Monday, October 27, 2008

Roland Barthes on The Election

Every morning, I am a little disconcerted about some newspapers not supporting Senator Obama. But this morning, I was happy to read the FT. In a break with from its short tradition, this blog will take a step aside this week and speak of the election - for I strongly believe there is no commodity like the apolitical business journalist.

Here is something interesting that I have been reading - I was struck by the relevance of it today as it was when this book was first transated from French in the 1950s.
From Mythologies - by Roland Barthes - Photography and Electoral Appeal.
"Some candidates for Parliament adorn their electoral prospectus with a portrait. This presupposes that photography has a power to convert which must be analysed....Photography tends to restore the paternalisti nature of elections , whose elitist essence has been disrupted by proportional representation and the rules of parties (the Right seems to use it much more than the left). Inasmuch as photography is an ellipse of language and a condensation of an ineffable social whole, it constitutes an anti-intellectual weapon and tends to spirit politics to the advantage of a manner of being....Look at me, I am like you.
Electoral photography is therefore above all an acknowledgement of something deep and irrational co-extensive with politics. What is transmitted through the photograph of the candidate are not his plans, but his deep motives, all his family, mental circumstances, all this style of life of which he is at once the product, the example and the bait.....what we are asked to read is the known , it offers to the voter his own likeness, but clarified, exalted and superbly elevated into a type. This glorification is in fact the very definition of the photogenic: the voter is at once expressed and heroized, he is invited to elect himself, to weigh the mandate which he is about to give with a vertiable physical transference: he is delegating his race.
The conventions of photography are themselves replete with signs. The three-quarter face photographs are ascensional, the face is lifted towards a supernatural light which draws it up and elevates it into the realm of higher humanity...all political contradictions are solved: peace and progress and employers' profits , so-called free religious schools and subsidies from the sugar-beet lobby, the Right and the Left : all these coexist peacefully in this thoughtful gaze, nobly fixed in the hidden interests of the Order."

Friday, October 17, 2008

World is Flat

IMF’s Strauss-Kahn this week has called for Bretton Woods 2 ! (Bretton Woods – the hotel incidentally was sold a couple of years ago, but has now been turned around and restored). Many countries dependant on capital inflows have been facing tremendous pressure. Repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks is pushing these countries on the brink of bankruptcy.

1. Hungary’s problems stem from foreign currency loans and big budget deficits.
2. Ukraine’s banks face difficulties repaying foreign credits as the current account is widening.
3. Pakistan is seeking $4 billion in assistance. It is facing a financing gap of $10 billion this year – a crisis in its balance of payments. The Pakistani Rupee has crashed to record lows and its foreign reserves can pay for only two months of imports. Its sovereign rating is a couple of notches above the default level.

Some governments in emerging economies may be looking smug a little too soon. They are after all not that safe and far away from the chaos happening on American shores. This is only one way of diverting attention away from their own domestic problems of inflation, supply side mismanagement, lack luster growth in industrial production, stalled reforms among others. Economic weaknesses will not disappear – intrinsic problems within the economy will continue even as fundamentals remain strong.

Funny That - Central banks across the world are facing unusual activity – but in India its worse. Read an amusing story in the FT – “Industrial action at central banks is rare even in calmer times.” That’s right employees at the Reserve Bank of India are going on strike on pension issues! Not surprising – India badly need pension reforms, sooner than later the unfunded pension liability will blow up in the most unlikeliest of times.

Wednesday, October 15, 2008

Banks backed by the Big Stick

Capital injection in banks – will it make them more or less efficient? Will it open a can of worms with politics interfering in commercial lending decisions of banks. I can easily draw a parallel from what happens in India, where politics routinely interferes in the everyday functioning of banks – be it small cooperative banks facing pressure from small time local politicians, or large banks that have to appease the majority shareholder – in this case the government from time to time. There has been many a distressed lender crumbling under direct or indirect political interference. A New York Times report in 1999 warned of the interference of the Clinton administration in the affairs of Fannie Mae, that was under pressure to lend to a new category called “sub-prime loans”. But that does not really mean, we must expect the worst. Considering there was no other alternative, this will be a Damocles sword for banks going forward. How will future investors in these banks perceive the presence of the sovereign on the boards of these banks? Much has been said that the government was shortchanged in terms of the kind of equity stake that it will have in these banks.

Tailpiece: So much for capital adequacy - but what ever happened with all the stress testing that Basel norms provide? I guess the stress test was not designed to register a stroke in the credit market as it were. How closely were the capital adequacy norms being implemented. Banks were supposed to maintain a minimum of 9% as Capital Adequacy Ratio as per Basel norms. The costs of implementing these norms have been tremendous for some of the smaller banks. I guess we will see greater emphasis on capital adequacy – something that will discourage unviable leverage in future.

Thursday, October 9, 2008

The U.S. housing map

Where are the most expensive houses in the U.S. ?

Wednesday, October 8, 2008

Why not just throw bucketloads of money out of ice cream trucks?

Joe says "Why not just throw bucketloads of money out of ice cream trucks?" (a comment left on a blog). Why not indeed? Especially if this is the way things are going to turn out.

What are the cultural implications for American borrowers and consumers? Will it really be so bad, that it can impact on how a section of school going kids perceive of their country and their economy in the future? The pace of changes in the past one month will give enough work to economic historians, academics updating textbooks and future policymakers. There has barely been an opportunity for all of it to be recollected at tranquility - as one senior editor remarked.
How are policymakers dealing with the changes - even as they overhaul and initiate historic decisions - as a WSJ article recounted said there is no time for second guessing. "The test for all political leaders now is whether they can rise to the priorities this bewildering time has thrust upon them..." - a Guardian edit has said.

A thought or two on the monolithic multilateral organizations -
Always in times like these, we wonder why multilateral institutions like the World bank and the International Monetary Fund could not move faster and more decisively on systemic risks threatening global economy or bubbles in the financial markets? And what about the Bank of International Settlements? When central banks come together in a rare coordinated fashion to cut rates to stem the crises - we can expect the BIS to put its thoughts on the unprecedented turmoil in recent history - it is a little odd that we haven't seen any specific comments from Basel in the light of the current crisis. As the world's oldest financial organisation established in 1930, one would have expected BIS to remain ahead of the curve as it were, at a time when 'trust' is the biggest casualty in a crisis of such proportions. The BIS is a forum to promote discussion and policy analysis among central banks and within the international financial community, a prime counterparty for central banks in their financial transactions and a trustee in connection with international financial operations.

Tail piece: In my opinion bigger economies should show more sophestication in handling crisis than the smaller ones. The British government invoked the Anti-Terrorism Crime and Security Act 2001 to freeze the British assets of Icelandic banks. Read a Guardian edit called Icelandic Storms on the same. Instinctively I feel that classifying a country under a terrorist legislation may not be the most graceful way to address the situation. After all there is a diplomacy angle to the issue here.

Friday, October 3, 2008

Coagulation of credit

Our economics professor threw open the class to vote for or against the bail-out package. While the majority supported the package, self-styled contrarians said "we must bear the pain for a few years and not give in to moral hazard". Going with the contrarians, there could be lot to regret about. After all in hind sight everything is a mere should-have-done-possibility.

The most pressing concern that emerged is the fact that even big companies (some examples given were GE, McDonalds) are not able to borrow in the commercial paper market. Nobody is being able to lend anything other than overnight funds. So in effect the bluest of the blue-chip companies are turning blue, struggling for working capital.

The point is that the cost of money is increasing for everyone - including for those who had nothing to do with Wall Street. What will happen to municipalities for instance? Hospitals, schools are all getting affected.

Pick of the week -
This was in interesting read from The Economist dated November 1929.
Impact of crisis on the Balkans - a reuters report from Zagreb/Belgrade

Labor over Libor

Is the LIBOR correctly reflecting the true nature of the unfolding credit crisis? Every once in a while skepticism would give way to discussion, only to be forgotten later. The rate is now under scanner again.

Usually, overnight LIBOR is a little over the Federal Reserve's benchmark rate - the Fed Funds rate. The prevailing LIBOR is now 400 basis points above Fed’s target rate of 2% - reflecting that the banks are not lending to each other and whats more interest rates may adversely impact borrowers. These are historical highs ever since the British Bankers Association has started tracking it since 2001.

Like this Bloomberg story says “Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.”

The spread between the 3-month LIBOR and the overnight indexed swap (OIS) rate was less than 15 basis points. Since August the spread has increased as much as five times. A recent report by Merrill Lynch said that following the Lehman Brothers bankruptcy filing, the spread has moved up to 166 basis points, and has now been above 200 basis points for four straight days.

An indicator of whether the ‘near-term’ crisis has passed will be if the spread cuts by 100 basis points according to Merrill. “We do not expect to see a move back to the 11 basis point norm anytime this year or next," it has said.

Another crucial barometer in the on-going crisis is the TED spread - the difference between the benchmark London Interbank Offered Rate and US Treasury Bill rates. The success of the bail-out package will be judged by how this barometer jumps since it reflects inter-bank counter-party risk.