conceptualizer

April 30, 2008

Prognosis for the Economy

What is the prognosis for the economy?
There are three fairly obvious possibilities:
Firstly, some people think that most of the problems for the financial services have happened and so are we are near to a turnaround. This sentiment is evidenced by the current vacillating of the share markets.
Secondly, other people think that the financial services have precipitated a wider economic recession and now that will take over to drag down the economy into a deeper hole. As the economy is enabled by financial services that could certainly be true and consumer spending is changing, showing increasingly parsimonious spending patterns.
Thirdly, others believe that recent activities by central banks have staved off a potentially deepening crisis. Certainly, making more credit available to banks reduces the risks of further banking problems, which would pique the lack of confidence. However, has enough been done and are there other techniques that could be employed.

Which View is Correct?
The fact that the financial services sector was jointly at the heart of creating the problems and the fact that they are vacillating now over its depth means that they don’t have a clear vision of if we are at an economic low point, even though they are the ‘experts’. Central bankers seem to be at least as much in the dark as the financial services gurus, because they didn’t see the problems coming either. They have made increasingly strong efforts to avert a cascading of the problems into the wider economy and this indicates they too don’t know how far this will go. A preponderance of others have commented that they expect things to get worse before they get better. It would seem that the ‘clever money’ would be on a deepening of the current macro economic problems, exasperated by falling property prices along with rising food and fuel prices.
The full effects of problems on this scale do take time to ripple through an economy, so it is likely that even if we have reached the nadir of the original problems for the bankers, they may yet be revisited by their wider effects. So although none seems to have a full understanding of this problem plexus, we can expect the shockwave to ripple through the economy for some time. An important question is: will the after shock feed back to the financials strongly enough to initiate a new vanguard of problems.
My own view is that this crisis will deepen. Lending is constricted by tightening positions in financial services leading to tighter loan conditions. Many people have become comfortable with living at the edge of financial solvency and have started to find their newly restricted position forces them to cutback hard. This pruning of expenditure will denude businesses at marginal operational viability, which in turn will feed costs to the economy through unemployment. Fortunately, the businesses that are least viable and able to ride out a slowdown will tend to be small and although there will be a constant flow of them, they will have less of a confidence damaging effect than mass employers making redundancies. Also, people love to buy stuff and have a short memory for problems. As soon as their positions stabilise they will be back with what credit they can get and there will be creditors with money to lend. Further, service dominated economies are quicker to respond to demand, so for example the US and UK economies should bounce quicker than manufacturing based economies. Therefore, although I expect things to worsen, I also expect that they will flip back quickly to growth. Financial stability and solvency are less of a concern for many today and that combined with faster and more free flowing information than ever will resolve to a faster turnaround in the economy. We will soon return to the consumer dream, not because I want it, or think it is a good idea, but because most people want it. Given the desire for something and the opportunity for others to make money from that desire, there will be a race to make sure they get it, as soon as possible.

What should central bankers do?
Firstly, they must restore confidence. Confidence is the most important factor for a healthy financial services sector and central banks have moved to improve it. So much of the economic success of a country now depends upon its financial services sector that it must be unencumbered. Therefore, improving the stability of financial institutions with government backed loans is a possible scheme. However, this tardy tactic is essentially printing money and hence inflationary. Central banks know that the excessive valuations placed on residential property must be normalised. Price growth has exceeded wage growth and that leads to a bubble that draws in a disproportionate percentage of overall income to service that debt. This is not good balance and balance, after confidence, is most important. The central bankers should be encouraging the rapid normalisation of this over valuation to quickly restore parity. Drawing out normalisation will only delay the return to a balanced growing economy and I am concerned that a government statement about preventing people from losing their homes could do just that. They have not detailed how they plan to do this and it could be empty rhetoric, but if not and they start to intervene at this point they could stifle recovery for some time. An interventional strategy would have been much better to prevent the bubble. Intervention now should be to encourage a property market decline.
Secondly, they must address the root causes of the original crisis. They are manifold, but two stand out as significant: Excessive speculation using residential property, especially by people who do not understand investment markets. A poor pension system which encourages people to look for other ‘stable’ savings vehicles, in this case property investment was used.

What can we do as individuals?
As a general strategy, buck the trend. Be a saver when all about are spending big. The best time to spend big is when everyone else is not, you get the best deals then. Particularly, you should be looking at the big things: buying a house or moving to a better one, buying shares and a nice car at a bargain price. So, property will soon be a much better deal, shares already are, but will probably become better still and slightly used luxury cars will soon be everywhere at great prices. Simple really, just difficult to do.

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April 21, 2008

Financial Insecurity

The current money market and housing market problems are underpinned via a common root problem, so I will treat them together. Government plans to solve the woes of the money markets and housing market are short term tactics, probably designed largely to get the government past the next general election. These plans don’t recognise the underlying problem and its causes. Also late in arriving, they instead treat some of the obvious symptoms. So, as it is unlikely that the government will do what is needed, we must recognise how best we might adapt our plans. Although the root problem for both market systems is the same, the symptoms are different.

The Symptoms

The housing market symptoms have increasingly been affordability issues for first time buyers and recently price falls leading to the infamous negative equity trap for some. Government plans to tackle affordability for first time buyers by allowing them to own a fraction of a property exasperate rather than alleviate their problem. People will commit what they can to get a house, so enabling fractional ownership simply allows the same financial commitment for a fraction of a house. Obviously, this in turn increases the price for the whole house. No one wants to spend any money on buying a house, prices are dictated by how much people are allowed to spend by lenders. Fractional ownership simply increases that allowance. There are no direct plans to help those in the negative equity trap, which reduces the mobility of the workforce and so is bad for the economy.
The financial services industry has a crisis in confidence that has stifled the free flow of money. Money is a vector for the flexibility and growth of an economy, so this impediment will have far reaching implications for the UK and is the biggest single problem we face now. Government plans to restore confidence to the money markets using bonds in exchange for property backed debt are not solving the root problem. Instead this tactic dilutes the problem by spreading it over time and distributing losses to the public purse. Another possible tactic seeks a quick correction of the problem by compressing the problem in time and localising its effects. The latter tactic, although less intuitive, has a number of advantages, prime among them is returning the economy more rapidly to a better state. As a result, even those most impacted have time to recover and more obvious measures can be enacted to restore confidence, which is certainly one of the most important qualities of a market based system. Now the problem exists one of these tactics must be employed, as the over valuation of property has to be normalised, implying losses for those that bought in late. The only question is how much to dissipate and slow those losses. It should also be noted that as the government does not in fact have money reserves to back these bonds, so their effect is ultimately inflationary. Also the drawn out tactic using bonds disengages the debtor from the consequences of their poor judgment, which has obvious negative effects.

The Root Problem

The use of residential property as an investment vehicle is at the root of both the money markets and the housing market problems. There is a complex interplay of many causes, but the two most prominent are: Firstly, pension savings are inflexible, not protected and are subject to means-testing. The lack of confidence people have in pensions has encouraged them to find alternative savings vehicles. Secondly, poor understanding of investment markets by amateurs who have access to them with residential property. Profiteering using markets is as old as humanity, but amateurs using them with residential property is a bad idea. Stability of residential property supply is too important to allow it to be used as a tool for speculation which inevitably leads to the decoupling of prices from earnings.
So how should the government tackle this twin causes. Firstly, they must introduce a government backed flexible pension scheme linked to contributions that is not means tested. Importantly, these savings must be ring-fenced and protected in law to prevent misuse. This will provide a safe haven for people with savings and reduce the tendency to use inappropriate savings vehicles as pensions. Secondly, the residential property market is too important to be used as a speculative investment tool by people with a poor grasp of its consequences. Strong controls need to be applied to the total percentage of income and its sources used to repay residential mortgage debt. Naturally, to discourage the inevitable attempts to circumvent these controls significant penalties need to applied to transgressors. It will be difficult to fabricate this control and it will need continual tinkering with to perfect, but it is essential. The ideal time to apply these controls is approaching when we reach the bottom of a property price dip. This root problem will keep recurring until it is addressed by providing a sensible pension scheme and controls designed to strongly correlate residential housing prices with earnings.

What Can We Do

Given that the government is unlikely to see the light and tackle this problem correctly as I outlined above, what can we do for ourselves.
On housing, timing is important. There will be a bottom to the housing market price falls. If you are planning to get into the property market or move, the best time to do so is at the bottom a price slump. In the end it is not the relative price of a house that matters to you, it is the amount you borrow to pay for it. That amount is always going to be lowest at the bottom of a price dip. If you want a house that costs twice as much as your current house is worth, that is easier to fund if for example your house is worth £100,000 rather than £200,000. Naturally as we get further from the bottom the less good a deal we get, but caution need only be exercised where there have been years of house price rises above wage growth. This is very difficult to do when prices are rising rapidly, but that is the time to save until the inevitable price crash. Those who are brave enough, or have no choice can get in and try to get out when they feel a good profit has been made. However, this is a very risky venture because typically the sums of money involved are large relative to income. If you do try this approach, a mercurial nature is essential. On sensing the market is topping out, sell fast and strongly discount your price to ensure a quick sale. If the price is not good enough and you are left holding the property too long you will have to discount even further later.
The financial sector has experts that understand their problems well enough. Unfortunately, those experts are not directing the businesses and so short-term and badly formed strategies still get used. It is in the interests of their directorships to ensure that directors and senior management making strategic and significant tactical decisions are well enough educated in the fundamentals of their business. General businessperson and salesperson types without the correct background simply do not have the depth of understanding required. In addition the board should sponsor multiple technical reports on the viability of any significant shift in strategy. They should also have clauses in the contracts of the most senior figures that prevent severance payments in situations where it is considered a poor strategy has lead directly to losses. This will not discourage good people from competing for these positions, in part because nobody takes one with the expectation of failure.

April 3, 2008

Embryology Bill

Embryology Bill

WARNING: If you are religious and intolerant of other people having a negative view of religion, don’t to read this post.

The discord around this subject fits a pattern I have seen before. Some people, I will call them moral fundamentalists, think they have the right to try to impose their moral systems on everyone. Their guidance and edicts should be directed only toward people who have agreed to adhere to their moral code. They have no mandate to affect anyone else. In this particular case religious moral fundamentalists also presume to know better than anyone else the correct treatment of complex issues concerning genetics, despite having no expertise in the area. They have extrapolated some principles from ancient texts that they have been able to associate with the issues. In truth they have no original text guidance on these issues, the associations they make are loose, the extrapolations fanciful and containing surreptitious motives, and they are made by contemporary administrators, not deities or prophets. Like all fundamentalists, they are a danger to themselves and everyone that comes into contact with them, because they have an uncompromising extreme stance that they insist on everyone conforming to and they cannot see that they are fundamentalists. If you are disagreeing with this now you are probably a fundamentalist, but you will also deny it.
These religious moral fundamentalists are using this issue to support the supposed currency of what is an anachronistic and mostly static system in an increasingly sophisticated and rapidly evolving world. As ever more complex new issues arise this overextending of their original texts becomes increasingly obvious, so that today a smaller proportion of well educated people than ever are interested in their views. Their problems are rooted partly in the need to imply authority through the use of absolutes, tradition, longevity and divinity, and partly in using static texts as a basis for all their views. For those views to be taken seriously they also must either be static or evolve very slowly to give the impression of considered authority. Obviously, this requirement is out of step at a very basic level with an increasingly rapidly evolving world.
Good science can prove itself and delivers tangible benefits, where religion cannot prove it is correct and its benefits are mainly intangible. I suspect that most modern religion is a way of obtaining power and money and to do this it takes advantage of the less well educated in society. As the quality or at least the pervasiveness of education has improved there has been a corresponding decrease in interest. To survive they need to change their strategy to provide other services.
One would think that members of the Catholic church would have the sense to keep a low profile on science based issues, having an extremely poor track record in this area. Are we still supposed to be at the centre of everything according to them, or has that changed now the scientists have shown this to be false? One member of the Catholic church cynically appealed to the least well educated in society with scare stories of Frankenstein creations, shamelessly courting publicity. Worryingly a number of politicians who are supposed to running this country turn out to have sympathies with religious groups. Gordon Brown should remove anyone from government that allows any such views to influence their roles in government; mostly because promoting a religious view is not in their job description, but also because they have a dubious grasp on reality, probably because of a deficiency in their education. Why is he allowing them a free vote anyway? They were given office to serve the people and that includes the people’s well being, not to promote their respective religions. Members of the government need to adhere to government principles and they should be to promote the health and wellbeing of all the people, not the influence any religious group.
Some religious groups believe there is one fundamentally important and valuable aspect of a person, often referred to as ‘the soul’, which is present even in an embryo. The concept of soul is useful to provide differential status and hence treatment, between for example people and animals. Disproving the existence of a soul is probably an intractable problem and a battle that need not be fought. One may circumvent this issue by encouraging the religious to reinterpret their own texts. A new interpretation could extricate them from their moral dilemma. For example, selective divine intervention to prevent misuse of souls, whether retrospective or proactive. One could also envisage a special case where addition of a soul is conditional upon a priori knowledge of the embryo’s destiny. There are probably some other schemes that could be employed, but the latter has the advantage that it could be applied in tragic cases such as prenatal death. All they need do is pick such a scheme and use their talents for interpretation to find some text to support it. Then they can gain even more publicity by announcing that in fact their religion was in already aware and prepared for these discoveries hundreds of years ago and that science has just caught up. Sadly, some people will believe them. Hopefully they will reinterpret, then we can all move on peacefully and the scientists can continue to save lives.

October 30, 2007

Lets hide the debt problem!

Filed under: Economics, Musings, Observations, Worries — Tags: , , , , , , , , , — conceptualizer @ 5:16 pm

The Master Liquidity Enhancement Conduit (MLEC) fund has been created by several big US banks with between $75bn and $100bn (depending upon who you believe) to buy up debt from Structured Investment Vehicles (SIV) which in simple terms are mortgage providers. The debt is largely in the form of Residential Mortgage-Backed Securities (RMBS) and Collateralised Debt Obligations (CDOs) – i.e. mortgages. SIVs, which own about $400bn of assets, are investment pools used by banks, but most enthusiastically by Citigroup who originated them in the 1980’s. It is now clear SIVs have been too keen to offer debt to financially dubious property buyers. The MLEC is an attempt by the private sector to mitigate some of the risks associated with bad debt incurred during the US property price bubble. That bubble was inflated by the poor lending strategies of the SIVs and ultimately those that initiated them. The MLEC fund will be accepting only the best risks, leaving the worst in the SIVs, so they will flounder rather than the banks. It is interesting to speculate as to why this cause was not taken up by the IMF, whose role it is to promote international financial stability. Perhaps they do not see it as a big enough problem.

So can this fund help? Well as an attempt to reintroduce confidence to the market and hence stability, to some extent that is going to happen, especially as it has the tacit approval of the US treasury. However, ultimately the problem is rooted in lending money on the basis of economic growth that was not there. Now that position has to unwind and the costs of the overestimate will have to be dissipated. This fund can only act as a buffer, trying to spread and slow the normalisation cost, it still has to happen. So in that sense it is more like an attempt to convert a painful punch into a protracted uncomfortable pressure. The problem has to be handled and it seems that somewhere someone has made the decision that the drawn out normalisation approach is the better option. So as we get used to the inevitable slowdown, the remaining market confidence will be subdued rather than demolished. In that sense it is a better strategy as stability and confidence are perhaps the most essential assets of a reliable economy. Ultimately the costs of this failing will be carried by everyone, the banks will ensure that, rather than just their shareholders.

October 26, 2007

Iranian thinking

Filed under: Debate, Observations, Politics, War, Worries — Tags: , , , — conceptualizer @ 10:41 am

War is coming, again!
If I was working at a nuclear facility in Iran right now, I would be looking for a new job.
I don’t want to take sides on this issue, enough people already do. So regardless of the rights and wrongs of each side in this fracas, I have to wonder what the Iranian leadership thinks it will gain by provoking the Americans into bombing them. Do they really think the Americans will become coy when it comes to the deed? Do they honestly believe that some giant omnipotent hand will reach down and turn back the bombers? I really don’t see how this will end well for them. They have been pulling the hair of the biggest bully in the playground for some time, they should not be surprised when the bully turns its attention fully to them and behaves according to type. Yes, there are examples of how things don’t go too well for the Americans when they engage in war. However, I must point out that they go considerably less well for targets of American aggression. This will set back Iran by decades and all their effort will have been for nothing.
Does anyone out there have an insight into the mind of the Iranian leadership? I would honestly like to understand how they think they will benefit from this. Remember though, this post is not about who is right and wrong, it is about how the Iranian leadership expect this to turn out for them. I think we know how the Americans expect it to turn out; with some big holes in Iran where there were once nuclear facilities.

October 24, 2007

Power corrupts

The cash-for-honours affair is an example of how too much power rests in the hands of the morally and mentally feeble. We have a governing system that has existed for hundreds of years, yet still our politicians find ways to corrupt and misuse it. They probably think they are clever with their antics, whereas they demonstrate how very ordinary they are. To have a great vision and not be diverted from it by temptation demonstrates a nobleness of character which is lacking in the current crop of politicians. I hope in my life to see a prime minister worthy of the task, rather than these self aggrandising smart-mouthed children. They should feel ashamed of themselves for what they have done, but they will probably write books to make more money from that portray it as clever manoeuvring. I am ashamed for this country, to have leaders with such weakness of character.

October 19, 2007

Intelligent Cowards

The real intelligentsia in the worlds advanced societies are allowing the lunatics to run the asylum. The example of Professor Watson being denied a platform after articulating an axiom about racial differences in intelligence, is just the latest in a long history of failings by the intellectual elite to take control of human destiny. I can not count myself among that elite, but I know enough to know they should stop being cowards and lead humanity out of this insane state, where any fool with a small minded agenda, a loud voice and some populist policies gets to run a country.
I want our world to be run by intellectual giants, not petty bigots. It is the weakness of inactivity in the intelligentsia that has doomed humanity to its current state of endless war and injustice. You intelligent people, it is time to stand up and take control. Stop allowing the children to run the household.
I did an experiment today. I posted comments that supported the views of Professor Watson to articles in both The Times and The Telegraph. As I suspected, neither published my comments. It is possible that they thought my comments were not worthy of publishing. It is also possible that they censored them because they did not kowtow to the prevailing pseudo-intellectual PC fascist views. People are silenced by fear of reprisals from aggressive dogma peddlers, we do not have freedom of speech. It is sad that we have to faun before the mental midgets and let our battles be fought by old men because we do not have the courage ourselves. Most of us do not even have the courage to endorse Professor Watson’s right to speak and remain open minded on the subject.
On the matter itself. Firstly, I would point out that in all the quotes I have seen (I have not read a transcript of the original) Professor Watson talks about a different intellectual ability, not that Africans are stupid. Secondly, it is clear that African countries are not as successful as non-African countries, by many measures. Now the out-of-Africa theory suggests that sub-Saharan Africa was the root of humanity, from where all peoples migrated. Indeed recent genetic research backs up this view by pointing out that genetic diversity decreases as we move further from that root. Also recent linguistics research backs up this view. So Africa has had the longest time to be successful, but has conspicuously failed. I would like to suggest that the reason is that those that had the gumption to move and also the skills to survive that choice were naturally selected to be better achievers. This is unlikely to be due solely to a differential in intelligence. More likely it is a combination of factors, among which I would suggest that physical endurance, social and language skills, adaptability, compassion and empathy are likely very significant. That filter of surviving and prospering through the rigours of migration has recently been destroyed by commercial movement of people, whether by their own volition or another’s. The remaining filter is the self perpetuating of an elite successful class through their adaptability to whatever obstacles are put in their way. In practice this equates to promoting the interests of one’s own offspring through the advantages and insights one has gained. It is difficult to denude this last process and those societies which have tried to have failed.
The relatively new field of epigenetic inheritance may also have something to say about how our success in life is determined by our ancestors. However, I don’t like the idea of using any inherited or environmental disadvantages as an excuse for not trying. To try ones best is a noble ideal and should be seen as an end in itself.
I can understand why people are reticent to stand up and be counted, but I hope that some of those great minds also have the courage to bring the debate forward. A prerequisite for progress is a desire to understand.

September 21, 2007

Mad as a balloon!

Filed under: Economics, Worries — Tags: , , , , , , , — conceptualizer @ 12:38 pm

We are all encouraged to sell our work before we have even done it, for those nice shiny things. Lenders understand human nature and the future of money management ~ see Debt to save the world. If you are a prospective first time UK house buyer I sympathise, you are trapped. It has become a competition of who dare take on the largest debt. There are plenty of 125% mortgages available and several 130% offers! Those of us who are not trapped need to resist the temptation, or at least understand it.
This crazy situation can only be reversed if financial services regulators prevent large salary multiples, high loan to valuation, very long repayment periods and fractional (shared equity) mortgages being used to calculate the acceptable size of a loan. Unfortunately such regulation would be a very unpopular move with lenders and in the short to medium term with borrowers. Perhaps it is best implemented at the bottom of a house price cycle when there will be more acceptance of it, especially if it were be phased in gradually.
I will not be surprised when lenders start offering us mortgages before we have even left school. That way lenders can extract even more from the most successful in society; people will always go the extra mile for their children. This will, like private schools, tend to perpetuate advantage and an elite successful class, making the idea of social mobility even more farcical.

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