Quotulatiousness

April 18, 2011

The real secret weapon of the “China economic miracle”

Filed under: China, Economics, Government — Tags: , , , , — Nicholas @ 10:35

Chriss W. Street thinks the Chinese banks are about to suffer a crisis moment:

It is ironic that China is demanding greater control of the World Bank and International Monetary Fund, just as the nation’s banking system is about to be devastated by the white hot flames of inflation.
From a distance, China’s economy seems to be the poster child of sustainable growth. Recent government reports show the economy expanding by 9.7%, retail sales up a blistering 17.4%, foreign reserves at $3 trillion, and inflation only 5.4%. But these statistics mask a dark side; Chinese communist authorities have been artificially holding down fierce inflationary pressures by subsidizing consumer prices.

[. . .]

The less known and far more important secret-weapon of the “China Economic Miracle” is the absolute control of the banking industry by China’s four largest state-owned banks (“SOB”); Industrial and Commercial Bank, Agricultural Bank, People’s Bank of China and Construction. Since the government does not provide adequate social welfare programs and restricts its citizen’s investment options to bank accounts, about 40% of Chinese household income is deposited in SOBs each month. The SOBs then leverage the deposits by ten times and loan 75% of this massive amount of cash at extremely low interest rates to state-owned-enterprises (“SOE”). The other 25% of lending is allocated to real estate development.

China is no stranger to bankers making risky loans to communist party officials and their crony real estate developers. During the Asian Financial Crisis of the mid-1990s, it is estimated that 40% of all SOB loans were non-performing and most were written off. The Chinese paid for the SOB losses with a 76% devaluation of their currency that crushed the people’s buying-power by 76%. From 1997 to 2004 Chinese frivolous lending was somewhat restrained, but since 2003 the bureaucrats have mandated a massive expansion of lending. In comparison to the U.S. and Europe where bank lending is flat, SOBs have been expanding loans by 25% annually.

H/T to Jon for the link.

April 11, 2011

SSL is “just an illusion of security”

Filed under: Technology — Tags: , , , , — Nicholas @ 10:09

SSL (Secure Sockets Layer) is critically important to safe communications on the internet. It may also be “hopelessly broken“:

SSL made its debut in 1994 as a way to cryptographically secure e-commerce and other sensitive internet communications. A private key at the heart of the system allows website operators to prove that they are the rightful owners of the domains visitors are accessing, rather than impostors who have hacked the users’ connections. Countless websites also use SSL to encrypt passwords, emails and other data to thwart anyone who may be monitoring the traffic passing between the two parties.

It’s hard to overstate the reliance that websites operated by Google, PayPal, Microsoft, Bank of America and millions of other companies place in SSL. And yet, the repeated failures suggest that the system in its current state is hopelessly broken.

“Right now, it’s just an illusion of security,” said Moxie Marlinspike, a security researcher who has repeatedly poked holes in the technical underpinnings of SSL. “Depending on what you think your threat is, you can trust it on varying levels, but fundamentally, it has some pretty serious problems.”

Although SSL’s vulnerabilities are worrying, critics have reserved their most biting assessments for the business practices of Comodo, VeriSign, GoDaddy and the other so-called certificate authorities, known as CAs for short. Once their root certificates are included in Internet Explorer, Firefox and other major browsers, they can’t be removed without creating disruptions on huge swaths of the internet.

April 5, 2011

Grameen bank founder loses final appeal

Filed under: Asia, Economics, Law, Liberty — Tags: , , — Nicholas @ 09:09

The founder of the revolutionary micro-capital Grameen Bank has been removed from position of managing director:

Nobel laureate Muhammad Yunus has lost his final appeal in Bangladesh’s Supreme Court against his sacking from the Grameen micro-finance bank he founded.

The court upheld the decision by the central bank to remove him from office.

The bank said Professor Yunus had been improperly appointed while past retirement age.

But Professor Yunus said the attempt to remove him from the bank had been politically motivated.

The Grameen Bank has pioneered micro-lending to the poor by giving small loans to millions of borrowers.

March 11, 2011

Another oddity of British law

Filed under: Britain, Law, Liberty — Tags: , , , , — Nicholas @ 17:19

I was unaware, until today, that it is possible to get a legal injunction that effectively prevents anyone from knowing that the injunction has been issued: a “super injunction“:

The existence of the draconian injunction — so strict it prevents $PERSON being identified as a $OCCUPATION — was disclosed by John Hemming, a back-bench Liberal Democrat MP, in a question during a business debate at the House on Thursday morning. His comments are protected by parliamentary privilege.

He said: “In a secret hearing $PERSON has obtained a super-injunction preventing him being identified as a $OCCUPATION.

“Will the government have a debate or a statement on freedom of speech and whether there’s one rule for the rich like $PERSON and one rule for the poor?”

Leader of the House Sir George Young said a forthcoming Westminster Hall debate would explore freedom of speech, adding: “I will raise with the appropriate minister the issue he has just raised.”

The terms of the injunction are so strict that the Daily Telegraph cannot reveal the nature of the information that $PERSON is attempting to protect.

Because I am not rich, I’ve chosen to avoid including any information which may fall under the strict terms of the injunction . . . others are not being as careful, so you can find out who the rich wanker is and what occupation he wants to prevent the public from discovering by reading the whole thing.

March 10, 2011

Time to audit the Federal Reserve?

Filed under: Economics, Government, USA — Tags: — Nicholas @ 10:51

March 8, 2011

Canadian banks forced to enter 21st century

Filed under: Bureaucracy, Cancon, Economics, Government — Tags: — Nicholas @ 12:27

In a long-overdue move, the Canadian government is putting pressure on the banks to improve their glacial cheque-clearing time:

Ottawa is cutting the amount of time banks can hold cheques up to $1,500 to four business days from seven for consumers and small- and medium-sized businesses.

The measures detailed today, part of last year’s budget, will also give consumers “immediate access” to the first $100 deposited by cheque. There will be a 30-day period for comment.

“Lower-income seniors, Canadians without significant balances in their accounts, younger Canadians who do not have a long banking history, and people who receive cheques from newer employers or clients are often subject to longer cheque hold periods,” the Department of Finance said. “These are often the Canadians who most need quick access to their funds.”

This is great news for me personally: I’m self-employed. I bill my clients directly for a month’s work, they take time to process my invoice and issue a cheque, then I deposit it into my business account. Seven business days later after that, I can actually get some of that money into my personal account. It’s amazing how long seven business days can seem when you’re juggling the mortgage, property tax bills, utilities, and all the other things that can’t be postponed to a time when the bank lets you get at your own money.

H/T to Elizabeth for the link.

February 24, 2011

The core of the Irish financial crisis

Filed under: Economics, Europe, Government — Tags: , , , , — Nicholas @ 07:13

Theodore Dalrymple explains the underlying reason for Ireland’s financial woes:

If you want to study the economic crisis of the last few years, go to Ireland, where you will find it in its purest form. Ireland is a small country, with a population of just 4.4 million, and the connection between clientelistic politics, bankers’ cupidity, and the mass psychology of bubble markets is easiest to comprehend there.

Dotted around the country, outside of almost every town and sometimes in the middle of nowhere, are housing estates — completed, half-completed, and never-to-be-completed — which are unsaleable, will almost certainly never be inhabited, and are destined to fall into graceless ruins. Some 300,000 new dwellings now stand empty in the Irish Republic, a number whose equivalent in the United States would be approximately 21 million.

[. . .]

A house in Shrewsbury Road, Dublin, sold for $80 million in 2005 but, now standing empty, is on the way to dereliction, and no house on the road — a millionaires’ row — has sold for the last two years, despite a fall in prices of at least 66 percent. During the boom, taxi drivers and shop assistants would tell you about the third or fourth house they had bought — on borrowed money, of course — and of their apartments in Europe, from Malaga to Budapest to the Black Sea Coast of Bulgaria. It was not so much a boom as a gold rush, or a modern reenactment of the Tulipomania.

February 17, 2011

Victor Shih interview on China’s economy

Filed under: China, Economics, Military, Politics — Tags: , , , , — Nicholas @ 07:35

The Browser interviews Victor Shih:

What do people get most wrong when they think of the Chinese economy?

The biggest misperception about China is that it’s a dynamic market economy — it isn’t. It’s a fast-growing, state-dominated economy with some dynamic, private-market aspects. If you look at investment, a main driver of growth, much of it is going to state-owned enterprises (SOEs) or shareholding companies dominated by state entities. Or it’s going directly to government investments carried out at a central or local level. The misperception has abated recently following Richard McGregor’s book on the Chinese Communist Party. People are realising that the party is still behind much of what happens in China.

[. . .]

Your first choice is Yasheng Huang’s Capitalism with Chinese Characteristics. I believe this book successfully demolishes the idea that China is developing a new economic model called ‘market authoritarianism’.

I think Yasheng goes a little too far with some of his claims. But the broad outline is correct. There was a period of healthy organic growth in the 80s, driven by the de facto private sector. Many township and village enterprises were collectives or owned by the local government. But in reality they were private enterprises. This changed in the mid-90s, especially with the adoption of the ‘grasping the large and letting the small go’ policy that circumvented the special interests in the state sector. When Deng Xiaoping was alive, his executive vice premier, Zhu Rongji, wanted to bankrupt or merge many of the smaller state-owned enterprises into larger ones. It was a political tactic to further reform. And it worked.

The problem was that it created these giant, state-owned enterprises. Recent statistics reveal the state sector made a profit of 2 trillion renminbi last year, of which the 122 largest SOEs made 1.35 trillion. They have combined assets of over 10 trillion dollars and have become an enormously resourceful and powerful interest group. Their CEOs have numerous ties with top political leaders and sit on the party’s central committee. Most bank loans, issued bonds and stock-listing proceeds in the system go to these conglomerates. There’s still a private sector but it has been squeezed tremendously, especially in the last two years.

[. . .]

Most investment bankers like to talk things up, but that’s not something we can accuse Carl of doing.

By the late 90s, China’s banks were technically insolvent because the non-performing loans ratio was 40 to 50 per cent. Carl’s still a big fan of Zhu Rongji, the former prime minister. One of Zhu’s greatest achievements was to ‘solve’ the problems in the banking sector by setting up asset-management companies and recapitalising the banks. Today, of course, the banks are still lending very recklessly despite a lot of reform — the formation of credit and risk-management committees, for example. The banks continue to require bailouts and recapitalisation from the Chinese government, which props them up so that they can sell these bank shares to the public in Hong Kong or Shanghai. Carl sees this process as a kind of Ponzi scheme.

February 3, 2011

How bad is Ireland’s banking situation? Try “spectacularly bad” and you’re close

Filed under: Economics, Europe — Tags: , , — Nicholas @ 17:28

Michael Lewis tries to provide some idea of the scale of the problem to American readers:

It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. To get some sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

That’s one of the three big banks the Irish government had to help. The other two may be in worse shape. You could say Ireland’s banks are awful:

Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers set some kind of record for destruction. Theo Phanos, a London hedge-fund manager with interests in Ireland, says that “Anglo Irish was probably the world’s worst bank. Even worse than the Icelandic banks.”

Ireland’s financial disaster shared some things with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while Icelandic males used foreign money to conquer foreign places — trophy companies in Britain, chunks of Scandinavia — the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was to buy Ireland. From one another. An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.

As mentioned in this post yesterday, the Irish who can do so are starting to head to greener pastures. A thousand a week in net emigration over the last year and a half.

H/T to Tyler Cowen for the link.

December 22, 2010

In Soviet America, bank robs you!

Filed under: Bureaucracy, Economics, Law, USA — Tags: , — Nicholas @ 12:19

All joking aside, how is this allowed to happen?

The NYT reports on a growing phenomenon of wrongful foreclosure by US banks on homeowners who are caught up on their mortgage payments — and on homeowners who have no mortgage at all. In some cases, homeowners return from vacation to discover their locks changed and their every earthly possession sent to the dump (one woman lost her dead husband’s ashes when her bank burgled her ski chalet). Prominent in the list of banksters who rob innocent people of their homes and all their belongings? Those upright guardians of morality at Bank of America, who have decided that their customers can’t choose to contribute to Wikileaks’s defense fund.

H/T for the headline to commenter “Doramia“.

December 3, 2010

Reactions to the Irish financial crisis

Filed under: Economics, Europe — Tags: , , , , , — Nicholas @ 09:09

Kevin O’Rourke sees it as almost a kind of bereavement:

It is one thing to know that someone you love is terminally ill; their death still comes as a shock.

I certainly don’t want to compare the arrival of the EU-IMF team in Dublin last week to a bereavement. But I was surprised at how upsetting I found it, given that it came as no surprise. It had been clear for a long time that the blanket guarantee given to the liabilities of Ireland’s rotten banks, in September 2008, had saddled the State with a debt that was too big for it to handle. Ten successive quarters of declining real GNP, and one attempt too many to draw a line under the losses of our banks, made our exclusion from international capital markets inevitable. But to know something is one thing; to see it actually happen is something entirely different.

I am not alone in feeling this way, it seems. The economics editor of the Irish Times, Dan O’Brien, wrote that

“nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.

This is not to say that we would be happy to have our country’s affairs managed by the current, disgraced, government. I yield to no-one in my loathing of the men and women who have done this to my country. What has been the intellectual low-point of the last couple of years? Was it the cash-for-clunkers stimulus package (Ireland does not produce any cars)? Or the statement by our Finance Minister that Ireland need not fear a bank run, since Ireland is an island? Or the biggest Irish joke of them all, which underpinned the bank guarantee in the first place: that if we wanted investors to retain confidence in the creditworthiness of the Irish State, we needed to make sure that nobody who invested in our (private sector) banks ever lost a penny?”

H/T to Tim Harford for the link.

November 30, 2010

Assange says next target is a “major American bank”

Filed under: Media, Technology, USA — Tags: , , — Nicholas @ 07:35

Julian Assange talked to Forbes about the next big WikiLeaks release of confidential data:

Early next year, Julian Assange says, a major American bank will suddenly find itself turned inside out. Tens of thousands of its internal documents will be exposed on Wikileaks.org with no polite requests for executives’ response or other forewarnings. The data dump will lay bare the finance firm’s secrets on the Web for every customer, every competitor, every regulator to examine and pass judgment on.

When? Which bank? What documents? Cagey as always, Assange won’t say, so his claim is impossible to verify. But he has always followed through on his threats. Sitting for a rare interview in a London garden flat on a rainy November day, he compares what he is ready to unleash to the damning e-mails that poured out of the Enron trial: a comprehensive vivisection of corporate bad behavior. “You could call it the ecosystem of corruption,” he says, refusing to characterize the coming release in more detail. “But it’s also all the regular decision making that turns a blind eye to and supports unethical practices: the oversight that’s not done, the priorities of executives, how they think they’re fulfilling their own self-interest.”

September 12, 2010

QotD: Ireland’s post-boom cleanup

Filed under: Economics, Europe, Quotations — Tags: , , — Nicholas @ 00:30

It’s not a good sign when the government has to intervene to prevent a run on a bank that is already owned by the government, but apparently, that’s what it’s doing with Anglo-Irish bank [. . .] One guesses that [. . .] the restructuring will cost a lot, and the “asset-recovery” bank will be worth very little. The Irish economy has a lot of fundamentals going for it — educated population, good corporate tax rates, and considerably fewer regulatory barriers to doing business than you find in Italy or Greece. But as a real economic boom, driven by European integration, brought increasing incomes, the Irish went on a borrowing binge even worse than our own, and inflated their boom into a bubble. One of my favorite stories of the period concerns a friend of mine, an Irish American who was married to an Irishman living in Galway. The level of status-competition that suddenly blossomed among her relatives and in-laws led her to consider opening a boutique that would literally specialize in ugly things which cost unreasonable sums of money.

Cleaning up after that consumer frenzy is going to be long and painful. As it will be for us, though less so.

Megan McArdle, “Ireland Moves to Shore Up State-Owned Bank”, The Atlantic, 2010-09-09

July 15, 2010

Reasons not to get angsty over China’s growth

Filed under: China, Economics, Government, USA — Tags: , , , — Nicholas @ 10:02

The ever-sensible and highly entertaining Monty points out that Americans fretting over the growth of the Chinese economy are bothered over (comparatively) minor issues:

The angst over China’s economic ascent continues to smell rather strongly of the same panic the US felt over Japan in the 1980’s. I respond to this panic in two ways: 1) I am happy for the average Chinese citizen, who is finally seeing some benefit from their labor after 400 years of failure and ineptitude — they deserve any success that comes their way; and 2) America is in the enviable position of being able to worry about unlikely hypotheticals because we are the world’s largest economy and will continue to be so for much of the 21st century and perhaps beyond. We face severe problems — public spending being #1 among them — but our competitors also have problems, in many cases more dire than our own. We as a people have a habit of overestimating our own problems and underestimating those of our adversaries. Don’t begrudge the Chinese people some measure of success; just hope that they can cast off their Communist government and move towards being a freer people. There may come a time when the US and China square off as enemies rather than just competitors, but that outcome is not inevitable.

Fitch agrees with me about taking the whole “China is taking over the world” thing with a grain of salt. The Chinese are hiding an enormous amount of bad debt. If China hopes to succeed beyond their export-driven economy, their finances are going to have to become more transparent. And when/if this happens . . . look out below. That crash is going to make our little economic vacation of the past couple of years look mild in comparison.

I know that it may appear that I’m anti-Chinese based on some of my past economic postings, but that’s not true. I’m actually quite positive about China in the long term — once they manage to get rid of the last trappings of authoritarian government and overcome the huge dead hand of army-controlled crony capitalism. Most Chinese markets are not yet free, but they’re in most cases far more free than they were a decade ago. That’s wonderful, both for ordinary Chinese people and for the rest of the world. China has immense untapped resources of skills, talents, and ideas that can’t be accessed in a controlled economy. If-and-when their economy becomes as free as typical western markets, sit back and watch all that human ingenuity go to work.

On the down side, while China is becoming a bit more free, many western countries are becoming less so: piling on regulations and creating additional barriers to economic growth (Canada, for the most part, has not been doing this . . . it’s a significant factor in Canada’s escape from recession). If these trends continue, perhaps the worriers-about-China will see the Chinese economy vault into first place as the American government tries to control everything.

June 24, 2010

It’s a “Failure of its systems for monitoring”

Filed under: Economics, Europe, Greece, Politics — Tags: , , , — Nicholas @ 10:45

Austin Bay thinks he’s identified the elephant in the European parlour:

Greece teeters on the edge. The Wall Street Journal‘s Paul Hannon wrote this week that “the failure of its (EU) systems for monitoring and controlling build-ups in government debt” are why the bailout loans given to Greece by the International Monetary Fund (IMF) and fiscally disciplined EU members like Germany became necessary.

He’s right. “Failure of its systems for monitoring,” however, is a euphemism — economic diplo-speak for a very difficult word: corruption. Greek governments cooked the books (its actual deficit is twice as high as officially reported), violated fiscal agreements and borrowed money they could not repay.

Corruption lies at the dirty core of the Euro-zone’s trouble. Governmental corruption and its cohort, illicit business practices, are a pervasive, multicultural, global affliction.

Corruption coupled with systemic lack of accountability — to include personal accountability, where managers and workers let lackadaisical and lazy work practices slide — eventually produces more than anger, cynicism and financial turmoil. Even among economies in the developed world, it stunts economic productivity, robs the future and sows the seeds of armed conflict. In the developing world it undermines aid efforts, manacles fragile economies and as a result condemns millions to poverty.

The big remaining question is no longer “Will the Euro fail?” but rather “Who’ll bail out first?”

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