Robert Paterson's Weblog

The dollar - a sad story

What this says to me as well as the obvious is that the pursuit of a financial focus as a proxy for wealth is a failure.

Raj on the Value of Nothing - Brilliance in 3 Minutes

 HT Charles Frith

This is the pathway to our future - we go this way or we go nowhere - and you only have to invest 3 minutes to hear the ultimate in coherence - a masterpiece of compression and story telling - I am aghast at how thoughtful he is.

Financial Crisis - Explained in a way I can Understand

Brilliant! - Again you will never hear this in the mainstream media

Who is hot or not - Sovereign Risk

HT Jesse's Cafe Americain

Greece - What's Wrong - Can PEI offer an answer?

Imagine if you were the President of Greece! What would do do? 

At the moment all the debate is about how deep the cuts and how can this be accomplished politically. But what has caused the problems in Greece and maybe in all the countries now under review? For in the end, if we can see the root causes, we might be able to create an agenda other than simply cut and hurt.

As I walked the dogs this morning my mind turned to PEI. A little state of 140,000 people. Is our story that is small enough to understand relevant? 

Does PEI have a real economy?

 

Our energy bill is approaching our income tax threshold. Most of this money leaves PEI. As we approach the ramp up to peak oil, our energy costs may well exceed our tax base. This is so because we have done too little so far to get ready for what is to come. Greece would have the same picture. In a climate like ours about half this bill goes on heating. PEI has the highest commuter rate of any society in Canada and the most dispersed population.

These are all things that we can work on - But for now they remain as minor items.

We import nearly all our food. Our most important agricultural sector has been directed to play in the industrial cash crop sector instead. We are now at the end of this. The 2 big processors are pulling back.

The result:

Our rivers are silted up and filled with chemicals.

Our topsoil is in very bad shape.

Our farmers are broke.

Most of the energy of governments on PEI in the last 15 years has been in trying to prop this system up. Just as they are trying to prop up the lobster fishery that is also in the same trouble - too much capital tied up in an export commodity where the big players have the producers where they want them.

Just as there is lots of potential for a local energy system so there is for a local food system. This is not about 5 big farms all farming the old way, just as local energy is not about finding our own oil. It is about a new connected system of small producers using very different methods.

PEI has almost no local manufacturing. Nearly everything we buy comes from away.

PEI has only a tiny local financial system - the Credit Unions. Most of our savings leave the Island.

There is a small service sector.

There is very high unemployment and underemployment.

This has led to a large underclass that drives a large support demand in social and health services.

The government has become the centre of the economy. It employs lots of people who, as in Greece, have gold plated wages and benefits. It supports the underclass with just enough to struggle by. It pays an ever growing health bill that now is over half the budget.

There is not the real tax base to support this and other areas such as energy and food suck as much money as our tax base out of the Island economy too.

PEI has been borrowing to cover the deficit. We have been drawing down our natural capital to pay the deficit. We have been drawing down our human capital to pay.

But at some point, like Greece, the bill will have to be paid. Like Greece the pain will be politically impossible and like Greece an outcome could be chaos.

Can we avoid this?

I think that if we started to go for it in local energy and food, we might.

We start keeping more and more money in our economy. We could save at least $200 million on the heating bill alone at current prices. With real effort, we could reduce our energy bill by half. We could pump at least $100 million into food.

We could create lots of real employment as well. We would begin to restore our natural and human capital.

Please not waste this crisis. For there comes a point - maybe Greece is there - where there can be no fix.   

Banking? No A Casino!

As many have said — though not many politicians in either party — something is fundamentally amiss in a financial culture that thrives on “products” that create nothing and produce nothing except new ways to make bigger bets and stack the deck in favor of the house. “At least in an actual casino, the damage is contained to gamblers,” wrote the financial journalist Roger Lowenstein in The Times Magazine last month. This catastrophe cost the economy eight million jobs.

via nytimes.com

Wall Street describes itself as the centre for innovation that helps the economy. Yes it is indeed a centre for innovation but for practices that help only itself and that have taken the life blood out of the economy.

They have found a system that extracts value from the real economy and gives it to them.

 

This slide shows the scale of the skimming since the 1980's and the advent of proprietary trading and derivatives. All of this was made possible by the access by the banks to vast pools of capital. Caused in turn by the change in regulation.

The heart of the matter is capital allocation. No insurance for trading. This means that the trading and deposit taking have to be severed as they were before the change in the 1980's.

If this continues, they cannot help themselves but make a bad situation worse.

But the will is not there to do this - so, we wait for the next show to drop as it must.

Meanwhile the markets ramp up again. Will you profess to be surprised when it all crashes down again? Will you play the Casino once again, knowing that the game is rigged in the hope that you will be smart enough to get out in time? Will you get angry with the politicians then?

Posted via web from Rob's posterous

Wall Street Should not be Caesar's Palace

WHILE the Securities and Exchange Commission’s allegations that Goldman Sachs defrauded clients is certainly big news, the case also raises a far broader issue that goes to the heart of how Wall Street has strayed from its intended mission.

Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet — like those in a casino — that allowed speculators to increase society’s mortgage wager without financing a single house.

via nytimes.com

Gambling is legal in a few states. Most gamblers know that in the end, the House Wins. The House wins because it rigs that game so that they have to win. You can have a good day, week, month, year. But in the end the House will win.

Wall Street is Las Vegas on Steroids.

The big houses like Goldman sit in the centre of the "Flow" - they see things we can never see. They can shape the game.

And it has been a game since the 1980's The key has been capital. Prior to the 1980's, true investment banks had limited access to capital. They truly had to live on their wits. Goldman had a traditional partner structure that made the long term key and prudence essential. You only got paid out in your last 5 years from all the accumulated increase in value for the firm.

But when the status of investment banking changed and they were allowed to access outside capital, they could control the game. The temptation was too great not too.

So quickly it was the trading rooms - that had been the "barrow" boys that made the money by trading for their own account. Power shifted from the "Bankers" who used a lifetime of relationships and intelligence to do business to the people in the trading rooms who were street smart and who used the firm's capital to give them leverage.

The Bankers lost to the Brokers. The focus on the real economy shifted to the Casino.

I was in the business for 15 years - just as this transition took place and was both a broker and a banker. Regretfully I was a major proponent of the shift. Back then, I did not have the knowledge as to how this would play out. Who did?

This last week has given me some hope that the reality of what Wall Street has become is emerging into the public domain.

Time to shed even more light about the distortion and danger of the "Broker" Casino.

All power corrupts. Total power corrupts completely!

Posted via web from Rob's posterous

Goldman and the SEC - A Tipping Point?

But with its latest lawsuit against Goldman Sachs, the most powerful, most feared and most envied firm on Wall Street, the S.E.C. is sending a signal that it is back on the beat and that it is going after very big targets.

In interviews this weekend, Mary L. Schapiro, the commission’s chairwoman, and Robert Khuzami, its new director of enforcement, said the agency was stepping up both its rule-making and its investigations in the wake of the financial crisis.

via nytimes.com

The British executed Admiral Byng for not being agressive enough. Voltaire quipped "in this country, it is wise to kill an admiral from time to time to encourage the others"

 

So with Goldman Sachs. By taking on Goldman in one case that the SEC have a good chance on, the whole pack of cards which is the Global Casino could tumble. You can feel how for instance the UK Government, on the hook for billions in bailout to RBS, a "victim" of Goldman; how the German Government, on the hook for Greece, another Goldman "client" are gearing up as they follow the case.

The regulator's ambition, to wound Goldman so badly that the rest will get the message.

A regulator cannot look at every deal. But if it is clear that they will make examples, then the real risks for the player reach a level where some caution is merited.

No British Admiral after Byng for 150 years made the same mistake of caution in the face of the enemy. Byng's execution worked.

Posted via web from Rob's posterous

When the Trucks Stopped in August 2010 on PEI - The Locavore Challenge UPEI Feb 6

This Saturday (Details Here) I will join a gang of people at UPEI to spend the day thinking about the practical aspects of shifting much of our food system to a local one.

Behind this is the context of Food Security. We don't really think much about how dependent we are on cheap and easy to get oil. So in my bit, I thought we might imagine what might happen if something happened to take this away. What happened if this happened this year? What would this mean to how we live?

 

Ian Petrie who was the CBC TV correspondent that had the Food Beat here on PEI has kindly offered to interview me. We will imagine that this is 2020 and that we are looking back. We will focus on what happened and what we did.

I was inspired in this by Jason Bradford who pioneered this scenario in great depth. You can see his work here. He makes the case using the facts of our vulnerability that apply to us.

Many of the ideas I also took from the Cuban experience when they were cut of from oil - Here is a very good film about what happened and how they responded.

The story starts here:

Chapter 1 - The end of the world as we know it
In August 2010, the trucks stopped. War in the Middle East broke out when the Israelis bombed the Iranian nuclear facilities. The Iranians blocked the Straits of Hormuz for 6 months. Gas prices went up to $12 a gallon when you could get it. On the Eastern seaboard of Canada where we depend solely on the world market supplies were very spotty and PEI was on the bottom of the list. 

Of course the financial markets collapsed as well and credit dried up - there was no room left to bail anyone else out. 

So when the straits were reopened the global supply system was not there any more. The global economy had lost its connective tissue.

Canada balkanized into regions. The Atlantic provinces were largely cut off from the rest of Canada and PEI from the mainland.

We were on our own.

The rest of the scenario is after the jump - interested in how you might fill in the gaps as I have only done a sketch

Bonuses on Wall Street - The old myth - the New Reality

If we don't pay bonuses then our good people will walk to other firms - used to be true but now...

I deserve a bonus because I made so much money. Oh did you? No you used the leverage of your bank to make the money. You used the bank's capital to make the money. Now that capital belongs to the tax payer.

The bonus issue has to be addressed.

You can't pay based on the use of the firm's capital and leverage. That is not in the control of the trader or the banker. The gearing is the issue.

Using the gearing of what is in effect free capital is what has killed our financial system. No downside for the person = ultimate irresponsibility.

In the good old days - when I was young and a partner at Wood Gundy - we used our own money to make money. We risked the firm's money that was provided by us. Then you really did make the money. You argued your share of the firms capital and then you took the risk. If you lost, all would have to pay - you paid the most because you would have hurt your partners.

This is where the control can return. It is not about limiting the payout. It is is putting the risk back into the equation. To do that you have to take the firms' capital off the table. You have to put the bonus pool into the risk.

In the old days again at Goldman - it was assumed that you would leave the firm in your early fifties late forties. Your bonuses accumulated in the capital account of the firm until you sold at book in your last 5 years. Of course if the traders etc blew the pool, you left with nothing. That never happened but it could and it put the discipline into the deal.

The practice today is not based on risk - everyone expects a bonus. Put the risk back and put back the idea of being a partner.

The goal in the firm is to make partner. The big money comes from retiring or leaving the firm as partner where the pool of capital has been built by a successful enterprise over time