity and risk that globalised finance have brought along with it. I’m a firm believer in free markets etc. but I’m also deeply committed to transparency and accountability two things that have been absent in the world of business and not least the financial sector before 2009.

It saddens me to see that some of the people in this report are still very much active in there nice of the world and that that they have not learned any other lesson other than trying not to get caught next time. They continue to believe it is a game and are now designing ever more elaborate systems that can bypass the barriers we try to put up as we speak. The US has and still has the most elaborate financial reporting system (Sarbanes-Oxley) and it could still not stop the crisis from shaking the world so why would new systems even more complex do any better.

You can read the whole thing here