Henwood on market turmoil

Left Business Observer‘s Doug Henwood (well, that should maybe be the other way around since LBO is Doug Henwood) has posted his long-awaited analysis of what has been going on.

The Internet left is getting all heated up—this is the Big One, the End of the World, the Death Agony of Capitalism. Maybe; that’s always possible. But it’s not likely.

The upshot is similar to my point the other day, that central banks are generally able to prevent major collapse by providing money to tide things over and stop trauma from spreading until things calm down. And, along the lines of Mark’s comment yesterday:

 It’s annoying how Wall Street complains about protectionism protecting the incompetent and welfare corrupting the poor and then quickly turns to the state screaming for a bailout. But without a bailout—or the somewhat comprehensive socialization of investment, to quote Keynes—they could take us all down with them.

Published in: on 21 August, 2007 at 12:25 pm  Leave a Comment  

Postcards from the edge

It’s a slow burner, but is it a fuse? Or just the fag-end of a cigar smoldering in the ashtray while finance reaches for another? There are a lot of doomsayers, and a lot of positive thinkers. The truth is that nobody really knows what is going on or where it is leading because the critical links in the chains are not visible.

“The fundamentals are sound”: At his testimony to a parliamentary committee hearing on Friday, Reserve Bank Governor Glenn Stevens gave the central bankers’ line, heard the world over: global growth is strong, too strong even; inflation remains the threat; profitability is high; investors’ reaction to credit market difficulties was “bordering on irrational”.

Yet surprises keep popping up. If this post can bear another metaphor, it’s like a whack-a-mole game – you never know where in the world trouble is going to rear its head next. The real story is not the sharemarket. The sharemarket fall is not all that big at this point. What is freaking people out is debt, and the sharemarket plunge is only reflecting that, with banks and financial institutions taking the biggest hits.

For example, the mole that popped its head up in Australia last week was RAMS Home Loans. It makes its money by lending for mortgages, packaging up these loans and reselling them on capital markets, thus funding another round of mortgage lending. It has run into trouble now that the packages cannot be resold on the markets, at least not for a profitable price, thanks to what has happened to American sub-prime mortgage-backed securities. The company (and others like it, such as Aussie Home Loans) tread water by issuing short-term paper into the money markets, but the price is high. This seriously hurts profits and scares investors that the company will go bust. So RAMS share prices fell by almost a third at one point last week.

Total collapse, though, is not the result. Institutions that relied on continually rolling over short-term paper in the markets are now invoking their back-up lines of credit, previously negotiated with banks. These are like overdrafts – it’s the limits that are negotiated, and they don’t show up on bank balance sheets until the money actually flows.

Banks assume that in normal times, like overdrafts, not everyone is going to be invoking them at once. But at a time like the present, a lot are being called on at the same time. How do the banks cover this? They go back to the money markets. It seems circular since it was trouble in the money markets that forced the finance companies back to the banks. But since the banks are not considered risky borrowers, they are able to access funds at rates the finance companies cannot. But not without cost. Now it is banks competing with one another for funds in their own markets. This drives up the cost of funds for them, too.

This is where central banks come in. These days monetary policy works by targeting the rate banks pay to borrow reserves, which is exactly the rate being bid up. A central bank targets this rate by buying and selling in this inter-bank market. So if there is upward pressure on this rate, central banks are buying paper off the banks to bring it back down, thus providing the reserve funds the banks need. This is what was happening on a grand scale last week in the US and Europe.

So that is where things are at. It is hard to get an overall sense from what is reported as a series of loosely-related anecdotes. The finance section of last week’s Economist was full of stories from all over the world of separate-but-related consequences and causes: postcards from the edge. The Federal Reserve refuses to lower interest rates. A bank in Dusseldorf gets a bail-out after revealing a hemorrhaging, off-balance-sheet, offshore portfolio of American mortgage-backed securities. Big-name Wall Street investment banks beg in the market for injections to save their hedge funds. A French bank suspends withdrawals from certain funds after finding “the complete evaporation of liquidity in certain market segments”. And so on.

Summing up, the Economist‘s anonymous finance columnist concludes:

The financial system will probably survive this sell-off: the global economy looks resilient enough. But the market turmoil may be a dress rehearsal for the real crisis that will emerge when the economy is in poorer shape.

Published in: on 19 August, 2007 at 3:26 pm  Comments (2)  

A nightmarish alternative horrible to contemplate

Scott posts a spam poem at Reading the Maps. I’m also a connoisseur of this artform, although I think it has been in decline since the great wave of stock pump-and-dumps last year. Apparently, these scams actually do/did make the originators some money. Below is one of my favourites from that era. It says something about the source material that a random computer cut-up can generate something simultaneously hilarious and so full of dread.

‘Alexander Downer, media release at DFAT site But the Australian contingent of yes-men for bellicose American masters has been distracted somewhat in recent weeks.


The release of a new audio recording this month from famous al Qa’eda leader and spoken word artist Osama bin Laden went unmentioned by US President George W Bush.

But some analysts now maintain this is the best rather than the worse case scenario, painting a picture of a nightmarish alternative horrible to contemplate. Brown excuses SBS with the usual claims about the necessity of obtaining revenue from rapacious, inhuman corporate interests by selling airtime for the broadcasting of their repugnant messages.

Since making the 17-year old comments for which he has been brought to trial, new documents have apparently been brought to Irving’s attention which have shed new light on the issue.

And half of Israel’s nuclear arsenal will be put at Lebanon’s disposal. But around Australia there was record attendance at marches held to remember Australia’s wars and those that fought in them to such distinction.

But some analysts now maintain this is the best rather than the worse case scenario, painting a picture of a nightmarish alternative horrible to contemplate. ”’How do you justify this logic of having a full arsenal of nuclear weapons, but when it comes to nations such as ours, you do not even allow research? He was slapped again, once on each cheek. ‘Transcript of ABC Stateline Tasmania report on the upcoming State election .

The success of the rigorous community-based health care incentivisation programme for doctors is unfortunately not supported by the Coalition that controls Iraq. The Prime Minister is equal to the Zone of Chaos threat. Occasionally there is something to break the monotony of the long nights of intermittent mortar attack and other modes of Yankee-baiting.

Many of the pictures were also published by Salon. Most time capsules are designed to inform and provide a point of human contact between one generation and their descendents. Local authorities everywhere are prone to losing their pliability when world attention is on them.

But these are only minor contributing factors to the swelling pride in the Australian heart at the dawn of this new century.

Recent interventions in the Middle East have exacerbated rather than alleviated lingering resentment towards the West born of old injustices.

Musharraf expressed shock and disappointment at the publication of caricatures of Mohammed in Europe and the United States. In one incident in Australia’s capital Canberra, the image of Downer’s pixellated face was slapped several times about the cheeks.

Sharon’s condition has not improved significantly since a series of operations were performed to reduce bleeding on the brain.

The potential for carefully cultivated future generations is limitless, as long as this youthful nation stays the course.

In order to make Coca Cola truly democratic – the ultimate dream of the corporation’s executives, and those already drinking the refreshing beverage – some compromise is necessary in some areas.

The war on terror may get us all killed, say our capable leaders, statesmen, and officials. While the United States authorities declare that Bin Laden is alive, somewhere, and probably Pakistan, another possibility is under consideration. Institutional investors and money-men are now keenly reinvesting in companies likely to see significant profits from the production of the new-style vaccine for the deadly disease. Critics of the project say it is unreasonable to present Twenty-First Century humans in this poor light. The Liberal Party does not and has and will never supported the socialist nanny state that places close controls on the lives of the citizenry.

The Australian Government is critical of the Kyoto Protocol ratified by all the nations of the world except Australia and the United States.

In addition to the initial impact on the American psyche, a slow and wearing global war of attrition on American interests is centred on theatres chosen by the US.

Uranium enrichment is a key technology for producing nuclear fuel but also nuclear weapons.

Published in: on 15 August, 2007 at 10:02 pm  Comments (2)  

E. L. Wheelwright, 1921-2007


Last year I wrote a bit of an obituary for Ken Buckley, one of the patron saints of Australian political economy. Now his collaborator, Ted Wheelwright, has died. Wheelwright was possibly the man most responsible for the department I study and tutor in: as a socialist lecturer in Economics at Sydney University, he became a bit of a cause celebre when he was blocked from professorship for the sixth time in 1975. This was right in the middle of the split in Economics that eventually led to a staff strike, an occupation of the Vice-Chancellor’s office, and a 4000-strong student walkout. Eventually Political Economy became an autonomous discipline in its own right. You can read the full story here.

Prof. Frank Stilwell, today’s chair of Political Economy, wrote the obituary for Wheelwright in the Sydney Morning Herald.

Incidentally, this is Political Economy’s last semester as part of the Economics and Business faculty. Next year we move to Arts.

Published in: on 13 August, 2007 at 10:18 pm  Comments (1)  

Central banks to the rescue

You can tell people are freaking out about what’s going on in financial markets around the world when much of the Australian media turns to Steve Keen for expert commentary. Keen’s an Associate Professor in Economics at the University of Western Sydney, but as author of a book called Debunking Economics, he’s not your typical market commentator.

Keen’s blog tracks debt and financial instability in Australia and abroad, and is an excellent, well-researched resource. He is more than a little bearish and has few reservations about predicting a reckoning – maybe not imminently but certainly before too long.

Keen is heavily influenced by an economist called Hyman Minsky. I also like Minsky a lot, and he plays a big role in my thesis. Minsky is known mainly for his ‘financial instability hypothesis’, which, to put it very simply, argues that stability is destabilising for capitalism – good times tempt capitalists into overstretching their credit. In fact, John King writes in his History of Post-Keynesian Economics that Minsky was a classic hedgehog, in Isaiah Berlin’s sense that “a fox knowns many things, but a hedgehog knows one big thing”. 

I think this is a little unfair to Minsky. Although he did drive home this ‘financial instability hypothesis’ in many articles and his major book Stabilising an Unstable Economy, he is misinterpreted as a prophet of doom. What’s often left out of nutshell accounts is the role of the central bank. Minsky’s real message is not that advanced capitalism is likely to suffer another 1929. It is that every time the system has been threatened since the 1960s, central banks have stepped in to shore things up. This has some consequences: flooding the market with liquidity can undermine counter-inflation policy, and the cleansing function of a financial crisis never takes place, so that asset price inflation quickly gets going again, each time from a higher starting point.

This, rather than major financial crisis, has been the outcome of most episodes of financial stress since the 1980s. And, once again, central banks have stepped in over the last few days. The state must be taken into account in any prediction of a serious financial crisis.

Published in: on 11 August, 2007 at 6:56 pm  Comments (1)  

Planes, trains and taxis

Public-private partnerships in Sydney’s transport system notch up another glory: the cost of a train trip from the city to the airport rises 10 per cent, taking it above $13. It was already expensive, but this means that if you’re travelling with at least one other person, a taxi is just as cheap. Reports the Sydney Morning Herald:

The decision to boost ticket prices was based on Westpac’s purchase costs earlier this year: “When the business was sold the new owners paid a price for it, and the Airport Link has to service the investor’s investment.” [Airport Link head John Wilson]

Published in: on 2 August, 2007 at 10:28 am  Comments (1)