Greek should know to beware of people bearing Gifts

Does it really surprise anyone that Greece was "assisted" by investment banks to help present finances acceptable to the Maastrict requirements? Even France and Germany had to do some fancy footwork to meet the strictures of the Euro and it took some time for Greece to do so. If you really want to dig I am sure that you will find that Goldman's Swap structure was mirroring the movement of liabilities onto Off-Balance Sheet facilities by just about everyone so why shouldn't a sovereign get in on the scam.

Put something Off-Balance Sheet and the contingent liability doesn't have to be reported- but it's okay because it's just a deferral! And yes it's legal. The question shouldn't be if it's legal or not. The question should be why would you look for a way to hide things in the first place. Making it legal doesn't make it right.

But let's not yell just at Greece and Goldman. What about the State owned entities which were owned but not guaranteed by their owners like Fannie and Freddie, or any number of European State owned entities.

But, just in case anyone thinks I might be going soft, check out the issuance of the Greek Ministry of Defense and see where those debts show up on Greece's Balance Sheet.

The Power of One's Convictions

Sitting as I do in London it is difficult to gauge the true opinion of the American electorate as I am limited essentially to polls without knowing how the polls were organised and if they are the result of non-partisan information gathering or not.

I have always been disturbed by the existence of Democratic or Republican Polls as they seem to reflect what I consider the bane of politics: blind partisanship.

It is therefore refreshing (as well as disturbing) to have a man of conscience and principle emerge out of the morass that Congress has become and actively decide not to seek re-election from a position of strength-by all accounts Mr Bayh would have been quite easily re-elected to his Indiana Senate seat.

"For some time, I have had a growing conviction that Congress is not operating as it should.....there is too much partisanship and not enough practical problem-solving....at a time of enormous challenge, the people's business is not being done" were some of the reasons Mr Bayh gave for his decision. All too true in my opinion;just strange that a sitting Member of Congress would be so resolute in his analysis and response to a Senate apparently incapable of passing even basic legislation.

But it is very disturbing- does this not make Mr Bayh a quitter? Is his dissatisfaction equally with his fellow Democrats and the Republicans? Some commentators immediately jump in and say this is a reflection of how far Democratic fortunes have sunk. That sounds pretty partisan to me. Isn't it much more a reflection of how low our political system has sunk?

Mr. Bayh was described as a centrist. Isn't that what we need. Politicians in the middle who are not by definition defined by their liberal or conservative views and therefore are able to actually listen and review legislation in coming to their conclusions? Does Mr. Bayh think that by weakening the Democratic majority and thereby strengthening the Republican minority that we will have a better functioning Senate? Has he not noticed that the Republican mantra to "just say No!" is already being pounced upon in the scramble for his seat? Those pillars of democracy are exploring their legal options to deny Democrats a candidate if no one meets the filing deadline! Nothing like a one-party election to help sell America's mission to bring Democracy to such places as Iraq and Afghanistan given how well it's doing in the US.

Saving Wall Street

I have been disturbed by the bravado of Hank Paulson's "I saved Wall Street" headlines-and the snideness in the subtitle 'and could have saved Lehman if it weren't for those smarmy Brits'. Now if Hank cared he would have couched his saving of Wall Street in terms of explaining how government and finance are intertwined and that there is actually a political economy. Hank doesn't care. Why should he. He saved Wall Street. If there were any benefits to anyone else, great, but the main thing was to save Wall Street.

I will admit that at the time I agreed with Hank's decision. We were in a real mess and something had to be done. I don't think he got it all wrong, nor did he get it all right. The Treasury is a powerful organisation, but in the US it still is part of the Executive and so is kept in check by the Legislative and Judiciary. That helps explain some of his actions. Still I believe Hank comes from that school of thought which thinks that what's good for Hank is good for the Nation; not that what's good for the Nation is good for Hank.

The problem is that the Nation is at stake. Wall Street is not the Nation. Wall Street is the embodiment of Milton Friedman's Free Trade view of the world. Of course it's always nice that the big boys on Wall Street tend to be American, but make no mistake, they are multi-National. Their push to globalisation has lined their pockets as capital, and much more disconcertingly, employment flows like water to the most "advantageous" locations.

Hank might have saved Wall Street, but it is President Obama's Stimulus Package that has saved Main Street-for the moment. The Congressional Budget Office estimates that without the stimulus, growth would have been anywhere from 1.2 to 3.2 percentage points lower in the third quarter of 2009. Despite this we still have over 10 million unemployed citizens and there are a number of commentators highlighting that the impact of the Stimulus is essentially spent and that we have years of high unemployment ahead of us and that the future average rate might well be 50% higher than our current "average" of 5%.

As a child growing up in the US we were leaders; a vibrant, innovative nation. We were happy to export low-skilled jobs because we would keep the skilled, technological jobs. It's not happening. Even skilled jobs are being outsourced, and our innovation seems to focus on how to make money rather than how to make things.

Hank Paulson is worried about how he will be viewed in history. I would have thought he were more concerned with the fate of the United States rather than Wall Street.

Maybe I've been gone to long.

Freedom isn't Free

This morning I read an article in the Washington Post recommending that the solution to the Europeans fiscal plight would be a "tea party" movement to lobby for fiscal conservatism.

Now in my book anyone arguing that the solution to anything is to invite a right-wing fringe group like the tea party agitators essentially disqualifies themselves from being taken seriously.

I am not denying the need for fiscal restraint, nor the need for many voices in a functioning democracy, but the history of the United States has demonstrated time and time again that self-regulation is basically a chimera in pursuing the unlimited opportunities of the American Dream.

The tea party's "limited, responsible" government is often enough a byword for lawlessness and the tea party movement, harking back to their namesakes, demonstrated that in their original (dis)guise. Just a thought-why were they dressed as Indians?

The article continued on to praise Mervyn King's "Sudoku for Economists" which King claims illustrates "that it is essentially a political and not a technical problem" because the required balance between high-saving and low-saving countries requires political will, all on the part of the low savers!

The low-saving countries must "reduce their net borrowing" and stop playing the "role of consumer of last resort". Oh, so now it's all our fault. The fact that the high-saving nations on the whole are characterised by low wages, no social welfare nets and essentially non-existent environmental protection laws and as such are making workers in the low-savings nations redundant doesn't come in to the equation?

Perhaps it is because the Mervyn Kings of the world think that you can separate politics and economics. Personally I don't buy that.

Different Strokes for different Folks?

On the (London) morning of the great Democratic debacle in the Massachusetts Senate race Bloomberg ran an article focusing overwhelmingly on the effect the loss of Ted Kennedy's seat would have on the insurance and health care companies. There were quotes from Asset Managers advocating said companies on the basis that Obama's Health Care Reforms were essentially dead in the water. There was a brief analysis of how the stocks of these companies had already started to rise in the days leading up to the election as the market was predicting a Republican victory.

Nothing new there. A very clear analysis of the situation calling a spade a spade. Of course the insurance and private healthcare industry would profit if the Health Care Reforms are not enacted, but stating it so clearly obviously upset someone's sensibilities in New York for a couple of hours later the article which I had inadvertently left open on my screen had been completely rewritten. Gone was any discussion of the financial repercussions on insurance and health care companies and in its place was an analysis of the two campaigns, what impact this would have on the upcoming mid-term elections,was this the rebirth of the Republican Party etc.-essentially a political discussion without any crossover into the private sector.

Then yesterday there was an article published in the London morning by the same provider highlighting President Obama's understanding and support for the bonus paid to Mr Blankfein of Goldman Sachs. I thought this a little strange considering all the furore surrounding the Treasury and its' relationship to Goldman Sachs but perhaps Obama was purposefully mentioning Goldman given the (relatively) low bonus Mr Blankfein was paid.

In any event, again when New York entered, although this time the gist of the article remained-Obama demonstrating that although he will play the populist card when necessary he was definitely not un-American and certainly not a Socialist with the twist being that in the later version it was no longer Mr Blankfein but rather Mr Dimon of JPMorgan that was the beneficiary of President Obama's largess.

None of this is earthshaking, but it does make me wonder why the Americans can't read the same material as the Europeans.

Europe at the Crossroads

So now we are faced with the dilemma of Greece (and Italy and Portugal and Spain and France and Belgium)and once again we have this discussion of moral hazard and contagion-with a twist. This time it is not the banks that have been playing with the public's money, but rather individual EEC member states with the Union's money as a whole and more specifically with Germany's money. Now we have a real dilemma. Germany evokes strange emotions at the best of times given its' history especially in the context of the last century.
Germany has been plagued by being at the crossroads of Europe with difficult to defend borders and the spectre of war on two fronts and so Germany's wars, though often rightfully viewed as wars of aggression, can generally be understood as a means of trying to solidify its' position geographically and improve its' position economically. Starting with v. Clausewitz's "War is a mere continuation of politics by other means" and realising that a major objective in the first World War was to create a Central European Economical Sphere of Influence, it can be said that Germany acted essentially like many other European powers although generally speaking more efficiently. The Second World War changed this view of Germany and rightfully so. The politics behind this War were abhorrent and there is no excuse or explanation that could ever soften that horror, but one shouldn't forget that one of the main thrusts of the War in the East was to gain Lebensraum, notwithstanding all of my previous comments. My point is not to go into the rights and wrongs of Germany in the 20th century but rather to explain where we are today. Since the Second World War Germany has essentially been an economic powerhouse, helped by an understanding of the weaknesses of the Treaty of Versailles being replaced by the largess of the Marshal Plan. This turned Germany into an economic and importantly non-military power although (West)Germany did join NATO and not coincidentally became the financing engine for the development of Europe at least since the Treaty of Rome. But all this was done without a real political voice. Germany had much to atone for and it was not until the fall of the Berlin Wall, the re-unification of Germany and the creation of the Euro with the Bundesbank as the implicit if not the explicit model for the ECB that Germany has slowly started to develop a political voice to go along with its' economic position.
Now the moral hazard. We are faced with a European crisis that Germany would appear to have the economic might to solve-if the problem were to be contained by "fixing" Greece. If the rest of Club-Med, and France and Belgium are to be bailed out than I question if Germany can handle it. Any number of commentator's now speak of the moral hazard of bailing out Greece- won't that make the others stand in line hat in hand? Some like Mr Roubini's economist suggest the IMF should bail out Greece- Germany is too "interested" a party?-and somehow this would stem the contagion to other European countries that a German solution would precipitate, the precedent Mr Goodhart ex-BOE is so concerned about.
First of all I don't see how an intervention by the IMF would not have the precedent/contagion aspect, unless the suggestion is that the sanctions imposed by the IMF would be so severe that the other European countries with debt/deficit problems would be "forced" to get their finances in line. If that is the argument, then there must be something else driving these comments because it is quite clear that a German-led bailout will undoubtedly come with the same severe conditions although in this case would be a European solution with some strong knock-on effects. The Bundesbank would essentially become the ECB. German economic power would pave the way for German political power which would be another major step to a Federal Europe.
Germany, and therefore Europe stands before a decision eerily reminiscent of the Klein Preussen versus Gross Preussen dilemma. Let's hope politics remain politics. draft

Why we should fear the FSA

So Hector Sants is retiring after 3 years as head of the FSA. Should we really be afraid of the organisation he left behind? Yes, but not for the reasons he would like us to be. In a financial environment where the institutional providers have traditionally been able to extract maximum profit from the retail client base Greed will inevitably raise its' head (even higher) and prove that the "bigger fool" theory of economics is a perfect description of the retail client.
The retail investor is regularly fleeced with investment ideas promoting products created for the retail investor offering returns, opportunities or whatever in language clear enough to be comprehended if not necessarily understood. So the product is sold on trust, a trust which has been repeatedly betrayed.
Enter the FSA. They focussed on protecting the retail investor believing that it was just a matter of documentation. The truth of the matter is that the FSA was putting out the fire in the gatehouse while the main house was being engulfed by flames, better known as excessive risk resulting in the credit crisis.
Until the FSA is able to distance itself from the bodies it regulates and objectively understand that profit begets greed begets risk begets boom begets bust and that it is their responsiblilty to save the institutional providers from themselves, thereby protecting the retail investor (and acutally just about everybody else) from the instititutionals we the public, not the banks should be afraid of the FSA. Self-regulation presumes Utopia and we all know how Thomas More ended.