Category Archive

Global Crisis/Innovation Blog

Micro-Finance: the “Atomic Energy” Syndrome Returns

By Shlomo Maital

        A BBC report notes that India’s huge microfinance industry faces collapse, as the borrowers in an entire large state, Andrha Pradesh, struggle to repay their loans. In Bangla Desh, where micdrofinance was first invented by Mohammed Yunus,  the government has slapped a ceiling on interest rates for microloans: 27 %.   Ceilings (maximum rates) tend to become also minimum rates. And how many strong businesses, like Microsoft, could afford to pay 27 per cent on their debt?  

  What went wrong?

    It is the atomic energy syndrome.  Splitting the atom made possible an enormous source of energy for peacetime purposes.  Heat from nuclear fission (and one day, from nuclear fusion) makes steam, that turns turbines, that generates electricity.  But splitting the atom also makes it possible to create nuclear weapons,  thousands of them, that threaten humanity.  Like almost all technologies, splitting the atom is both a fantastic boon and an enormous evil.  It all depends on how we use it.

  Microfinance has been, expectedly, misused. By allowing the private sector to run amok in this area, with the aim of making profit, it has made microfinance into a micro-example of what the village lenders did earlier – charge usorious exorbitant interest rates that the poor cannot repay, then take away all their possessions when they fail to pay it – at times, leading to suicide. 

     Some industries are simply not suited to for-profit rapacious capitalism. Health care is one.  Microfinance is another.  Why do free-market advocates repeatedly grab control of industries that need to be provided as public goods, and turn them into private bads? 

     Dr. Kazi Akhmed, a Bangla Deshi expert, notes that microfinance loans have to be repaid starting one week from receipt of the loan, in weekly installments. How many businesses can make profit within one week, in order to repay the loan?  Even philanthropic microfinance companies charge 12-15 percent interest – the rate of interest that the government of Ireland is struggling to pay.  How many poor people taking microfinance loans have the business expertise to know how to run businesses, especially in hard times, during the global crisis?  Lending the poor money is not enough; they need to learn about basic rules of business as well. Why is this not provided together with the money? 

     Collapse of microfinance will mirror the collapse of investment banks – only it will be the poor who pay the price, not the rich.  It could, and should, be prevented.   

Global Crisis/Innovation Blog

Blame the Fed – Again!

Frank Partnoy

Blame the Fed for irresponsibly slashing interest rates during 2001-4,  causing the worst part of the U.S. housing bubble. [See my editorial in Barrons, Dec. 15, “Blame the Fed”, refuting Allan Greenspan’s self-serving and misleading article*].   

   Blame the fed, again,  for irresponsibly bailing out foreign banks in 2007, then choosing NOT to bail out Lehman Brothers, a disastrous error,  then claiming (Bernanke) it didn’t rescue Lehman brothers because to do so would have broken the law.  False. 

   Now we know the truth.  A law suit brought by Bloomberg, under Freedom of Information, demanding that the Fed open its books and reveal what it did, to whom it loaned and how much, and against which collateral,  together with the Dodd-Frank Act, in which a tiny clause required the Fed to come clean, has now brought revealing documents from the Fed. 

    Why did it take a law suit?  Why did the Fed, the ultimate regulator, the body that demands transparency from the banks it regulates, not come clean itself?  Why did it hide the truth? 

    And the truth is this, according to Frank Partnoy, professor at U. of San Diego and author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, a remarkable indictment of Wall Street skullduggery.  (See the Financial Times, Dec. 3, 2010 **).   The American Fed was lending prolifically, in 2007, to the tune of a staggering $3.3 trillion (more than 20 % of US annual GDP).  Much of this lending went to foreign banks!  Says Partnoy, based on his analysis of the newly-released Fed data:  “the Fed’s new data show it was well aware of the crisis [in 2007] and had the ability to lend tens of billions of dollars, but it opted to lend primarily to non-US banks.  Those non-US banks, incidentally, lent some of the money back to troubled US banks. 

    Writing in the same remarkable issue of FT, Gillian Tett notes that the Fed, with its staggering $3.3 trillion in new lending, was replacing the collapsed securitization market, supplying liquidity where none was available, not only in the US but also in Europe.  This raises the question, for ECB head Jean Trichet, and for the EU in general:  Where were you? What were you thinking? Why were you asleep? 

     Scholars will doubtless research 2007-9 intensively.  As more and more data appear, we see a mixed picture of aggressive Fed action mixed with inexplicable and disastrous decisions.  We can, indeed, as a result, blame the Fed.  

———————————————–

* Alan Greenspan.  The Crisis.  Brookings Papers on Economic Activity:  Spring 2010, pp. 201-246.

** Frank Partnoy.  “Sunlight shows cracks in crisis rescue story”.  FT, Comment.

Global Crisis/ Innovation Blog

Where Will the Money Go? When Will Inflation Recur?

By Shlomo Maital

  Simplify!  Simplify!  In an age of uncertainty and enormous fog enfolding the global marketplace, how can we make sense of the rapid and often startling events that occur? For example, yesterday’s Financial Times reports that Ireland, Portugal, even Spain, cannot sell either government bonds or any corporate bonds any longer.  Since neither government nor business can do business without borrowing, unless this situation unfreezes soon there will be crisis.  The unthinkable appears increasingly likely – withdrawal of periphery states of Europe from the euro system, returning to their original currencies.  The key will be Spain, whose government owes 250 b. euros this year in maturing debt. If Spain cannot roll over the debt – what will happen? Spain’s socialist Prime Minister Zapatero appears angry and in total denial, blaming everyone and anyone for Spain’s woes – except his own government’s ineptness.

     Let’s simplify and look at the issue of money. America is engaged in an enormous and irresponsible experiment, flooding the world with money. (It is called QE2, it should be called PRINT ONE TRILLION MORE AND RUIN THE DOLLAR).  There already is a huge amount of money, not only dollars but euros and yen and yuan, in the world, after Central Banks tried to battle the crisis with credit expansion.  That money is at present earning nothing.  A quick look at the back page of The Economist reveals that real interest rates worldwide are near zero. Even where nominal interest rates are high (India, Brazil, Vietnam), inflation is equally high, and the different is nil.  So huge amounts of money are parked, waiting, waiting. It is like a football (soccer game), the final game of the World Cup 2012.  The pitch is ready. The players are on the sidelines waiting.  They have not yet taken the field. The referee is waiting to blow his whistle…..and we wait.  WHERE WILL ALL THAT MONEY GO?  It has to go somewhere – the opportunity cost of lost interest while it is waiting is huge, and pensioners, for instance, need their monthly payments, so pension funds, institutional investors, insurance companies, all need to find some reasonable return somewhere, adjusted for risk.

    Where????

    When will the money “go onto the field” and begin to play?  Where will it go? How will it be invested? With enormous uncertainty surrounding global capital markets, and risk hysteria (the next step beyond severe risk aversion) prevalent, with bond markets frozen, banks unwilling to lend – when will the money begin to ‘play’?  If you can innovate a new and attract investment vehicle, one which offers attractive return and transparent easy-to-measure clear risk, you can do very well.  The old vehicles are tired and unsuitable.

     I recently looked  at this question:   Why has the world not had inflation, if so much money has flooded into the world, in Europe, America and Asia?  Answer:  the ‘velocity’ of money has slowed everywhere, without exception.  The money is not in play.  Since economic momentum is the product of the amount of money times its velocity,   even if M money has grown,  V velocity has fallen to offset it, leaving momentum stagnant. 

    When will inflation again rear its ugly head?  When the money begins to move again.  When velocity begins to rise.   Watch that number closely.   You will have to calculate velocity yourself  (nominal GDP divided by Money),  the World Bank, which provides 1,158 data series,   sees fit NOT to provide one of the most vital ones, velocity of money.    

 Global Crisis/ Innovation Blog

Insanity:  1997/8, 2007/8 —  2017/8 ?

By Shlomo Maital

    In 1997/8,  a housing bubble and a wrongheaded decision not to rescue those ruined by it created a global crisis.

    In 2007/8, a housing bubble and a wrongheaded decision not to rescue those ruined by it created a global crisis. 

     It is not a misprint.  The events of 97/8 and 07/8 are strikingly similar. Only the names of a few of the players and the countries are different. 

    In 1997, Thailand found it had created an enormous housing bubble, including an entire ‘city’ that could house 700,000 people (about the size of Boston) between central Bangkok and the airport, funded by numerous fly-by-night banks. On July 2, the baht, the Thai currency, collapsed, helped by forex speculators.  America chose not to provide emergency loans to Thailand, via the IMF.  It was a horrendous decision. The ‘contagion’ quickly spread to the rest of Asia, and ultimately, on Aug. 18, 1998, led to Russia’s default on its debt (as Asia sank into recession, the price of oil plummeted, Russia’s oil revenues collapsed, and the Russian government couldn’t pay its debts). 

    The decision not to bail out Thailand was taken by U.S. Sec. of the Treasury Robert Rubin, who had been co-Chair of Goldman Sachs, where he worked for 26 years.  He was joined by Fed Chair Allan Greenspan.  I am certain they hugely regret it.

      In 2007/8, America found it had created an enormous housing bubble, including entire neighborhoods in California that emptied when mortgagees defaulted.   On Sept. 17, 2008, U.S. Secretary of the Treasury Henry (Hank) Paulsen, who had led Goldman, Sachs, along with Ben Bernanke, Fed Chair, chose NOT to rescue Lehman Brothers, facing bankruptcy. It was a horrendous decision.  The Lehman “contagion” led to a 20 % drop in stocks in one week, biggest in decade, and greatly worsened the global crisis.  I am certain Paulsen and Bernanke hugely regret this disastrous mistake. 

   The similarity between those two events is staggering, is it not? 

   Albert Einstein once wrote, “insanity is doing the same thing over and over and over, and expecting different results.”

    Those who run the global capital market system are making the same mistakes over and over.  Why would we expect anything other than recurring global crises?   Why is it totally justified to call this situation “insanity”?  

     And when will sanity be restored?   Before, or after, the crisis in 2017/8?  Can we expect from those who control our money and economy, an “innovation” — acting sanely, after learning minimally from history? 

Global Crisis/ Innovation Blog

Happiness – What Neuroscience Shows

By Shlomo Maital

  BBC has been running a four-year series on the science of happiness.  The results are truly fascinating.  In some ways, they are encouraging, because they indicate that there are many ways to be happy, or more happy, without gaining wealth or income – good news in an era when many people, in the U.S. and Europe, are struggling to find employment.

   Here is a short précis on what scientists studying happiness have found:

***Happy people live a lot longer:   According to Professor Diener the evidence suggests that happy people live longer than depressed people. “In one study, the difference was nine years between the happiest group and the unhappiest group, so that’s a huge effect”.

*** We’re richer but often not happier:  “Standard of living has increased dramatically and happiness has increased not at all, and in some cases has diminished slightly,” said Professor Daniel Kahneman of the University of Princeton.  “There is a lot of evidence that being richer… isn’t making us happier”.

**** Above the minimum, money doesn’t count much:  “Once you have a home, food and clothes, then extra money does not seem to make people much happier.”

***  Why money doesn’t make us happier?  Two reasons.  We go for things which give us short bursts of pleasure whether it is a chocolate bar or buying a new car.  But it quickly wears off.  Secondly, it is thought that we tend to see our life as judged against other people. As we get richer, so do our peers, often.”

 *** What DOES bring happiness?  Ed Diener:  First, family and friends are crucial – the wider and deeper the relationships with those around you the better.   It is even suggested that friendship can ward off germs. Our brains control many of the mechanisms in our bodies which are responsible for disease.   Just as stress can trigger ill health, it is thought that friendship and happiness can have a protective effect.  According to happiness research, friendship has a much bigger effect on average on happiness than a typical person’s income itself.  [One economist, Professor Oswald at Warwick University, has a formula to work out how much extra cash we would need to make up for not having friends.  The answer is £50,000. ]   Marriage also seems to be very important. According to research the effect of marriage adds an average seven years to the life of a man and something like four for a woman.  The second vital ingredient is having meaning in life, a belief in something bigger than yourself – from religion, spirituality or a philosophy of life.

 The third element is having goals embedded in your long term values that you’re working for, but also that you find enjoyable.  Psychologists argue that we need to find fulfilment through having goals that are interesting to work on and which use our strengths and abilities.

   None of this is new or surprising, and all of it is consistent with common sense.  Yet, remarkably, how many of us pursue wealth and income, in the pursuit of happiness, often at the expense of those very things that do bring us happiness?  Why?