Monday 31 May 2010

The Oil Crisis is Real

Recently there has been a lot of discussion on the role of the government in everyday life and the question of what size government-and its corollary-how much taxation should we have. If I believe the Tea Partyers we should get rid of all government, and certainly Mr Obama.

I find it then interesting to hear in the news reports and political analysts blaming this disaster understandably on BP-and now on Obama. BP is a paragon of the private sector which fights government regulation continually. In this instance even BP's CEO Tony Hayward has admitted that at least 7 cardinal rules were broken in the lead-up to this disaster. But now it's Obama's problem?

There were any number of problems with this well before the explosion occurred as evidenced by BP internal and external correspondence. Regulations were either broken or the cosy relationship between the regulators and the industry resulted in exceptions being accepted, with the result that we now have a full-blown crisis in the Gulf of Mexico, which may even spread beyond.


All the comparisons between Katrina and Deepwater Horizon are merely trying to make political capital out of a disaster. For the record, Katrina was a hurricane. Deepwater Horizon was man-made.


But I don't want to get caught up in the politics either. Deepwater Horizon is like a massive trade error. Only the ignorant and the gormless get caught up in the blame game before the error is closed. Anyone with an ounce of understanding recognises that the first requirement is to close the error. There will be plenty of time to determine who was at fault afterwards.


Despite this I am disappointed by Mr Obama whose first instinct was to worry about the cost of the problem and to focus people's attention on the fact that BP will bear the cost of this disaster. What he should have done, and still has time to do is to recognise that BP is overwhelmed by this nightmare and has its hands full trying to stop the leak while engaging in a PR exercise.


For BP this is damage limitation-reputational and financial. For the Gulf of Mexico it is also damage limitation, but solely environmental. Ordering BP to triple its cleanup efforts of the shoreline and tidal marsh is the wrong approach. Order Homeland Security to organise the cleanup, and present BP with the bill. If the military has equipment/expertise in fixing the leak, send them in, and present BP with the bill.

Waiting for BP to gets its act together-you might as well wait for Godot.

Thursday 27 May 2010

Corruption and Scandal in the Beautiful Game

Last week Lord Triesman, the (former)Chairman of the British Bid to host the 2018 World Cup and (former) President of the English Football Association (FA) took an unexpected walk on the wild side.

Lord Triesman, the married, 66 year old former Labour Minister, met in a London cafe with a 37 year woman with whom he allegedly had an affair in 2008 who taped their meeting. On the tape he suggested that Spain may withdraw its bid to host the 2018 World Cup if Russia, which is not in this year's World Cup but is competing to host the 2018 Cup would help Spain to bribe referees during this summer's tournament.

The English FA faxed "grovelling" letters of apology to the Spanish and Russians as part of a "damage limitation" exercise. The English Press, (except The Mail on Sunday which printed the story) and the English public has seen this as a major PR fiasco and have pilloried both Lord Triesman and the woman, a 37 year old civil servant.

The point is that in England Lord Triesman resigned from both posts immediately and the nation has labeled him Villain #1 for torpedoing the English bid and questioned the patriotism of the Mail on Sunday for printing the story. The English press, which happily does stings like the News of the World's expose of Duchess "Fergie" because of the "social importance" of the story have suddenly found that the Lord Triesman story was beyond the Pale and could not possibly be in the public interest!

In Germany on the other hand, the focus is on what they see is another example of corruption in the world football association FIFA. The German state-owned TV stations ARD/ZDF openly discuss the Russian bid as being characterised by a combination of Oligarchs and Politicians supported by criminal kingpins such as Alimsan Tochtachunow who is accused of manipulating the results for Ice Skating in the 2002 Winter Olympics. Mr Tochtachunow has met with FIFA President Sepp Blatter and is currently in hiding seeking to avoid an international arrest warrant.

Their report goes on to mention that although the English have apologised profusely for even suggesting that such "deals" are possible, that everyone in the FIFA "scene" knows that it is precisely such "deals" that determine things.

Spain's Football Chief, Angel Maria Villar LLona is also Chief of FIFA's Referee Association "in which several very corrupt functionaries sit" such as Vice-Commission Chief Ricardo Teixeira who is also Brasil's Football Chief and continually under investigation for corruption as well as Poland's Michal Listkiewicz who is strongly supported by Mr Blatter and is currently under suspicion for major corruption affairs including bribing of Referees and other scandals back in Poland.

Now however it gets even more complicated. Lord Coe, who was the Chairman of the FIFA Ethics Commission but left that post last year to assume the role as Head of the 2012 London Olympics. He has recently fired off a bevy of articles in the UK press saying everything with the UK bid is fine and that the whole affair should be put to bed. FIFA for its part has announced that its Ethics Commission will look into it.

Funny that. The former Chairman of the Ethics Commission Lord Coe has announced that Lord Treisman was talking nonsense-there is no corruption in football. No corruption?
More likely "don't mention corruption". The current FIFA Vice President for England, Geoff Thompson, was actually given the job as a quick-fix after John McBeth was thrown out of the FIFA Executive.

The cause for his dismissal:an in-depth interview in which he spoke frankly about the backroom deals and corruption in FIFA, specifically naming the President Mr Blatter and the Vice-President Jack Warner. He went on to discuss how Mr Warner became a multi-millionaire through his corrupt dealings under the FIFA umbrella, and that he wouldn't shake hands with him "for fear of him stealing one of his fingers!"

I doubt whether the Ethics Commission will find any corruption.

Some Real Belt Tightening

Depending on whose data you take somewhere between 56 and 66 per cent of federal spending is automatic and mandatory — mostly Medicare, Medicaid, Social Security and interest on the national debt. My understanding is that interest on national debt is around 5% which leaves between 50-60% on Health and Social Security. If Social Security is around 20% of the total debt we end up with about 25% of the national debt being spent on Medicare and Medicaid.

Now let's look at the fact that 30% of Americans are overweight; 30% are outright obese; and all of the above are seriously inactive. 60% of the American population is unfit and fat. They account for a large part of the health care costs in the US. Now maybe this is part of the social contract in the US. Maybe not.

The recommended daily calorie intake for an adult is 2000 calories. A cheeseburger and fries is 755 calories. A small coke is 105 calories. A slice of pie is 250 calories. A donut and a cup of coffee (with milk and sugar) is 250 calories. OK, you know where I am going with this.

The food industry basically makes us fat. One way or another all of us pay for that fact, either personally-the 60% of fat or obese and unfit members of the population, or the 40% whose health insurance and medicare/medicaid rates are spiralling ever upwards.

For a while the big villain was smoking. The turnaround has been nothing short of amazing. Just watch an old movie, even as recently as the 70's and the amount of smoking is outrageous. But concentrated effort, led by the government no less actually slowed the tide of smoking. Now it is obviously easier to get people to stop smoking than it is to get them to stop eating. But no one is suggesting not to eat.

The ruckus about Health Care was focusing on the wrong aspect. Yes it is desirable to provide minimum health care to everyone-but it is more desirable and infinitely more effective to introduce preventative action and that begins with the food industry. The sooner that torch is taken up, the faster we can institute figurative and literal belt-tightening.

Tuesday 25 May 2010

Why the Volatility?

When asked about the Financial Reform Legislation being enacted and if we will have another financial crisis in the future Richard W. Fisher, president of the Federal Reserve Bank of Dallas responded: "The answer is yes, because capitalism is inherently unstable and that's the nature of financial and economic history".

Now I have worked on Wall Street for over 30 years and have certainly profited by it, but I do wonder what kind of a structure we have erected. 125 years ago in his book "Looking Backwards" Edward Bellamy wrote that the trouble with capitalism is it creates waste in 4 major areas damning mankind to misery. They were "mistaken undertakings; competition and mutual hostility from those engaged within the same industry; the waste of periodic gluts and crises, with the consequent interruptions of industry; and lastly the waste of idle capital and labour at all times". He also mentioned that the use of credit is like building a house with dynamite for mortar. That very same credit that Niall Ferguson proclaims is the basis for the growth of our financial system.

Of course Bellamy was a socialist and none of the socialist experiments have proven to be successful, and certainly not enticing. It is interesting that in the 20th Century all of the "ism's" were given a shot on a grand scale. We had Communism in Russia, Fascism/Totalitarianism in Germany and Fascism in Italy and Spain, Communism in China, American Capitalism in much of the Western World with the exception of Europe's Market Socialism.

American Capitalism and Market Socialism appear to be the current winners. And yet by our own admission they are inherently unstable. All the regulation in the world won't stop the next crisis. Indeed, it might be sowing the seeds for an even greater blow-up. The fact is that no one really knows what the market is going to do beyond an (un)educated guess.

That's why I think fraud is so prevalent. As long as you don't get caught it almost guarantees success. Reminds me of the cartoon of a boy telling his father that he is considering a career in organised crime to which his father replys, "Government or Private Sector".

North Korean Shennanigans

If anyone can explain to me just what the North Koreans goals are I am all ears. I get (sort of) religious based terrorism. It's not as if that particular brand of trouble-making hasn't been going on since recorded history. But the North Koreans? They don't appear to be overly religious!

I have read that "ambiguity in the midst of strong denial" is an important part of North Korea's strategy. Apparently during a recent visit to Beijing by Kim Jong Il North Korean officials proclaimed their innocence, or more importantly that they were not responsible for the sinking of a South Korean corvette. The reports went on to say however that the North Korean leader himself remained silent which would allow him to maintain that he did not directly lie to the Chinese should he need them later.

It's great that these great games of Chess, or perhaps Go take place. It's great that the protocols of diplomacy allow for such refined nuance. But how does that help when at the same time the evidence points to a North Korean torpedo as the cause of the sinking of the ChonAn and the deaths of 46 sailors?

It seems that North Korea's role is to be a bully although why South Korea accepts the role of victim is beyond me. Perhaps it's the fear that if the bully is pushed the violence will escalate, and in this case the bully has nuclear weapons.

Funny, I know another nation that likes to play the same cat and mouse game. In Iran's case it's almost more understandable-they are looking for regional hegemony. Maybe that's what North Korea wants, and the region in this case is the Korean peninsula. In any event, if the threat of nuclear war is what allows Kim to lead us on a merry dance, and if Iran is able to act with relative impunity without nuclear weapons, how will the world feel once they have them?

No, I am not war-mongering. I am thinking rather of a German proverb which roughly translates to "As long as my neighbour wants war I shall have no peace". Warren Chamberlain learned that the hard way. Appeasement doesn't seem to influence bullies.

Monday 24 May 2010

The Devil too can cite Scripture

This morning I opened up my news pages to learn that inflation is dead! Given that all last week most of the commentaries I read warned of the inflation inherent in the massive deficits in Europe- and, I thought in the United States- I was somewhat surprised to find that that dragon had once again been slain.

If I scroll back to the beginning of the year it seemed that most market commentators at the major banks were predicting a recovering economy and therefore were advising against Treasuries and promoting stocks.

Now, not even 6 months later, we are being bombarded by warnings of deflation and fears that the austerity measures being introduced to rollback deficits will cripple growth thus taking pressure off inflation. There are articles heralding that perhaps the US is entering into the limbo of Japan's "Lost Decade", and suddenly not only Treasuries, but a quasi-derivative thereof, STRIPS is suddenly all the rage.

Now it is true that STRIPS have had a great performance since the beginning of the year, and the stock markets have not, so relatively speaking there is merit ex post facto that once should have bought STRIPS. But the question is not what one should have done, but rather what one should do.

STRIPS are zero's so they can only go to 100. The 30 year UST yields around 4%. The 10 year around 3.25%, and the 5 year around 2%. There is a bond market adage that says 10 year yields of today are inflationary expectations of tomorrow. The 10 year yield today is suggesting that there isn't that much fear of inflation although if we are entering a lost decade I should add that in Japan the 10 year yield level sunk to around .75% so there is a lot of room to fall if you think we are going that way.

But just 2 months ago there were headlines screaming that US 10 year yields were the highest they had been since June 2009. The small print asked if this reflected optimism about the US recovery, or because of concern about the rising level of US debt.

So which is it? What is the significance of the large budget deficits? Are they harbingers of inflation, or foreshadowing deflation? Well do you believe that the public sector has the ability to manage the economy at times of crisis to stimulate growth, or do you think that the only solution is through the private sector, and more importantly can either of them decrease the deficit without causing recession(deflation) or create non-inflationary growth?

Maybe it is a theological question after all-it's just a matter as to how you interpret the scriptures!

Friday 21 May 2010

Fish or cut Bait

Last week I was sent an economics article in which the writer cautioned that the markets had a decidedly August '08 feel about them and yet it was unclear as to what investments would be appropriate.

Being an investor myself I had agonised as to whether the old adage "sell in May and go away" was the correct course of action- it was. Since that time we have been buffeted by the volcanic eruption of Greece and the makings of a classic case study on the inter-connectivity of politics and finance.

The media is filled with the warnings of economic technocrats who if surgeons would lop limbs off the body of Europe without a moments reflection as to the political and social aspects of the case. And that might be the biggest impediment to a lasting solution. Europe, and by extension the world in this new global marketplace appears to be caught between what are posed as mutually exclusive decisions between market and fiscal disciplines, the latter of which is actually political.

On the continent the great powers France and Germany are slugging it out with one eye on the edifice of Europe and the other on their electorate. Posturing by Mr Sarkozy belies a deep-seated insecurity with regards to the next election, and a realisation of the limits to the actual room to maneuver by France which is more closely related to Club Med than to the Teutonic North.

Elsewhere, the undercurrent of populism of the "are we saving the Greeks-or the banks" variety permeates the discussion in Germany but carries menace in every country that has played at the ECB's financing window. The proponents of this attack seem unable to comprehend the fact that it doesn't have to be an either/or question and that quite possibly it is both necessary and desirous to do both.

If the Euro is worth saving, and if the success of the Euro is intimately intertwined with the success of Europe, then the Greeks will need to be saved from themselves. Saving Greece will also save the banks, which will also help save Europe in the short term. What is absolutely clear is that new rules and regulations will have to be introduced to protect the integrity of the Euro/Europe construction if it is to be saved in the long term.

Once again Europe stands at the cross-roads trying to figure out which continental power will take the lead. This time there are two advantages in comparison to the past. Firstly, it doesn't appear that it will move from the political to the military, and secondly the UK doesn't seem to be in a position to play the spoiler.

Thursday 20 May 2010

Let's Kick 'em when They're Down

I spent much of yesterday reflecting on the moves by the Germans to ban the short selling of European government bonds, credit default swaps, and some German financial securities.

The immediate reaction of most market participants, in addition to the somewhat chaotic nature of the markets in the face of uncertainty was to decry the ban outright. The basic explanations were along the lines that the invisible hand of the market will always find a way to be exercised, even if inefficiently bound. Furthermore, risk premiums will rise, liquidity will evaporate and regardless of all this European governments are going to require massive funding over the coming months and years and to do that they will need functioning markets.

Now I appreciate all of these comments and agree that there will be massive borrowing programs that will require buyers. But it is one thing to refrain from buying; it is another to actively try and force an issuer to its' knees.

I am not suggesting that certain European governments don't have serious problems to address if they are to avoid insolvency. I am asking however if it is really in the best interest of the European, or Global social structure for individual traders, or, as I have heard reported, for groups of traders to clandestinely co-ordinate their attacks on chosen names such as Greece.

They claim to do so under the guise of bringing truth, transparency and market discipline to the Greek situation. A noble cause. But at what cost, and to whom? It is patently clear that severe austerity measures will have to be instituted. It didn't require Johnny Shortseller to bring that fact to light. Crushing Greek bonds doesn't help Greece unless one thinks that kicking someone after you have knocked them to the ground is constructive.

What Germany is trying to do, as was the aim of the 750 billion Euro support package announced earlier is an effort to buy time and take pressure off the EU economies. The breathing room they are trying to create has a severely limited lifespan. Shortselling is not the cause of Greece's/Europe's problems- it just exacerbates them.

The sooner the countries under pressure understand, at a governmental but also at a populace level that severe austerity measures will have to be endured the sooner this financial crisis will end.

Tuesday 18 May 2010

That Evil Public Sector

I am torn by the obvious need to cut the public deficit and yet uncomfortable with the introduction of bonus restrictions on senior civil servants and NHS managers. The top 4000 public sector employees got an average bonus of £12,700, and NHS managers received up to 7% of their salaries. According to the Daily Telegraph cutting mandarin bonuses by 65% will save £15 million a year. Surely there must be bigger fish to fry.

That being said I am all for analysing who gets a bonus and why, but am very wary of knee jerk cuts reeking of populist symbolism especially when any discussion of cuts is always couched in terms of undoing the "evils of Labour's dying days".

Although the Civil Service has a much better reputation in the UK and continental Europe than in the US, it appears to me that what Messrs Cameron, Brown and Cable are working towards is to ensure that the best and brightest don't look to the Public Sector unless they are either imbued with some unbelievable desire for public service, or are independently wealthy.

It is interesting to see that Mr Will Hutton, the former editor of the Observer who was closely linked to New Labour will now be asked to tackle public sector pay. Good sop to the Centre-Left. As an unpaid position I should imagine the value is in image for the Government, and profile for Mr Hutton.

Then again he could start by commenting on the salary of Sir Alan Budd, the temporary Chair of the newly formed Office for Budget Responsibility- ~£40,000 for three months work. Funny that given Mr Cameron's stated determination to cut the previous government's £1.5 billion for management consultants (even if I agree with the sentiment!).

Monday 17 May 2010

Immigration and the Shires

Following on from the discussion of bloody-mindedness in my walk in the woods on the weekend our conversation veered towards another minefield-immigration.

My friend started the discussion mentioning that in much of the agricultural sector in the region there would be insufficient workers if it were not for the East Europeans.

He went on to explain how the Polish workers who were being made redundant went and shook hands with the factory owner and offered condolences for the collapse of the enterprise! They had apparently experienced the closure of factories before and understood the demands of the marketplace.

The local meatpacking firm has a large contingent of Bulgarians. The English workforce had greeted the first Bulgarian with grins and chicanery-he couldn't even speak English! They had to teach him with sign language.

At the end of the first week he would say "good morning boss" as he showed up on time and said "good evening boss" as he ended his shift.

At the end of the first month he could speak enough to ask if he could introduce a fellow Bulgarian, who followed the same procedure.

They showed up on time. They didn't take "sickie" days, and they were good workers. The English workers with the same standards welcomed them. The atmosphere in the plant improved. The values of punctuality, loyalty and reliability made everyone's workload easier to plan and schedule.

The strange thing is that my friend, as well as our Polish cleaner and gardener and apparently most of the nation think that immigration has to be managed better. You can't just let everyone in, even if they are good workers.

The challenge is to get the English to work. I think Frank "Think the Unthinkable" Fields might find that his time has come.

A Walk in the Woods

This weekend we took a walk in the South Wiltshire Woods around the "chocolate box" village of Castle Coombe. The walk was described in the Weekend FT which is running a series on great walks in the UK.

They failed to mention that in addition to being a charming village nestled in the Cotswold's Castle Coombe also plays host to the Castle Coombe Race Circuit which meant that once we exited the M4 we were suddenly surrounded by a cacophony of souped up Honda's, Subaru's, Nissan's and various other makes all sporting huge wings and tuned exhausts and pumping hard rock music at 9:00 in the morning!

After standing in a traffic jam for 45 minutes we turned off to outflank the travelling hordes suddenly finding ourselves in a countryside wonderland with each lane getting smaller and smaller driving along towering hedgerows opening up onto bucolic pastoral scenes or woodlands with a floor covering of what turned out to be ramps or to my English readers wild garlic.

We arrived in the quaintest of villages parking next to the market cross-a relatively elaborate edifice which once served as the centre of trade for Castle Coombe. Across from it was village church the size of which also suggested that there had been reasonable wealth in the area at one time. Inside amongst others was the grave of a knight whose stone effigy revealed that he had died in battle-a drawn sword; had been on 2 Crusades-crossed knees; and that he had had 6 children-5 of whom had survived childbirth and went on to become a priest, a soldier, a lawyer, a merchant and a farmer's wife according to the pictographs along the side of his monument.

At the village pub we met our friends who had driven down from Salisbury and we crossed the stream and cut up through the fields for a 5.5 mile hike.

My friend and his wife and children moved out of London over 5 years ago and we meet up regularly. His background is in banking part of which was in insolvency proceedings. He is now a private advisor and had just been involved in the demise of a local food company which had gone in to administration.

I had just returned from a trip to New York where I had a dinner with amongst others a Private Equity manager whose business model was to find businesses small enough to fall below the radar of Anti-Trust administrators, buy them, and then proceed to aggressively destroy the competition to move from a dominant to essentially a monopoly position. He explained to me that the goal of capitalism is not to make money, but rather to make as much money as possible regardless of the collateral damage.

With this dinner conversation in mind I asked if the demise of the food company was as a result of the general economics of the recession, poor management, or predatory capitalism. His response was poor management, and bloody bastard capitalism.

I understood poor management, but not bloody bastard capitalism and hazarded if that were not the same as predatory capitalism. "No", he assured me, the bloody bastards out there sprang decisions on suppliers such as the company he was advising without warning out of sheer bloody-mindedness.

In short this company supplies fresh food products to a larger company which slaps it's logo on them functioning essentially as a powerful marketing/distribution organisation. The "marketing" firm had come to the conclusion that in order to increase the shelf life of their products they were going to start pasteurising them and therefore were shifting to a different supplier with that capability.

No problem there-except that they had known about this decision for at least 6 months and gave 4 weeks notice per their contracts that they were cancelling their relationship.

"Two can play at that game" he continued, hinting that the marketing firm might find themselves in the uncomfortable position of having to defend selling pasteurised products as fresh.

Touche.

Friday 14 May 2010

Please Sign on the Dotted Line

Now that the USA has decided that it is time to get tough and tighten up the guidelines for mortgage documentation it is interesting to see that a lot of the new regulations appear to simply be to re-enact the rules and regulations which were created in the 1930's.

As a result of that financial crisis broad reforms such as deposit insurance, prudent limits on risk-taking and transparency combined with the Federal Reserves role as lender of last resort, and for a fee, access to the FDIC were established.

The problem we are being told was that since then we experienced the growth of non-bank financial institutions which were established to operate outside of the regulatory framework which applied to traditional banks. This parallel banking system sought an environment of lighter regulation, lower capital requirements, weaker consumer protections and better tax and accounting treatment.

This begs the question of course as to why these new institutions were allowed to mushroom. It's not as if the creation of off-balance sheet entities such as bank-conduits, Asset-Backed Commercial Paper Conduits (ABCP) and Structured Investment Vehicles (SIV's) and specialised finance companies which were active in consumer, business and mortgage lending was hidden. Where were the regulatory authorities who one would like to assume were intelligent enough to recognise that if it walks like a bank, talks like a bank and quacks like a bank it's probably a bank and should be regulated as one.

I know that the easy answer is that this massive parallel banking system which at its' peak was similar in size to the traditional banking system fell between the cracks of the Fed, the SEC, the OTS and any of the Finance Committees of the Senate or Congress!

Now of course, after the horses have bolted all of these organisations are falling over themselves to re-regulate, some of which will be good, and other parts such as separating derivatives and proprietary trading activities from banking which I believe will be bad-but that is a different discussion.

I think the clearest indication of where the problem lies is in the attempt by the mortgage community to stop an amendment to tighten up the documentation required by Fannie Mae or Freddie Mac. Among other things, the document which has to be signed by the servicer, says that the servicer acknowledges that providing false or misleading information to Fannie Mae or Freddie Mac (which are helping the Treasury run the program) may constitute a federal crime.

Imagine that! How preposterous to suggest that providing false or misleading information may constitute a federal crime. Like lying on your Income Tax. It's called Fraud. It's been at the root of almost every financial crisis.

Just ask the Greeks.

When Fair isn't Enough

This morning I read an article in the WSJ extolling the GOP to take on the mantle of the "We're-Not-Europe Party". The byline stated that the bill for a life of fairness comes due at the expense of growth. The editorial continues describing how Europe has entered into a Faustian bargain in which they negotiated a life of social protection and income fairness, no matter what the cost. The devil, in the world of the WSJ is the bond market which has just arrived and demanded it's money.

Now first of all I find it amusing for the WSJ to characterise the bond market as the devil. I also find it ironic that in trying to reshape the Republican Party to get away from the image of being the party of "No" they moved on to becoming the party of "Not". Somehow still a negative....

I think however that the editorial misses some points. A social-market economy tries to balance wealth distribution and overall economic growth. It is a contract which requires that all signatories fulfill their end of the bargain. It is not a question of left or right, conservative or liberal, but rather of ethics and human nature.

The Germans had a very strong welfare state which required taxes of over 50% regardless of the party in power. The result was the relative absence of poverty, functioning public transportation networks, medical care and in general a comfortable social milieu.

Then came reunification and the massive costs associated with incorporating a country half the size of Germany at a ridiculously high exchange rate. Twenty years later and under a Social Democratic government it was recognised that the cost side of the balance sheet was drowning and so cuts were instituted to bring the things back to an equilibrium.

Funny, the changes in the USA from welfare to workfare were also instituted under a Democratic government. I am always told by my conservative friends that they "can't" introduce social legislation as they will always be viewed as crass, greedy and not concerned with those less well-off, so they need the liberals to do it! But I digress.

Germany recognised that living beyond your means will sooner or later catch up with you. They are dealing with the excesses and were on their way to managing their deficits when the financial crisis hit exposing Greece's problems.

Well actually, Greece was in trouble long before the financial crisis hit. This is where the social contract kicks in, and it is not only between a state and its' populace, but also between the state and the umbrella organisation of which it is a part.

Greece cheated on its' finances to enter the Euro in 2002. It didn't really conform to the Maastricht criteria of a budget deficit of less than 3% of their GDP or a debt ratio of less than 60% of GDP. This is where the real problem lies and where other nations and financial authorities should take note.

Now the Greeks are being told to introduce their equivalent of Hartz IV. The popular response is much more Gallic than Germanic. Demonstrations in the streets rather than a morose acceptance. The demonstrators don't mention that they can take early retirement at age60 and that a large percentage of these early retirees then take jobs on the black market which aren't taxed-not to mention that not paying taxes in Greece is the rule rather than the exception, and that the tax collectors are generally viewed to be corrupt.

All the regulations and stipulations in the world are useless if they are not adhered to. This is true in government, and to the world's chagrin, finance.

Which brings me back to the question of Fairness. Is there an ethical component to being Fair? My friends at the WSJ surmise in response to Gordon Brown's statement "I tried to make the country fairer" that there is a more important goal- growth.

Sort of smells of predatory capitalism.

Wednesday 12 May 2010

The Perils of Splendid Isolationism

I just spent 10 days in the US returning on the 11th of May to the best reality TV show going: the live coverage of the respective trips to the Queen first by Gordon Brown to offer his resignation-she accepted, and then by David Cameron who was offered the responsibility to form Her Majesty's Government-he accepted. Mr Cameron then ran off to finalise the negotiations with the Liberal Democrats thus creating the first coalition government in over 65 years.

There was another major anniversary of 65 years. Saturday was May 8th, the 65th anniversary of the end of WWII in Europe. The Russians celebrated it big time rolling out all their artillery and missiles in parades demonstrating "we're back"! The British, in classic style instead chose to celebrate the 70th anniversary of the Blitz and of the evacuations of children from the cities.

I didn't see or hear anything about it in the States.

Parallel to this in Germany the results of the Nordrhein-Westfalen election were being digested-the conservative CDU lost 10% vis-a-vis '05 yet were still the largest party by a smidgen-and then the horsetrading over what the composition of the new State government would be.

And parallel to all of this the Finance Ministers of the EU were meeting to hammer out a solution to the problems of Greece and by extension, Portugal, Spain and perhaps other nations not to mention the Euro itself.

What was striking to me was that in the States all the discussions I either had or listened to on the Radio and TV about the crisis in Europe had a hue of Schadenfreude-how could Europe ever have thought they they could become a united people?!

I heard how slow Europe was to change and that the barriers to unity were insurmountable. Watching the theatre of tradition in the transfer of power from Labour to the Conservative/Liberal Democrat coalition I will admit how bizarre the transition appeared.

But then I remembered the ceremony of the transfer of power from Mr Bush to Mr Obama: the shaking of hands, the new First Family waving goodbye as the old First Family flew off in a helicopter. I remembered the tortured birth of the United States and the horsetrading between the North and the South resulting in the 3/5ths Ratio to forge a Union which set the stage for a Civil War "Four score and seven years" later culminating in the election of a Black President 150 years later.

Perhaps I was a little parochial in my view of England.

But I was still reeling from the free fall of the Dow-Jones on Friday, at first blamed on the Greeks, then on a "fat"(stupid)finger that allegedly typed a B instead of an A in front of the word "illion"!

Sitting back in London I had time to reflect.

It made me think of how far Europe has moved in the last 65 years. The Iron Curtain has fallen. Germany has been reunited. Former Eastern Bloc countries such as Albania, Bulgaria, Croatia/Slovenia(sort of Yugoslavia), Latvia, Estonia, Lithuania, Hungary, Poland and the Czechs and Slovaks had all joined NATO. The EU had expanded to 25 countries, and now it found itself in the middle of a crisis of extreme proportions threatening its' very core.

Granted, the EU was more a customs union than a political entity, but it was marching towards that with the creation of the Euro and the creation of a Rapid Response Military Group. Its’ beginnings were in 1951 with the creation of the European Coal and Steel Community at the Treaty of Paris followed by the Treaty of Rome in 1957 and the founding of the European Economic Community. Then in 1993 the Treaty of Maastricht created the European Union, and in 2000 the Euro.

Many Americans, and, for that matter, the Euro-sceptic press in the UK were heralding the collapse of the Euro and perhaps of the EU. I understand the English; I don't understand the Americans unless I am cynical.

I do understand the Europeans. After centuries of bitter conflict trying to establish a continental power and in the aftermath of the second horrific war in the 20th Century the countries of Western Europe got together and began a journey designed to bury the past and look to the future.

Last night in a political talk show on German TV 80 year old Heiner Geisler, former Chairman of the CDU and 84 year old Hans-Jochen Vogel, former Chairman of the SPD and the bitterest of enemies in their prime essentially joined hands and said that this crisis was a great opportunity to create a political union to match the currency union-and who better to lead that effort than the Germans.

Not as conquering demigods, but as leaders with the necessary economic and political clout to forge a union without resorting to the tried and failed attempts to do so through military might.