Maurizio – Omnologos

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Archive for the ‘Economics’ Category

Careful With Upcoming “Massive Stock Clearances”…

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…it may mean a different kind of stock clearance than usual. And you may end up becoming an unwitting shareholder!!!

Written by omnologos

2008/Oct/15 at 21:32:47

Time for No-frills Banking?

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Overbloated rewards, periodic bankruptcies, giant inefficiencies, always ready to ask for Governmental handouts…that’s the characteristics shared by national airlines, and an unseemingly large number of banks.

When will anybody take the chance to build a no-frills bank?

Perhaps one or two of the super-rich Sovereign Funds or Oil Magnates will give it a try. They do have the money, after all…and they have just seen lots of it getting burned by professional bankers.

Written by omnologos

2008/Oct/14 at 22:38:34

Financial Crisis…Hopefully, Not Charles II’s “Cure”

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Fingers crossed…after clueless proclamations by clueless European politicians, we can only hope the current “financial crisis” is not a remake of the notorius case of King Charles II’s being “cured to death”

[On February 2, 1685] Charles […] suddenly uttered a cry of pain and erupted into thrashing fits (most likely from a stroke that produced a brain seizure). A physician […] applied “emergency treatment,” that is, he let sixteen ounces of blood from a vein in the king’s left arm […] Scarburgh drew off an additional eight ounces […]

Unfortunately for the king, he stirred, and this “auspicious sign” was taken to mean that he would benefit from more fluids being extracted from his body. This Scarburgh did with a “volumous Emetic” that induced retching vomiting […]

Again His royal majesty stirred, and this time he was given an enema to extract still more ill humors […] another enema [was] administered […] force-fed an oral purgative […] the doctors shaved his head and smeared it with blistering camphor and mustard plasters […] encouraging frequent urination and the loss of more humors.

The patient, who thus far had felt no pain, spontaneously regained consciousness. The doctors were ecstatic. Their treatment had worked! Surely the king would benefit from more of it. […]

No need to dwell into more details of the ordeal. Charles II of England, Scotland and Ireland finally died after 5 days of “treatment”…

Written by omnologos

2008/Oct/06 at 22:49:31

The Financial Sky Is Not Falling (Yet)

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A great post (in English) from mixed English/Italian blog noisefromAmerika with David K. Levine e Michele Boldrin explaining why it does not look like the world financial system is going to collapse tomorrow.

Unless the Bernanke&Paulson couple is not telling the whole truth…

That would also explain the otherwise absurd sight of politicians declaring an upcoming Armageddon with one hand, and squabbling for petty gains on the other.

As usual, the only thing to fear is fear itself (and a rushed-up solution). At this rate, the best thing that can happen is that nothing substantive is agreed until after the Presidential Elections. It’s only a month to go. If President Bush is really worried about it all, he can always impose a one-month bank-holiday period 😉

Most academic economists – the economists who do not work for companies likely to benefit from the bailout, nor for the President – are opposed to this plan […]

the total value of outstanding mortgages is $11 trillion […] while the value of insurance contracts written on them is about five times as large. Clearly, Mortgage Backed Securities (MBSs), CDOs and so on, were used as collateral for lots of additional borrowing […] That explains why, as the value of those houses is dropping the whole castle of cards threatens to crumble. […]

The problem in banking is the possibility of cascading failures, that the failure of bad banks may drag down the good banks […]

What is the solution? One is for the government to step in and buy securities, as proposed in the bailout plan before Congress.

[If those securities are not properly valued, the government] will only get securities worth less than that with the taxholder responsible for the difference. Notice that the ones who reap the rewards are the holders of bad securities […] In effect in order to keep the bad banks from driving out the good we rescue the bad banks.

There are many alternative schemes to the one proposed by Treasury:

  • Require banks to raise more capital. [In that case] the losses are borne by the good banks rather than the taxpayer
  • Forgive debt in exchange for equity. [It is well known that] debt forgiveness schemes have worked for resolving financial crises in the past.
  • Buy foreclosed houses for the value of the mortgage
  • Force an orderly winding down of the housing based derivative market […]

Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month […]

The bottom line, in the immediate future, is this. The Federal Reserve Bank and its sister agencies […] already have strong tools against a cascading failure of the banking system. […] We have not seen good banks fail, nor have we seen cascading failures. We have been given no reason to think anything of the sort is imminent. […]

To debunk the obvious: Washington Mutual failed Thursday night. Washington Mutual ATM cards continue to function as usual. […] The fact that banks are reluctant to lend to each other does not have much impact on their ability to make short term loans to customers. […]

If the Federal Reserve Bank and Treasury in fact have information that things are worse than Bernanke reported they should tell us what it is. Otherwise they should stand up and make it clear that doomsday is not around the corner.

Written by omnologos

2008/Sep/29 at 22:37:01

Bernanke and the “Too Big to Fail” Syndrome

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I am glad to see that the U.S. Federal Reserve and the Bush Admnistration are giving clear instructions on how to succeed in business in America.

Apparently, all you have to do is to make your Company “too big to fail” (TBTF).

Then if anything untowards risks happening to it, Bernanke will step in and save another day. Even if it’s all been your own fault. Even if the Feds have been sitting idly whilst the Company was becoming TBTF.

Directors of TBTFs are surely rejoicing at the idea of unlimited profit opportunities with more or less zero chance of filing for bankruptcy protection, let alone close down the business.

A new wave of acquisitions like there is no tomorrow is surely in order. Obesity does pay, in the US business world.

Written by omnologos

2008/Jul/15 at 21:30:04

Is China’s Authoritarian Capitalism Better Than Liberal Democracy?

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(No it isn’t: just like trying to earn a living by gambling is not better than having a salary, even if potential returns are much higher)

Is China’s authoritarian capitalism better than liberal democracy (as “the condition and motor of economic development“)? That’s more or less what Slavoj Žižek, co-Director of the International Centre for Humanities at Birkbeck College, asks in the Letters section of the London Review of Books (Vol. 30 No. 8 · Cover date: 24 April 2008), at the end of a singularly even-handed description of the Tibet-China relationship (that by the way only victims of their respective propaganda machines will believe to be a story of good guys vs. bad guys).

Fareed Zakaria has pointed out that democracy can only ‘catch on’ in economically developed countries: if developing countries are ‘prematurely democratised’, the result is a populism that ends in economic catastrophe and political despotism. No wonder that today’s economically most successful Third World countries (Taiwan, South Korea, Chile) embraced full democracy only after a period of authoritarian rule.

Following this path, the Chinese used unencumbered authoritarian state power to control the social costs of the transition to capitalism. The weird combination of capitalism and Communist rule proved not to be a ridiculous paradox, but a blessing. China has developed so fast not in spite of authoritarian Communist rule, but because of it.

There are a few i’s to dot, and t’s to cross in Mr Žižek’s discourse. First of all, Taiwan, South Korea and Chile became “today’s economically most successful Third World countriesafter getting rid of “authoritarian rule“. So from those examples it appears that dictatorship may gestate a successful economy, but more often than not “Authoritarian Rule” transforms itself into a suffocating mother, if not an evil stepmother.

More importantly, China itself is in a sense only the last manifestation of a truism: an (economically) enlightened dictatorship can be much more efficient than the collection of dirty tricks known as democracy. Voltaire likely believed in that, just as Plato and countless others, and even if it does sound like an elitist concept, it is obvious nevertheless. An intelligent, caring, politically and economically wise Prince can decide for the best of everybody in minutes, rather than wasting months trying to convince, negotiate, win over people, perhaps in interminable parliamentary committees.

Such a Prince can also guarantee decades of good governance, truly a blessing for his (or her) people.

There is a small matter though. Say, your Prince is Octavianus Augustus and peace and prosperity is for everybody. Then comes Tiberius, and things start out ok: only, to worsen with his increasing paranoia.

Then you’re stuck with Caligula. And Nero is not too far away either.

Things haven’t changed much in the intevening 2,000 years. The trouble with authoritarian rule, hence with authoritarian capitalism, is not its ability to generate prosperity: rather, its perfectly equivalent capacity to degenerate, quickly because almost without control, thereby hampering the growth of that prosperity if not killing it off entirely.

Speaking the language of the financial world: just like a new CEO can resurrect or destroy a Company, so a despotic Prince (or committee of Princes, aka the “Communist Party of China Central Committee“) is a recipe for increased earning opportunities and, for the very same reasons, for an increase in risk.

And that’s something that should definitely be factored in in any judgement about what to choose as “the condition and motor of economic development“. After all, who wants to continuously gamble all of one’s wealth?

Communist Banking in the U.S.

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Investment bank Bear Sterns has been bailed out by JP Morgan, at least in theory, and by the Federal Reserve, in actual practice. Apparently this is because Bear Sterns is “too big to fail“.

What kind of massive regulatory failure is that?

What organization did allow BS to grow large enough to be “too big to fail”? Step forward…the Federal Reserve!!!

And they haven’t learned any lesson. JP Morgan in all likelihood will gobble up BS after a few weeks. And so, if it isn’t now, then JPM will definitely become “too big to fail”. Is that going to inspire a proper risk management attitude at JPM, one wonders? Of course not: they’ll obviously become even more reckless, getting ready to be bailed out by the Federal Reserve, if things go badly; or to pocket huge amounts of money, if things go well.

Losses are public, that is, profits are private. So much for a capitalist system.

It is time to end the merger mania. Split, split, split!!!

Written by omnologos

2008/Mar/15 at 05:22:49