Li DaoKui on China

This article by Grace Segran appeared on Today , on 25/11/2011.
Those who follow me on the CNA Forum will know that he is one of my fave commentators on China.

By all accounts, the Chinese economy is thriving. While America and Europe continue to struggle with debt and unemployment, China is moving from strength to strength. Still, Chinese economists and policymakers are looking ahead to see what problems China may be facing in the not-too-distant future and, more importantly, how to prevent or mitigate them.

For a start, Professor David Li Daokui (picture), a     member of the Monetary Policy Committee of the People's Bank of China and the director of the Center for China in the World Economy at Tsinghua University, believes that China is heading into a major grain shortage.

China already has a very limited amount of per capita arable land, he told INSEAD Knowledge. However, as China industrialises and urbanises, labour costs are rising quickly. These costs will be capitalised into the price of agricultural products such as grain. The Chinese consume grain in very large quantities - not just whole grains but also as raw materials for the production of other food items. Together, these factors are leading to a perfect storm that will result in an increased demand for grain.

The increase in demand for grain is a global problem, according to Prof Li. It would only take one bad crop to throw the world into a major food shortage. "We can imagine that, with the frequency and severity of natural disasters in China as well as in other parts of the world, the overall global grain output will be decreased, which will pose a potentially grave threat to grain security, leading to worldwide food shortages and resulting in global inflation in food prices," he says.

It is important for China to think carefully about its agricultural strategy. Prof Li recommends that the Chinese government takes measures to increase the scale of grain production by investing in agricultural technology. He also suggests that China invests in grain production overseas.

He opines: "This will not only work towards China's self-interest but will also contribute to helping to solve the wider global grain supply problem."

OIL MARKET FLUCTUATIONS
Prof Li predicts that, like grain, there could be a global shortage of oil that could adversely affect China's development. However, he points out that oil and grain are different kinds of resources.

"The risks associated with oil and grain are different, as the geographical supply of oil is relatively concentrated," he says. "Oil responds much more dramatically to changes in the global economy. The downturn in the European and American economies has depressed the price of oil. However, even a small economic recovery could cause an upward surge in oil prices."

Since China is dependent on external oil supplies, a dramatic increase in oil prices could be devastating to the Chinese economy. In Prof Li's view, China must be prepared for these possible fluctuations by building a domestic supply of crude oil equivalent to three to six months of domestic consumption. China should also diversify risk factors by establishing long-term contracts with countries that supply oil and begin to rely on other energy sources.

EXCESS CASH SUPPLY
Over the past three decades, China has experienced a steady increase in its supply of money. It now has an overall money supply of US$10.5 trillion (S$13.7 trillion), which is higher than that of the United States and is equivalent to nearly double its gross domestic product.

Prof Li explains that this excessive circulation of cash presents many risks for the Chinese economy. Without viable options to invest this money, asset price bubbles could develop and the prices of certain assets could climb. "We saw this in the housing market bubble in the US ... When asset prices reached unsustainable levels, the bubble burst, causing a nationwide economic meltdown."

Prof Li suggests that China shifts its monetary policy to reduce the amount of money circulating in the economy. He says: "China should tighten its supervision on financial institutions to control systemic financial risks in this sector and prevent excessive price increases."

China could also let excess capital flow out of the country, by allowing companies and individuals to convert their yuan into other currencies. Eventually, these measures should facilitate a two-way flow of capital, allowing China to regulate the flow of money into and out of the country.

On the whole, the Chinese economy is in good health, Prof Li asserts. Still, it is vitally important not to underestimate the risks that, if left unchecked, could devastate China and undo years of economic progress.

This article first appeared in the latest issue of INSEAD Knowledge. David Li Daokui, who received his doctorate in economics from Harvard University, is Mansfield Freeman Professor of Economics and part of a trio to replace Fan Gang as academic members to the Chinese central bank's monetary policy committee.

El-Erian on the Global Economic Uncertainty

The Anatomy of Global Economic Uncertainty

2011-11-18

NEWPORT BEACH – The sense of uncertainty prevailing in the West is palpable, and rightly so. People are worried about their futures, with a record number now fearing that their children may end up worse off than them. Unfortunately, things will become even more unsettling in the months ahead.

The United States is having difficulties returning its economy to the path of high growth and vigorous job creation. Thousands of people have taken to the streets of US cities, and thousands of others in Europe, to demand a fairer system. In the eurozone, financial crises have forced out two governments, replacing elected representative with appointed technocrats charged with restoring order. Concern about the institutional integrity of the eurozone – key to the architecture of modern Europe – continues to mount.

This uncertainty extends beyond countries and regions. Those looking around the next corner also worry about the stability of an international economic order in which the difficulties faced by the system’s Western core are gradually eroding global public goods.

It is no coincidence that all of this is happening simultaneously. Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.

Restoring these anchors will take time. There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.
Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive. Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.

The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation.” The objective is not to account for everything, but rather to pinpoint a small number of variables than can explain key factors, albeit neither perfectly nor fully.

Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.

The first relates to balance sheets. Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbors that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.

Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt. Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.
A third group, led by the US, has not yet made an explicit de-leveraging choice. Having more time, they are using the less visible, and much more gradual, path of “financial repression,” under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors.

De-leveraging is closely linked to the second variable – namely, economic growth. Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.

Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.
But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased.

 Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth,” which, most critically, involves greater “social justice.”
Indeed, there is a deep sense that capitalism in the West has become unfair. Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust. Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role. And why should they, given that record bailouts have not revived growth and employment?

Calls for a fairer system will not go away. If anything, they will spread and grow louder. The West has no choice but to strike a better balance – between capital and labor, between current and future generations, and between the financial sector and the real economy.

This leads to the final variable, the role of politicians and policymakers. It has become fashionable in both America and Europe to point to a debilitating “lack of leadership,” which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes, and governance systems.

Unlike emerging economies, Western countries are not well equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008– have been predominantly cyclical. The longer they fail to adjust, the greater the risks.

Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.

Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of  When Markets Collide.

Project Syndicate

http://www.project-syndicate.org/commentary/elerian11/English

___________________

My Thots....
El Elrian coined the term "New Normal" at a time of great uncertainty during the GFC, so as to help his PIMCO believers see the "new paradigm". Many like myself, took to the refreshing manner and the simplicity with which he made the volatilities and uncertainties look manageable.
But, his "New Normal" of  low growth and low low interest rates were perhaps an inducement to encourage investments in fixed income bonds and the likes.
PIMCO under Gross and El Elrian did many right calls, but  missed some too (especially on US Treasuries in the previous Qs, this year).
So opportunities can be missed too, even called wrongly, by the fixed income experts in times of great uncertainties.
It just go to show how unpredictable the politicos are, when put together;  and in the EU, there are 27, with 17 in the Eurozone!!

Reits- Corporate Governance

The following is a very timely article by BT's Wong Wei Kwong, dated 15/11/2011 entitled   "Don't let Reits be the next wave of governance lapses ."

Excerpted....... SINGAPORE boasts of a thriving real estate investment trust or Reit sector, but recent events have served another reminder that beneath the glowing surface, there are some key fundamental concerns. K-Reit Asia, last week, pushed through its plan to buy 87.5 per cent of Ocean Financial Centre (OFC), and raise some $976 million through a rights issue to fund part of the cost. It had earlier announced that it would pay some $1.57 billion to buy parent company Keppel Land's entire stake in the OFC office building. Keppel Land will see a net gain of about $492.7 million from the sale.  Put before shareholders for their approval at an extraordinary general meeting (EGM), the proposal ran into howls of protest. Shareholders questioned the stiff price and timing of the deal, at a time when the economy is facing a slowdown. Shareholders noted that while the prime Grade A office building in Raffles Place has a tenure of 999 years with 850 years remaining on the lease, KepLand is selling its stake with only a 99-year lease. Others questioned why K-Reit is paying its manager (which is owned by KepLand) an acquisition fee - even though it is buying the asset from its parent company.There were also rumblings about the independence of the manager. In a nutshell, the EGM brought to the fore two key issues relating to Reits here that corporate governance advocates have been highlighting for some time: This isn't the first time - and probably it won't be the last - that issues like these arise at a Reit. For some time now, there has been growing disquiet among corporate watchers about weaknesses in the corporate governance structures in Singapore Reits. Earlier this year, a review of Asia-Pacific Reit markets by the CFA Institute produced less-than-assuring results. Looking at the governance of Reits in Singapore, Australia, Hong Kong and Japan, the institute in its report called strongly for Reit managers to be independent. In the current most common scenario, the Reit sponsor wholly owns the Reit manager, and also holds a large stake in the Reit. And even before the latest K-Reit development, cases of sponsors selling properties to Reits have triggered concerns about conflict of interest, and unitholders have often questioned the purchase of these assets and how they were priced. The CFA Institute said that to better protect ordinary unitholders, most directors on the boards of Reit managers should be independent of management, sponsors and substantial unitholders.  This should be made law, rather than just a best-practice guide. There is also the need to have more transparent structures to pay Reit managers and to tie these more closely to performance, and indeed to require all Reits to hold annual meetings for unitholders. Reits are often presented as defensive plays, and given their yield structures, there is some truth in this. But it would be unfortunate if investors buy into Reits for their relative safety just to have their interests as minorities undermined by weak corporate governance structures. If nothing is done, the Reit sector could be where the next wave of governance lapses emerge, and that would be a pity for a sector that has done quite well so far.

BT

__________________

My Thots......

A stitch in time saves  nine!!

Corporate Governance
Corporate Governance is an evolving process which needs the participation of all------- manager of the Reit, the Board of the Reit, majority shareholders (aka Sponsors), retail/minority Reit investors, not  forgetting SGX and MAS; which encouraged and fostered the ecosystem for the growth of this important asset class.
In the Sg context, Reits can and must evolve into a class of shares in which conservative investors can look forward to regular recurrent dividends payouts (DPUs, DCFs) with relatively low risks and be de-risked from untimely "wants" for cash calls.
 Note: I call it a "want" and not a "need", as it is often the sponsor/majority shareholder whom is the chief beneficiary and decides on the timing for the call. A well concieved Reit with good Reit-able tenants have the luxury of choosing the timing for acquisitions; it is the sponsor who needs to cash out at opportune situations.


Why Reits ?
The raison det're for Reits for the Sponsor/majority shareholders is that it allows monetisation of their assets and serve as a vehicle for recyling the monies; in short, as the last and most important component of the asset recycling model.
The raison det're for Reits for the minority/retail shareholders is that it serves as a defensive investment choice for regular DPUs, given that the Reits tenants are supposedly chosen to give safe recurrent incomes with locked in leases.
For the Asset recycling model to work, the Sponsors must not forget the investors at the end of the food-chain.
Hence, the Reit must acquire properties with good location, which have a stabilised portfolio of proven tenants (in terms of ability to pay),  with a stabilised mix of tenants able to provide that mix of regular recurrent income net of operating expenses and interest charges which can then translate into accretive DPUs.
That said, it implies a period of incubation at the sponsor level, so that the rental profiles in terms of tenant mix, WALE, cost of borrowing  and operating expenses are all quite stablilised.
As  OFC is only 80%  rented out at passing rentals of SGD 9psf with the remaining 20% subject to the uncertainty of the current Office rental mkts (buffeted by the woes of the Eurozone crisis), rental support is an artificiality ------- it is  certainly not real as the tenants are not captured yet and  is an attempt to  substitute  for (get around)  the uncertainties with an explicit guarantee by the majority shareholders (aka Sponsors). One may ask, what if the returns that sponsor was seeking did not materialise, so that the sponsor herself falters and fails,  and will be unable to cough out the guaranteed rental supports ?
Regulators may want to look at the validity and the use of such "Rental supports". How do they know that the sponsor will remain viable to  keep their promissory "Rental supports"?  What if the weaker sponsored Reits, also want a piece of this kind of  "Rental supports" options/actions? 
The issue is that the Sponsors themselves may have hidden agenda and entirely different motivations for unloading the property assets at such a time, completely unaligned to the Reit  biz model.

Kepland, as the prime beneficiary could be trying to lock in the price of OFC before the downturn and eyeing the cash from the monetisation of  OFC for certain "prizes" that they want to capture in a mkt downturn---- in other words, Kepland is trading and timing the buy and sell of property assets which IMHO, is fair as it is in the biz of developing and trading of such properties.

But, for the KReit management and KReit Board,  which is in the biz of finding  a good tenant mix and locking in good rents and rental periods so as to get positive recurrent incomes with positive reversionary outcomes, buying or selling property assets should not be happening in such uncertain periods.

Yes, KReit can cite need for growth, but growth must be from acquisitions of properties that are accretive DPU-wise and whose incomes have truly stabilised.
In this case, KReit is getting itself involved in trading of property assets risks ; as well as risks in the volatilities associated with rentals rates, borrowing costs, as well as risks of a possible rise in gearing (falling property values or NAVs may risk downgrades in debt ratings due to increased gearing;  causing a rise in borrowing costs).

Growth should be according to the schedule guided, well in advance-----OFC was not due to be offloaded by Kepland until end 2012 or early 2013------ so that investors do not get nasty surprises for cash calls; cash which they can use for buying juicy assets at low low prices in these crisis driven environment.

For KReit minority shareholders (as distint from the sponsors who have a  stake in OFC, the choice is between an meagre accretive 2% increase in Proforma DPU vs having to cough out 17/20 of cash for the rights issue.
3 cash calls in 3-4 yrs is an awful record for KReit, and the pliant Board is not taking good care of minority shareholder interests. The worry is in MBFC Tower 3. Will there be another cash call?


Does that mean that minority shareholders should just sell their shares and park the money in others?
To answer this Q, we come full circle, back to the issue of evolving Corporate Governance---- reporters, shareholders, corporate governance watchdogs------ by speaking up , helps to influence and shape opinions and policies in the Reit investment ecosystem.
The number of available safe haven defensive plays in the Sg mkt are few and far between.
Reits can be and should be such an asset class.

Minority Shareholders must speak up, so that the Sponsors (whether TAL for Ascott Reit or Kepland for KReit etc)  realise that such practises are contrary to the practise of good corporate governance; and in doing so,  help effect a change.

Make the Reits you own rise to better standards of Corporate Governance.
I used to subscribe to the thinking of sell and buy another asset/share, if you disagree with management.
But lately, I have another view------Don't just take the easy route of selling, which will in the end limit the number of types of shares of the different assets classes available for investments on the SGX----Speak up and stand up for better Corporate Governance.

Inherently, Kreit and most of the Temasek linked Reits vehicles have very good sponsors (Keppel Corp, FNN, Capitaland etc) and a robust biz model. But, as with every situation when the majority shareholders have complete dominance, minority rights can get overlooked and if undefended, trampled.
Complacency creeps in and the laxity can fester into a downward loop.

This BT article has done good by creating awareness of the Corporate Governance issues and make the regulating bodies be mindful of the possibilities of  the next wave of potential problems.

Bigger Issue
Hence, the issue here, is not really the quality of Kreit, as one may argue that Kepcorp and even Temasek will come in to help even if Kepland should inexplicably fail (which is unthinkable to many given Kepland's pristine record).
The issue is about fostering an environment, an ecosystem,  that is conducive to the evolving Reit class in Sg.
Yes, in terms of size, with 23 listed Reits and mkt cap of SGD 34b, SgX listed Reits has got the heft, but Corporate Governance is a process, more correctly an evolving process and as minority shareholders, we must support, speak up and stand up --- for it is only when we do so,  that the media, NGO watchdogs and regulatory bodies will sit up, listen and act!!

Soros on the Greek and Eurozone crisis

http://www.reuters.com/video/2011/11/04/soros-european-governments-have-the-bazo?videoId=224273274&videoChannel=4301


http://www.reuters.com/video/2011/11/04/soros-angela-merkel-was-the-creator-of-t?videoId=224281604&videoChannel=4301

http://www.reuters.com/video/2011/11/04/soros-greeks-would-be-ill-advised-to-lea?videoId=224287405&videoChannel=4301

______________________

My Thots....

Chyrstia Freeland asks Soros how the Eurozone crisis can be solved,
 why Greece will be ill-advised to leave the Eurozone and why he is sitting on the fence, for the moment......

Here comes the Sun

Op-Ed Columnist NYT
Here Comes the Sun

By PAUL KRUGMAN
Published: November 6, 2011

For decades the story of technology has been dominated, in the popular mind and to a large extent in reality, by computing and the things you can do with it. Moore’s Law — in which the price of computing power falls roughly 50 percent every 18 months — has powered an ever-expanding range of applications, from faxes to Facebook.

Our mastery of the material world, on the other hand, has advanced much more slowly. The sources of energy, the way we move stuff around, are much the same as they were a generation ago.
But that may be about to change. We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power. That’s right, solar power.

If that surprises you, if you still think of solar power as some kind of hippie fantasy, blame our fossilized political system, in which fossil fuel producers have both powerful political allies and a powerful propaganda machine that denigrates alternatives.

Speaking of propaganda: Before I get to solar, let’s talk briefly about hydraulic fracturing, a k a fracking.

Fracking — injecting high-pressure fluid into rocks deep underground, inducing the release of fossil fuels — is an impressive technology. But it’s also a technology that imposes large costs on the public. We know that it produces toxic (and radioactive) wastewater that contaminates drinking water; there is reason to suspect, despite industry denials, that it also contaminates groundwater; and the heavy trucking required for fracking inflicts major damage on roads.

Economics 101 tells us that an industry imposing large costs on third parties should be required to “internalize” those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure.

Yet what the industry and its defenders demand is, of course, precisely that it be let off the hook
for the damage it causes. Why? Because we need that energy! For example, the industry-backed organization energyfromshale.org declares that “there are only two sides in the debate: those who want our oil and natural resources developed in a safe and responsible way; and those who don’t want our oil and natural gas resources developed at all.”

So it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles. Pro-fracking politicians claim to be against subsidies, yet letting an industry impose costs without paying compensation is in effect a huge subsidy. They say they oppose having the government “pick winners,” yet they demand special treatment for this industry precisely because they claim it will be a winner.

And now for something completely different: the success story you haven’t heard about.
These days, mention solar power and you’ll probably hear cries of “Solyndra!” Republicans have tried to make the failed solar panel company both a symbol of government waste — although claims of a major scandal are nonsense — and a stick with which to beat renewable energy.

But Solyndra’s failure was actually caused by technological success: the price of solar panels is dropping fast, and Solyndra couldn’t keep up with the competition. In fact, progress in solar panels has been so dramatic and sustained that, as a blog post at Scientific American put it, “there’s now frequent talk of a ‘Moore’s law’ in solar energy,” with prices adjusted for inflation falling around 7 percent a year.

This has already led to rapid growth in solar installations, but even more change may be just around the corner. If the downward trend continues — and if anything it seems to be accelerating — we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal.

And if we priced coal-fired power right, taking into account the huge health and other costs it imposes, it’s likely that we would already have passed that tipping point.

But will our political system delay the energy transformation now within reach?
Let’s face it: a large part of our political class, including essentially the entire G.O.P., is deeply invested in an energy sector dominated by fossil fuels, and actively hostile to alternatives. This political class will do everything it can to ensure subsidies for the extraction and use of fossil fuels, directly with taxpayers’ money and indirectly by letting the industry off the hook for environmental costs, while ridiculing technologies like solar.

So what you need to know is that nothing you hear from these people is true. Fracking is not a dream come true; solar is now cost-effective. Here comes the sun, if we’re willing to let it in.

NYT

___________________

My Thots...

China's entry into the solar energy industry will quicken the lowering of the costs and hasten "Moore's law" in  the industry.

This is an Op Ed, but I would like to see more facts N figures subtantiating Krugman's claim that price of sloar energy has gone below that of coal (plus environmental costs).

MF Global

MF Global Meltdown Shows the Wisdom of Limits on Proprietary Trading

The bankruptcy of MF Global Holdings Ltd. is the first major U.S. casualty of the European sovereign- debt crisis. The trading firm’s demise is no small matter: Its $40 billion in debt is on the scale of Chrysler’s 2009 failure.

The MF meltdown is also sad news for creditors, shareholders and almost 3,000 employees, not to mention a humbling blow to Chief Executive Officer Jon S. Corzine, the former Goldman Sachs head, U.S. senator and New Jersey governor.

So is there anything to be learned from this mini- cataclysm? Well, yes. Three things, actually.
Lesson No. 1 is that there is no need for -- indeed, no one is even suggesting -- a bailout. MF Global took large bets on commodities, government debt, futures and derivatives, and did so with its own capital. No federally insured bank deposits or Federal Reserve discount-window loans were involved. Companies that risk their own money, or that of wealthy clients, should be allowed to fail.

Almost as soon as he arrived in 2010, Corzine set out to make MF Global a junior version of Goldman Sachs by diversifying his new firm, which until then had mostly arranged and processed trades for banks, corporations and other investors. MF Global, formerly part of Man Group Plc (EMG),was founded as a sugar broker by James Man in England in 1793. It was spun off as a public company in 2007.

The financial crisis and economic decline put a dent in trading revenue as investors reduced their risk appetites and generally had less money for trading. So Corzine pumped up the firm’s proprietary trading desk, using its small base of capital to buy European sovereign debt.


Poor Timing
To say the least, Corzine’s timing was poor, coming as many Wall Street firms were spinning off or shrinking proprietary trading desks and reducing their risk. MF Global went in the opposite direction by buying the debt of  Italy, Spain, Belgium, Portugal and Ireland, ignoring warnings of default by one or more of those countries.

The company now holds more than $6 billion in euro-area debt, the value of which has since tumbled. It also tried to earn interest off those assets in the overnight repurchase market. To do all this, the firm borrowed $40 for every $1 in capital, according to Egan Jones, a rating service. That’s more leverage than Lehman Brothers Holdings had when it collapsed in 2008.

And that raises lesson No. 2: Regulators this time didn’t wait for disaster to befall MF Global and its trading partners. The Financial Industry Regulatory Authority, the overseer of trading firms like MF Global, in September required it to reduce its leverage by setting aside more capital.

The unraveling came quickly. The short-term cash lenders that MF Global depended on began demanding more collateral for their loans. Ratings companies downgraded the firm, with Moody’s Investors Service citing the firm’s “outsized proprietary position.” The firm on Oct. 25 reported a net loss of almost $192 million for the latest quarter, the ninth loss in the past 11 quarters. Once Bloomberg News reported on Oct. 28 that MF Global had tapped out two of its credit lines, the shares plummeted and the firm was, for all intents, dead.

Because none of these activities took place within a bank, MF Global’s failure is contained within a relatively small circle of owners, lenders, counterparties and customers. This isn’t  to minimize the large and painful losses, but there are no public losses and, so far, little systemic fallout.

And therein lies lesson No. 3: MF Global’s wagering is a reminder why the Dodd-Frank financial reform law bars banks from making high-risk bets with depositors’ money. As Bloomberg View has written before, a big gamble that goes wrong can deplete the capital a commercial bank needs to fulfill its basic lending function. It can also put taxpayers on the hook for a bailout.

The Volcker rule, named after Paul Volcker, the former Federal Reserve chairman, would curb banks’ ability to make speculative bets for their own profit. The details of the rule are up for grabs, and will be the subject of future editorials. There’s nothing wrong with proprietary trading -- it just shouldn’t be done by federally insured, deposit-taking banks, a lesson MF Global’s collapse amply demonstrates.

Bloomberg
http://www.bloomberg.com/news/2011-10-31/mf-global-meltdown-shows-the-wisdom-of-prop-trading-limits-view.html

__________________

My Thots.....

Jon Corzine, made out to be a star with pedigreed lineage from Goldman Sachs, when he first joined MF Global has failed spectacularly; underlining the dangers of proprietary trading carried out by Investment Bankers.

The financial lobby is still trying hard to get around  Volcker's rule, by watering down the details during Dodd Frank implementation ----- that prevents a  deposit taking big banks from taking trading bets that involves those monies.

The danger is still there especially in big banks like CitiGroup, Barclays or even Soc Gen, one arm doing retail banking and taking deposits and another arm  doing investment banking, involved in proprietary  trading. The huge bets taken at the proprietary trading desks  can affect the  deposits placed by unsuspecting depositors, if nothing is done to segregate the risks at the holding co level.

MF Global's collapse should serve as a warning of the dangers of proprietary trading risks  and that it has no place in the deposit taking banks biz model.

Those arguing for limits and NOT full implementation of the Volcker Rule as it was envisaged are misguided.

IMF for Eurozone

See
http://www.project-syndicate.org/commentary/rajan22/English

A Standby Program for the Eurozone
Raghuram Rajan

2011-10-12

CHICAGO – How will the eurozone crisis play out in the next few weeks? With luck, Italy may soon get a credible government of national unity, Spain will obtain a new government in November with a mandate for change, and Greece will do enough to avoid roiling the markets. But none of this can be relied upon.

So, what needs to be done? First, eurozone banks have to be recapitalized. Second, enough funding must be available to meet Italy’s and Spain’s needs over the next year or so if their market access dries up. And, third, Greece, now the sickest man of Europe, must be treated in a way that does not spread the infection to the other countries on the eurozone’s periphery.

All of this requires financing – bank recapitalization alone could require hundreds of billions of euros (though these needs would be mitigated somewhat if the sovereign debt of large eurozone countries looked healthier).

In the short run, it is unlikely that Germany (and Northern Europe more generally) will put up more money for the others. Germans are upset at being asked to support countries that do not seem to want to adjust – unlike Germany, which is competitive because it endured years of pain: low wage increases to absorb the former East Germany’s workers and deep labor-market and pension reforms. The unwillingness of the Greek rich to pay taxes, or of Italian parliamentarians to cut their own perks, confirms Germans’ fears. At the same time, German politicians have done a poor job explaining to their people how much they have gained from the euro.

But we are where we are. A glimmer of hope is Europe’s willingness to use the European Financial Stability Facility (EFSF) imaginatively – as equity or first-loss cover. Clearly, some of the EFSF funds will have to go to recapitalize banks that cannot raise money from the markets. As for the rest, the amounts that are not already committed to the peripheral countries could be used to support borrowing that can be lent onward to Italy and Spain.

There is, however, no consensus about how to do this. Some propose bringing in the European Central Bank to leverage the EFSF’s funds. This is a recipe for trouble. Giving the ECB a quasi-fiscal role, even if it is somewhat insulated from losses, risks undermining its credibility. And if Italy were helped, the incoming ECB President, Mario Draghi, an Italian, would be criticized, no matter how dire Italy’s need. Moreover, financing would have to be accompanied by conditionality, and these institutions have neither the requisite expertise nor the necessary distance from the countries at risk to apply and enforce appropriate conditions.

Finally, both the EFSF and the ECB ultimately rely on the same eurozone resources for their financial strength. If markets start panicking about large eurozone defaults, they could question whether even a willing Germany has the necessary capacity to support the EFSF-ECB combine. Put differently, these institutions do not offer a credible, non-inflationary, external source of strength.

Indeed, the eurozone’s problems might soon become too big for its members to address. The world has a stake in their resolution. And it has an institution that can channel help: the International Monetary Fund. The IMF could set up a special vehicle along the lines of its New Arrangements to Borrow (NAB), which would be capitalized by a first-loss layer from the EFSF with the IMF’s own capital comprising a second layer.

This NAB-like vehicle could borrow as needed from countries, including the United States and China, as well as tap financial markets. It would offer large lines of credit to illiquid countries like Italy, with conditionality intended to help such countries resume borrowing from markets at reasonable cost.
A special vehicle is required because the amounts that must be made available far exceed what IMF members can usually access, and it is only right that if the eurozone seeks such amounts for its members, it should bear a significant portion of any potential losses. At the same time, the Fund’s capital resources would back the vehicle if the first-loss buffer provided by the eurozone were eroded; that way, the market would understand that strength from outside the eurozone can be brought to bear.
The IMF is not an institution that inspires warm and cuddly feelings. But it is also not the mindless preacher of fiscal austerity that it is accused of being – and it should start taking the lead in managing the crisis, rather than holding up the rear. The eurozone needs an independent outside assessment of what needs to be done, and rapid implementation, before it is too late and the incipient bank runs become uncontrollable.

Of course, the IMF cannot act without the permission of its masters, the large countries. The eurozone should suppress any wounded pride, acknowledge that it needs help, and provide quickly what it has already promised. The US should continue pushing hard for a solution. And the emerging-market countries should pitch in too, once some safeguards for their money are in place. Unresolved, the crisis will spare no one.

As for the birthplace of the euro crisis, Greece’s debt will almost surely have to be restructured. But adequate funding structures for Italy and Spain must be in place before any resolution. So, while others have to step forward to do their part, it is best if Greece steps back from the brink.

Project Syndicate
_______________

My Thots.....

Raghuram Rajan says use the IMF to leverage on the EFSF.
Others argue that the ECB should be the one leveraging on the EFSF.
The US (Geithner) will be the key determinant if the IMF were to step up.
Geithner has expressed reluctance.
Despite, Draghi's perceived baggage as an Italian, he would have to show leadership at the ECB  to build consensus for leveraging on the EFSF, given that the IMF and G20 have less "skin" in the game.

Steve Jobs

http://www.youtube.com/watch?v=UF8uR6Z6KLc

Today, we mourn the death of a visionary.
I viewed this U tube video quite some time ago and I got my kids to view it too.
It is highly inspirational.
In it Jobs, talk about the critical turning points in his life and how he overcame adversity and turned each of those turning points into opportunities.
An adopted child, his natural/biological mother wanted him to go to College. But, his adoptive parents were poor and he found the fees at Reed college to be too onerous for them.
So he dropped out of day college after 6 mths and dropped into night classses for 18mths where he learnt calligraphy - that's where all the beautiful fonts like San Serif etc  in the Mac (later copied by Microsoft) came from.
He talks about how his adversities -- he slept on dorm floors of his friends rooms, collected recycled Coke bottles and  walked  7 miles every Sunday night for one good meal each week at the Hare Krishna temple -- prepared him for his calling (or is it recalling) at Apple.

The speech comes in 3 stories...

In "Connecting the Dots"; his 1st story...
"You can't connect the dots looking forwards, you can only connect them looking backwards "

The 2nd story "Love and Lost", teaches us not to give up when we are rejected, when we fail...
His sacking by John Sculley resulted in him getting into and setting up the NEXT platform and in the birth of PIXAR. He found his love (wife) and the wind for the 2nd flight when he was sacked -
"The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life."

In the same positive attitude he tackles his illness Pancreatic Cancer in the 3rd Story...
  " No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new."

Is Death to be feared?
This is how Jobs viewed death....

"If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart"

Jobs, a Buddhist, spoke of  "letting go" in other speeches....
Knowing that you will die, that you can fail, frees you from the fear of losing it all, of letting go...

Let Go...
 Stay Hungry,  Stay Foolish

Can Apple , let go of  her iconic founder and still flourish ?
- Much depends on Job's choice of successor, Tim Cook

Other tributes....
http://www.washingtonpost.com/lifestyle/style/steve-jobs-and-the-idea-of-letting-go/2011/10/05/gIQAWxNqOL_story.html
http://www.bloomberg.com/news/2011-10-06/apple-fans-from-cupertino-to-singapore-mourn-passing-of-jobs.html
http://www.forbes.com/sites/roberthof/2011/10/06/four-very-small-stories-about-steve-jobs/2/
http://www.youtube.com/watch?v=mBAqSzvySFQ&feature=player_embedded
http://www.youtube.com/watch?v=SX1Lz8PDgg8&feature=player_embedded#!

Here's the transcript,  the genius  and the tenacity of the man comes thru...
Enjoy!!
___________________________

Stanford Report, June 14, 2005

'You've got to find what you love,' Jobs says

This is a prepared text of the Commencement address delivered by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, on June 12, 2005.

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:

Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, it's likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

My second story is about love and loss.

I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.

During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.

My third story is about death.

When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.

I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

This was the closest I've been to facing death, and I hope it's the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.

Stay Hungry. Stay Foolish.
Thank you all very much.

George Soros

For more read...
http://www.project-syndicate.org/commentary/soros71/English


Thinking the Unthinkable in Europe

2011-09-15

NEW YORK – To resolve a crisis in which the impossible has become possible, it is necessary to think the unthinkable. So, to resolve Europe’s sovereign-debt crisis, it is now imperative to prepare for the possibility of default and defection from the eurozone by Greece, Portugal, and perhaps Ireland.

In such a scenario, measures will have to be taken to prevent a financial meltdown in the eurozone as a whole. First, bank deposits must be protected. If a euro deposited in a Greek bank would be lost through default and defection, a euro deposited in an Italian bank would immediately be worth less than one in a German or Dutch bank, resulting in a run on the deficit countries’ banks.

Moreover, some banks in the defaulting countries would have to be kept functioning in order to prevent economic collapse. At the same time, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Finally, government bonds issued by the eurozone’s other deficit countries would have to be protected from contagion. (The last two requirements would apply even if no country defaulted.)


All of this would cost money, but, under the existing arrangements agreed by the eurozone’s national leaders, no more money is to be found. So there is no alternative but to create the missing component: a European treasury with the power to tax and, therefore, to borrow. This would require a new treaty, transforming the European Financial Stability Facility (EFSF) into a full-fledged treasury.


But this presupposes a radical change of heart, particularly in Germany. The German public still thinks that it has a choice about whether to support the euro. That is a grave mistake. The euro exists, and the global financial system’s assets and liabilities are so intermingled on the basis of the common currency that its collapse would cause a meltdown beyond the capacity of the German authorities – or any other – to contain. The longer it takes for the German public to realize this cold fact, the higher the price that they, and the rest of the world, will have to pay.


The question is whether the German public can be convinced of this argument. Chancellor Angela Merkel may not be able to persuade her entire coalition of its merits, but she could rely on the opposition to build a new majority in support of doing what is necessary to preserve the euro. Having resolved the euro crisis, she would have less to fear from the next election.


Preparing for the possible default or defection of three small countries from the euro does not mean that those countries would necessarily be abandoned. On the contrary, the possibility of an orderly default – financed by the other eurozone countries and the International Monetary Fund – would offer Greece and Portugal policy choices. Moreover, it would end the vicious cycle – now threatening all of the eurozone’s deficit countries – whereby austerity weakens their growth prospects, leading investors to demand prohibitively high interest rates and thus forcing their governments to cut spending further.

Leaving the eurozone would make it easier for the most distressed countries to regain competitiveness. But, if they are willing to make the necessary sacrifices, they could also remain: the EFSF would protect their domestic bank deposits, and the IMF would help to recapitalize their banking systems, which would help these countries escape from their current trap. Either way, it is not in the European Union’s interest to allow these countries to collapse and drag down the entire global banking system with them.


The EU’s member countries, and not only those in the eurozone, must accept that a new treaty is needed to save the euro. That logic is clear. So the discussions about what to include in such a new treaty ought to begin immediately, because, even with European leaders under extreme pressure to agree quickly, negotiations will necessarily be a prolonged affair. Once the principle is agreed, however, the European Council could authorize the ECB to step into the breach, indemnifying it from solvency risks in advance.


Having in sight a solution to the eurozone’s sovereign-debt crisis would be a source of relief for financial markets. Even so, because any new treaty’s terms will inevitably be dictated by Germany, a severe economic slowdown would be almost certain. That might induce a further change of attitude in Germany, in turn allowing the adoption of counter-cyclical policies. At that point, growth in much of the eurozone could resume.

George Soros is Chairman of Soros Fund Management

Project Syndicate

_______________________

My Thots......

Goerge Soros says "think of the unthinkable"...

 Protect bank deposits.

U will note he says a switch to European-level , as distinct from national-level, supervision of the banks is needed to ringfence the banks so that the default will be orderly and contagion due to collateral damage is minimised.

The core argument is that the Germans support is crucial to such a change, since they in Euroland will foot the most.

The article was written before the recent overwhelming vote in the German Parliament - German sentiments could have turned around and support could be found after the recent crisis.

Only 15 of the conservatives in Merkel's coalition deserted her, in the vote.

The logic in Soros argument is that in thinking of the unthinkable and coming up with solutions, there will be choices for the policymakers to take. And that the markets knowing that there will be solutions to  the take out the uncertainty out of those scenarios, will be calmed.

IMHO, Soros may have taken the assumptions a little too far by including the "defections" of Portugal & Ireland; as their finances are on the mend and healing - altho a Greek collapse may exacerbate  borrowing conditions and weigh down their debt repayments.

Barry Eichengreen

For more see...

http://www.project-syndicate.org/commentary/eichengreen34/English

Europe on the Verge of a Political Breakdown

Barry Eichengreen

2011-09-09

BERKELEY – Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.

European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.

If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one.
Other ideas, like moving to fiscal union, would require a fundamental revision of the EU’s founding treaties. And issuing Eurobonds would require a degree of political consensus that will take months, if not years, to construct.

But Europe doesn’t have months, much less years, to resolve its crisis. At this point, it has only days to avert the worst. It is critical that leaders distinguish what must be done now from what can be left for later.

The first urgent task is for Europe to bulletproof its banks. Doubts about their stability are at the center of the storm. It is no coincidence that bank stocks were hit hardest in the recent financial crash.
There are several ways to recapitalize Europe’s weak banks. The French and German governments, which have budgetary room for maneuver, can do so on their own. In the case of countries with poor fiscal positions, Europe’s rescue fund, the European Financial Stability Facility, can lend for this purpose. If still more money is required, the International Monetary Fund can create a special facility, using its own resources and matching funds put up by Asian governments and sovereign wealth funds.

The second urgent task is to create breathing space for Greece. The Greek people are making an almost superhuman effort to stabilize their finances and restructure their economy. But the government continues to miss its fiscal targets, more because of the global slowdown than through any fault of its own.
This raises the danger that the EU and IMF will feel compelled to withdraw their support, leading to a disorderly debt default – and the social, political, and economic chaos that this scenario portends. In Greece itself, political and social stability are already tenuous. One poorly aimed rubber bullet might be all that is needed to turn the next street protest into an outright civil war.

Again, help can come in any number of ways. Creditors can agree to relax Greece’s fiscal targets. The limp debt exchange agreed to in July can be thrown out and replaced by one that grants the country meaningful debt relief. Other EU countries, led by France and Germany, can provide foreign aid. Those who have spoken of a Marshall Plan for Greece can put their money where their mouths are.

The third urgent task is to restart economic growth. Financial stability, throughout Europe, depends on it. Without growth, tax revenues will remain stagnant, and the capacity to service debts will continue to erode. Social stability, similarly, depends on it. Without growth, austerity will become intolerable.
Here, too, the problem has several solutions. Germany can cut taxes. Better still would be coordinated fiscal stimulus across northern Europe.

But the fact of the matter is that northern European governments, constrained by domestic public opinion, remain unwilling to act. Under these circumstances, the only practical source of stimulus is the ECB. Interest rates will have to be slashed, and the ECB will have to follow up with large-scale asset purchases like those recently announced by the Swiss National Bank.

If these three urgent tasks are completed, there will be plenty of time – and much time will be needed – to contemplate radical changes like new budgetary rules, harmonization of other national policies, and a move to full fiscal union. But, as John Maynard Keynes famously quipped, “In the long run, we are all dead.” European leaders’ continued focus on the long run at the expense of short-term imperatives may indeed be the death knell for their single currency.

Project Syndicate
__________________________

My Thots....

Barry Eichengreen says think ( & act)  of solving the immediate problems first!!
In the longterm as Keynes said  "we are all dead".


He lists 3 urgent tasks that must be acted upon.... and fast?
Can Euroland deliver?

Nouriel Roubini

http://www.economonitor.com/nouriel/2011/09/22/full-analysis-greece-should-default-and-abandon-the-euro/
Debt reduction
Roubini says the debt reduction program with bondholders is unfair. He prescribes that Greece leaders, either uses or take the route of default , so as to "force" the bondholders into bigger haircuts; i.e. force-negotiate brinkmanship style, at least a 50% debt relief to the country.

Restoring competitiveness so as to retrun to growth
Roubini argues that this can only be done by leaving the monetary union so as to allow a return to a much devalued drachma.

Exit or NOT, Greece GDP is destined to fall; however an exit will lead to a faster recovery than years of deflation
He cites Argentina as an example whereby, the default led to a quicker recovery.

My Thots...
The biggest unpredictability is how the markets will react and how the Greeks themselves react?

I have my doubts....
The positives as he outlined appears to outweigh the negatives.
The question is can  an orderly breakup be possible, given the myriad of moving parts in Roubini's solution?
How do you negotiate, implement and make the market accept the transition from Euros to Drachmas in Greece itself and from a Eurozone with Greece,  to one w/o?
Once Greece leave, would the markets not expect a domino effect on the rest of Euroland eg Portugal, Ireland, Italy & Spain  will be pressured to do the same?
The imponderables and moving parts are far too many?
Assuming , default do take place, post default, how will the Drachma be accepted?
It is easy  for Roubini to shoot off a figure -- 30% depreciation he guess, to the Euro -- but, in truth nobody knows how the market will price the Drachma to the Euro. What if the value collapses to 20%; there will be heperinflation, since the Greek govt will have to print alot more, inorder to pay the debts.
Also at the moment, the Greek govt can sell her assets in Euros and settle her debts in Euros. To sell in Drachmas will mean a huge haircut for her prized national assets, it could be lelong time !!

From the sidelines, it is easy to comment, but policymakers on the hotseat may not want to or have the gumption to take those risks!!

A plea for an orderly divorce may not necessarily result in one, when you have so many partners in the Eurozone and the Troika to please and the markets have so many promiscous 'shorts' ready to rape you, the minute you turn naked when the tides go down....

China news .......

Plse visit website at

http://www.project-syndicate.org/commentary/roach9/English

China’s Landing – Soft not Hard


Stephen S. Roach

2011-09-30

China’s Landing – Soft not Hard

NEW HAVEN – China’s economy is slowing. This is no surprise for an export-led economy dependent on faltering global demand. But China’s looming slowdown is likely to be both manageable and welcome. Fears of a hard landing are overblown.

To be sure, the economic data have softened. Purchasing managers’ indices are now threatening the “50” threshold, which has long been associated with the break-even point between expansion and contraction. Similar downtrends are evident in a broad array of leading indicators, ranging from consumer expectations, money supply, and the stock market, to steel production, industrial product sales, and newly started construction.

But this is not 2008. Back then, global commerce was collapsing, presaging a 10.7% drop in the volume of world trade in 2009 – the sharpest annual contraction since the 1930s. In response, China’s export performance swung from 26% annual growth in July 2008 to a 27% contraction by February 2009. Sequential GDP growth slowed to a low single-digit pace – a virtual standstill by Chinese standards. And more than 20 million migrant workers reportedly lost their jobs in export-led Guangdong province. By late 2008, China was in the throes of the functional equivalent of a full-blown recession.

Thanks to a massive fiscal stimulus, China veered away from the abyss in early 2009. But it paid a price for this bank-funded investment boom. Local governments’ indebtedness soared, and fixed investment surged toward an unprecedented 50% of GDP. Fears surfaced of another banking crisis, the imminent collapse of a monstrous property bubble, and runaway inflation. Add a wrenching European crisis to the equation, and a replay of 2008 no longer seemed far-fetched.

While there is a kernel of truth to each of these China-specific concerns, they do not by themselves imply a hard landing. Nonperforming loans will undoubtedly increase in response to the banking sector’s exposure to some $1.7 trillion of local-government debt, much of which was incurred during the stimulus of 2008-2009. But the feared deterioration in loan quality is exaggerated.

The reason: With rural-urban migration projected to exceed 310 million people over the next 20 years, there is reason to believe that much of the apparent overhang of housing supply will be steadily absorbed. Like Shanghai Pudong in the late 1990’s, today’s Chinese “ghost cities” are likely to be teaming urban centers in the not-so-distant future. Meanwhile, deposit-rich Chinese banks have ample liquidity to absorb potential losses; the system-wide loan-to-deposit ratio is only about 65% – well below earlier pre-crisis levels that were typically closer to 120%, according to a recent analysis by the Xerion team of Perella Weinberg Partners.

Nor is the Chinese property market about to implode. Yes, a building boom and speculative excesses have occurred. But a year and a half ago, the government moved aggressively to dampen multiple property purchases – raising down payments to 50% for second homes and to 100% for third homes. While that halted much speculative activity, house prices have remained at elevated levels – underscoring lingering affordability issues for China’s emerging middle class.

Notwithstanding that problem, major imbalances in Chinese property markets should prove to be the exception over the next two decades.  While there could be supply-demand mismatches in any given year, with an average of roughly 15 million citizens a year slated to move from the countryside to newly urbanized areas, demand should rise to meet supply. 

Inflation is always a serious risk in China – especially with headline increases in the country’s Consumer Price Index surging through the 6% threshold this summer. The government has responded forcefully on four fronts:
  -    First, food inflation, which accounts for about half the recent run-up in overall prices, has been addressed by administrative measures aimed at cutting fertilizer costs and removing bottlenecks to increased supplies of pork, cooking oil, and vegetables.
  -    Second, in an effort to curtail excess bank lending, reserve ratios were increased nine times in the past 11 months.
  -    Third, the rate of currency appreciation has edged up.
  -   Finally – and perhaps most importantly – the People’s Bank of China has raised its benchmark policy rate five times since October 2010. At 6.5%, the one-year lending rate is now 0.3% above August’s headline inflation rate.

If food inflation recedes further, and the headline inflation rate starts to converge on the 3% core (non-food) rate, the result will be the equivalent of "passive monetary tightening" in real (inflation-adjusted) terms – precisely what the inflation-prone Chinese economy needs.

All of this underscores a potential silver lining. An increasingly unbalanced Chinese economy cannot afford persistent 10% GDP growth. Provided that there is no recurrence of the severe external demand shock of 2008 – a likely outcome unless Europe implodes – there is good reason to hope for a soft landing to around 8% GDP growth. A downshift to this more sustainable pace would provide welcome relief for an economy long plagued by excess resource consumption, labor-market bottlenecks, excess liquidity, a large buildup of foreign-exchange reserves, and mounting inflationary pressures.

For China, there is a deeper meaning to recent global developments.  A second major warning shot in three years has been fired at this export-led economy.  First, the United States, and now Europe – China's two largest export markets are in serious trouble and can no longer be counted on as reliable, sustainable sources of external demand. As a result, there are now major questions about the sustenance of China's long powerful export-led growth model.

Accordingly, China has no choice but to move quickly to implement the pro-consumption initiatives of its recently enacted 12th Five-Year Plan. Strategic transition is what modern China is all about. That’s what happened 30 years ago, when economic reform began.  And it needs to happen again today.  For China, a soft landing will provide a window of opportunity to press ahead with the formidable task of increasingly urgent economic rebalancing.

Project Syndicate
_________________________

My Thots.....

The latest PMIs show that China's New Orders Index is always higher than her Exports Index, indicating that domestic consumption has been driving growth.....

EL Erian

http://www.pbs.org/nbr/site/onair/gharib/mohamed_el_erian_reacts_to_efsf_110929/


Susie Gharib

 It`s been called "le TARP"; the EFSF is Europe`s version of America`s TARP bailout fund. It functions like a bank providing loans for troubled Eurozone nations. Of the 17 countries making contributions, France, Germany and Italy have put in the most money. It works like this - - a troubled country like Greece applies for a loan. It negotiates terms with the European Commission and the International Monetary Fund. Then, the loan must be unanimously approved by the fund`s members.

The loans are not a handout; they must be paid back with interest. Right now, the rescue fund is low on cash. It started out with $340 billion a year ago, but is tapped out after making loans to Portugal and Ireland. Eurozone countries are now voting to expand the fund to nearly $600 billion. Many economists believe it needs at least $2 trillion to be effective. Our guest tonight has been calling on European policymakers to take stronger and faster action to solve the debt crisis. He`s Mohamed el- Erian, CEO of PIMCO, the world`s largest bond fund. Hi Mohamed, nice to you have back.

GHARIB: So let`s talk a little bit about this fund. Is it big enough to do its job to fix the European debt crisis?

EL-ERIAN: It`s not big enough as yet. So Europe is taking a two-step approach. Number one, get all the parliaments to approve and number two, try to lever (ph) up the fund because you need a lot of money. You need a lot of money to stabilize sovereign debt and you need a lot of money to stabilize the banking system. So today was an important step, Susie. But it`s the first step in a pretty long journey.

GHARIB: Now you have been very critical about the way the policymakers in Europe have been handling the debt crisis. What should they be doing that they`re not doing?

EL-ERIAN: Two things. One is they should move quickly to stabilize the situation. And today`s step is an important one. It`s necessary but not sufficient so they got to get money into the system. And they`ve got to move quickly. Second they`ve got to deal with Greece in a more realistic fashion. No one believes that what Greece is doing today is sustainable. So we need a new approach to Greece. And third, they need to tell us what their vision for the Eurozone is going forward. (INAUDIBLE) these three things we`re going to go from one uncertainty to another uncertainty with a bit of good news in between.

GHARIB: Now even if the Europeans come together and work through this financial crisis and they follow the suggestions that you are making, how long is it going to be before the European economy starts growing again, helping American businesses and U.S. markets?

EL-ERIAN: A long time, unfortunately. So a lot of damage has been created. We just did our assessment here at PIMCO and we think that next, for the next 12 months, Europe is going into recession. So Europe will probably contract by 1 percent, so we`re not going to get help here in the U.S. from Europe. If anything, Europe will be a headwind for us economically.