So this is how they do that!
Some videos are just fun to watch. Whether you are interested in aviation or not, this blast through the making of an aircraft by Boeing makes it all look quite easy really:
By John Lewis
Category: Business
Breaking up the big banks
There are so many excellent Blogs out there that it is difficult at times to keep track of key articles. But here’s one reproduced from Washington’s Blog. It was published on the 30th April and sets out some powerful reasons why the so-called Too Big To Fail banks should, and must, be broken up. It is reproduced with permission. Ed.
5 Reasons We Must Break Up the Giant Banks
As everyone from Paul Krugman to Simon Johnson has noted, the banks are so big and politically powerful that they have bought the politicians and captured the regulators.
But the giant banks are not only dangerous because they skew the political system. There are five economic arguments against the mega-banks as well.
Impaired Competition
Fortune pointed out last February that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation’s smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
So the very size of the giants squashes competition.
Less Loans, More Bonuses
Small banks have been lending much more than the big boys.
The giant banks which received taxpayer bailouts actually slashed lending more, gave higher bonuses, and reduced costs less than banks which didn’t get bailed out.
Lack of Transparency in Derivatives
JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country’s derivatives risk, and 96% of the exposure to credit derivatives.
Experts say that derivatives will never be reined in until the mega-banks are broken up.
Increased Debt Problems
As I pointed out in December 2008:
The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:
The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.
In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don’t have, central banks have put their countries at risk from default.
Now, Greece, Portugal, Spain and many other European countries – as well as the U.S. and Japan – are facing serious debt crises. See this, this and this.
By failing to break up the giant banks, the government is guaranteeing that they will take crazily risky bets again and again and again.
We are no longer wealthy enough to keep bailing out the bloated banks. We have serious debt problems. See this, this and this.
(Anyone who claims that Chris Dodd’s proposed “reform” legislation will prevent banks from getting bailed out again is wrong. If the giant banks aren’t broken up now – when they are threatening to take down the world economy – they won’t be broken up next time they become insolvent, either. And see this.)
Unfair Competition and Manipulation of Markets
Moreover, Richard Alford – former New York Fed economist, trading floor economist and strategist – recently showed that banks that get too big benefit from “information asymmetry” which disrupts the free market.
Nobel prize winning economist Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market:
“The main problem that Goldman raises is a question of size: ‘too big to fail.’ In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information.”
Further, he says, “That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that’s why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you’re going to trade on behalf of others, if you’re going to be a commercial bank, you can’t engage in certain kinds of risk-taking behavior.”
The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorted the markets – making up more than 70% of stock trades – but which also let the program trading giants take a sneak peak at what the real (aka “human”) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).
Goldman also admitted that its proprietary trading program can “manipulate the markets in unfair ways”. The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government’s blessings.
Again, size matters. If a bunch of small banks did this, manipulation by numerous small players would tend to cancel each other out. But with a handful of giants doing it, it can manipulate the entire economy in ways which are not good for the American citizen.
No wonder virtually every independent economist and financial expert is calling for the big banks to be broken up.
Some argue that it is logistically impossible to break up the behemoths. But if we broke up Standard Oil, we can break up the giant banks as well.
No, No, No – STOP IT!!!
A suit was filed last week in the US against Goldman Sachs by the US government’s financial watchdog, the Securities and Exchange Commission.
GS is an example of all that is morally and practically wrong with capitalism. This is an obscenely-rich company whose ludicrously-rewarded executives do not actually do anything that I would describe as “work”. Their activities do not in
my estimation benefit the world in any meaningful way. They are parasites which feed off the backs of real workers (nurses, police, teachers, firemen, bridge-builders, electricians and so on) and – as in the recent shambles – end up practically killing the host.
There is a good case for forcibly putting them out of business and completely reorganising financial services, with the accent on SERVICES. A functioning society needs investment and jobs. Banks should be there to look after money and provide investment to companies, not shuffle around paper to make themselves obscenely-rich.
GS and others apparently have some sort of electronic system that operates automatically and instantaneously to market movements, allowing them to make vast sums by doing no work. NO WONDER bright graduates seek to join such leech-like firms instead of becoming teachers, researchers or otherwise seeking to do something useful for society apart from themselves.
If they are guilty, I hope we see the company broken up and put out of business. The criminal deception is no different from that at Enron, where people pretending (with already vast salaries) to serve the public were conniving to do criminal damage to put up the cost of their product. They were given a severe penalty, and it should be the same for any white-collar worker if found guilty. I don’t have much hope for the eventual down-to-earth-sizing of GS (they are well-connected and can afford good lawyers …), but I am not the only person angry about all this greed. Get past the cosy confines of Wall Street bars into the real America and there are plenty more who feel the same way.
By Chris Snuggs
Innovation? What innovation?
We’ve always known “why?”
Eureka!
We can carry on doing the same old things!
Along the way, we can improve, sell more, and cut costs.
But in end, sooner or later, we need to do something different.
That is why we innovate.
Now we know “how?”
Nowadays, everyone is talking about innovation!
Many things seem mysterious for a long time, and then we bring them under control.
It happened in “sales”, then in “quality”, now it is the turn of “innovation”.
In the past, a few people knew that they could manage innovation; now everyone knows.
There are processes for managing innovation using “ideation”, “co-creation” and, even, “open innovation”.
That is how we innovate.
But do we know “what?”
How do we know what to innovate?
Now there is a question!
By John Lewis
Today’s Quickie
“Son, your ego’s writing checks your body can’t cash.”
Well, this may be old hat for specialists but it surprised me. Is the same true for Britain? In either case, as Friedman says, it suggests we should explore more forcefully the ways we could aid business startups.
I always find Thomas Friedman excellent value for the time invested in reading him! See here:
“Here’s my fun fact for the day, provided courtesy of Robert Litan, who directs research at the Kauffman Foundation, which specializes in promoting innovation in America: “Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less,” said Litan. ‘That is about 40 million jobs. That means the established firms created no new net jobs during that period.’”
And if you want to know where the opening quote comes from, read the Friedman article!
By Chris Snuggs
Should you invest in U.S. bonds? Part 4
This is the concluding part four of a multipart series on the factors that drive U.S. and foreign bond prices and yields.
[Part One is here, Part Two here, Part Three here Ed.]
Bond’s in a weak or faltering economy will generate a lower return to lenders than bonds in a strong economy, absent inflation or any other material changes in the purchasing power of the currency. Weak demand for goods and services means weak demand for financial capital which means low rates of return on financial capital.
The policies of the government can increase the borrowing costs of private industry. Fiscal policy that increases taxes reduces the profitability of projects and undermines the ability of companies to pay coupons and repay principal. Monetary policy that increases the money supply may lead to inflation, which also increases the cost of borrowing and reduces economic activity.
Lastly, and of the greatest concern of late, is the level of borrowing by the U.S. government. Debt levels are at record highs, with no relief in sight. The AAA rating of U.S. debt is reportedly in jeopardy (Chicago Tribune editorial).
Both existing and new lenders worry about the ability of the U.S. government to repay. Yes, the can simply roll over existing debt by raising taxes or creating money to retire old debt and replace it with new, but the interest rate required by new lenders goes up as the ability of the private economy to sustain tax revenues falls and the risk of inflation rises (Moody’s explains U.S. bond ratings).
Both factors are in play now: an anemic economy with little hope that this administration will undertake policies that support business, and a ballooning money supply and weak dollar that undermine the purchasing power of the returns to lenders. The returns to U.S. debt may still be healthy relative to those one can earn in other countries, but the spread is shrinking. The private economy remains fundamentally strong, thanks to the work ethic of the American people and the profit motive of the capitalistic system, but the policies of the U.S. government are straining those resources.
By Sherry Jarrell
Should you invest in U.S. bonds? Part 3
This is part three of a multipart series on the factors that drive U.S. and foreign bond prices and yields.
[Part One is here, Part Two here, Ed.]
The yield on a bond is made up of several components. Some think of the return on a bond as the sum of the risk-free rate of interest (how impatient we are to get our money back, or how much we need to be compensated to delay consumption) and a risk premium (the additional return we require to compensate us for the risk of default, the risk the bond will be called, the risk of inflation reducing the purchase power of the repaid dollars, and many other sources of risk as outlined in the most recent article in this series).
Another useful way of thinking of the return on a bond is as the sum of the real rate of interest and the expected rate of inflation. But what is the real rate of interest? We never actually observe that rate, unless of course the inflation rate is zero and then the real rate is just the nominal rate set in the market.
It is useful, however, to think about what drives the ability of a company to generate a real rate of return to lenders, for this is essence of capitalism and risk-taking and creating economic value and growth.
A firm’s asset cash flows support the real returns to its lenders – all kinds of lenders (debt, equity, hybrid, and derivative security holders). A firm will want to borrow more, and is willing to pay a higher interest rate for those funds, the more profitable are the projects they want to undertake, or the greater the number of profitable projects. Profitability, in turn, is determined by the relationship between demand and supply: how much does society value a good or service, and how many resources does the business use in producing the good or service. As the marginal productivity or efficiency of a business goes up, it can afford to profitably fund more projects. So the core driver of the real return on bonds is the strength of the underlying economic activity of the private economy.
Or, when viewed from the investor’s side, note that an investor will purchase a bond, or lend money to a company, if they expect to earn a return sufficient to compensate them, first, for delaying consumption and, second, for bearing the various sources of risk or uncertainty associated with the bond’s cash flows or return.
By Sherry Jarrell
U.S. unemployment remains at 9.7%
Little reason for celebration
The official unemployment rate of the U.S. economy remains at 9.7%, and the underemployment rate increased to 16.9%. These numbers represent a real tragedy for many Americans.
While the White House tries to celebrate the creation of 162,000 new jobs last month, at least 48,000 of these new jobs are government jobs, specifically temporary census workers, who are doing unproductive work and are being paid with taxes collected from the rest of the private economy.
Employment also increased in temporary help services and healthcare, but continued to decline in financial activities and in information, which is interesting given the recent comments by President Obama that the government takeover of the student loan program tucked into the health care bill “took $68 billion from banks and financial institutions.”(Obama’s April 1 remarks) That’s a lot of jobs, Mr. President.
Seems like there is more concrete evidence that, rather than creating jobs, the President’s policies are costing the economy jobs.
by Sherry Jarrell
Let’s stop messing with the clocks!
Crazy, outdated concept – adjusting clocks twice a year!
The whole concept of adjusting the clocks with the seasons, “Daylight Saving” as the Americans call it, seems increasingly ludicrous the more that one thinks about it. In the UK, it is called British Summer Time and is abbreviated to BST; I call it British Silly Time.
The expensive consequences for computer systems, airlines, railways and many other systems and organisations having to mess about with times and schedules are completely unnecessary. And I have lost count of the number of times I have heard of people missing calls or online meetings due to misinterpretations of time zones and distortions in the name of “daylight saving”.
One would have thought that people who spend the most time involved with nature would find it the most ludicrous and that among those would be farmers. However, it seems that this is not the case as there is a discussion about introducing permanent BST or even “double BST” on the UK National Farmers Union (NFU) website.
The news article is titled “Should we change the clocks?”. My answer is a simple “no”. In case the answer is unclear, I mean “no”! That is “do not change the clocks”! That is “leave the clocks alone”! That is “stop messing with the clocks”! In the UK that means “leave the clocks on GMT, the correct time”!
Does no one else understand this? Well, thankfully, many people do. For example, the whole of the aviation industry uses Zulu time (UTC) worldwide. Let’s be clear what that means. When pilots get a weather reports from any airport in the world (whether it is Heathrow or Los Angeles airport), the times are in Zulu time which is UTC/GMT. Yes everyone uses UTC.
The really funny part is that the NFU news article even states “analysts have claimed an extra hour’s daylight could be worth £3.5 billion a year to the economy”. This is the ultimate fallacy.
Let us be clear about something, in case you had not noticed: THERE IS NO EXTRA DAYLIGHT!! Where, on earth, did farmers get the idea that there is?!
By John Lewis
So what next in the global merry-go-round?
Well, it is a Chinese saying, “May you live in interesting times”!
A couple of weeks ago on Learning from Dogs, there was an article reminding readers that the web has been around for 20 years and Sir ‘Tim’ Berners-Lee is still hard at it in terms of Internet innovations. And to support this, today accompanying this Post is one on what the BBC is doing to commemorate the event.
The Internet has completely reformed the way that ordinary people get access to information. Stratfor is a great example.
From their web site:
STRATFOR’s global team of intelligence professionals provides an audience of decision-makers and sophisticated news consumers in the U.S. and around the world with unique insights into political, economic, and military developments. The company uses human intelligence and other sources combined with powerful analysis based on geopolitics to produce penetrating explanations of world events. This independent, non-ideological content enables users not only to better understand international events, but also to reduce risks and identify opportunities in every region of the globe.
One can subscribe to a range of free reports and it came to pass that a Stratfor report on China came into my in-box.
Stratfor generously allow free distribution of this report and because the relationship between China and the USA has so many global implications, the report is published in full, as follows:
Learning from Dogs 