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THE NAUSEA EXPRESS
We are on our way to becoming another nation, whether we like it or not. No amount of numerological augury or even hand-wringing will change that.
James Howard Kunstler is back with another round of fire and brimstone. His basic thesis is that the transformation the U.S. faces, and the rest of the world to a lesser entent, goes beyond consuming less and saving more. Combined with his peak oil belief, he sees much more dramatic changes on the way, ready or not, all the way down to issues like getting enough food to feed the population. In effect, Iceland on a grand scale.
None of this is an argument for despair, Kunstler feels, "but it certainly invokes the need for steeply revised expectations and serious attention to a national 'to-do' list."
The G-7 world, the club of "developed" western nations plus Japan, has commenced an ordeal of suddenly waking up much poorer. All the desperate work-arounds being engineered by governments and central banks on an al fresco basis are intended to overcome this stunning basic fact, and none of them will. The benchmarks of everything are in flux -- stocks, bond values and yields, commodity prices, most especially currencies -- but these tend to disguise the basic fact of growing and spreading impoverishment. Is oil priced at $80 a barrel this morning? That is nice. Except if the company that employs you is about to fold up and you face a holiday season of driving frantically around Atlanta in search of another job, which the odds are against you find finding. Or if you are living on a retirement fund that has just lost 37% of its value and it is time to fill the heating oil tank.
Iceland is the poster-child du jour for this. The little island nation of about 320,000 souls (roughly half of Vermont's population) lately grew a banking sector that thrived on something-for-nothing finance. In little more than a month, its banks have imploded like mini-death stars, leaving Iceland with a pariah currency. Since it has to import just about everything, and it suddenly finds itself unable to pay for imports, the people are stripping the grocery markets of whatever remains there now. You wonder what they will do in two weeks. Ten years from now there may be 32,000 of them left, subsisting on blubber sandwiches.
I exaggerate perhaps a little, but who really knows where all this leads? Here in the USA, the Treasury, enjoying new and seemingly limitless powers of discretionary spending, has begun shoveling dollars into every truck that backs up to the loading dock. The numbers are staggering. In 10 days it has reached into the trillions in loans and handouts. Most of this money is getting sucked directly into the black hole of debt and margin calls of one kind or another. This is previously-presumed wealth that is now un-presumed. It is leaving the system, never to be seen again. One useful way of thinking about it is to regard it as our society's previous borrowings against our own future. Thus, we are seeing our future vanish into a black hole -- our future comfort, health, and basic nourishment.
This is the kind of fiasco that brings down governments, propels societies into revolutions, and starts wars. In a few months, America will be full of angry economic losers. We are not the same nation that crowded around the old radio consoles for Franklin Roosevelt's fireside chats. Back then, we were mostly a highly-disciplined, regimented, industrial society full of citizens who mostly did what they were told to do, and mostly trusted in authority. Today we are a nation of tattooed barbarian "consumers" with no impulse control, a swollen sense of entitlement, ruled by a set of authorities ranging from one G.W. Bush to the grifter-billionaire pantheon of Wall Street CEOs -- now heading into secret bunkers with their stashes of krugerrands, freeze-dried veal Milanese, and private security squads armed with XM-8 carbines.
I go along with Nassim Nicholas Taleb's idea -- read The Black Swan -- that nobody really knows anything. We construct our narratives to try and explain circumstances that are unraveling non-linearly before us, and some narratives are more plausible than others, depending on your vantage point. There are infinite narratives. This is nothing more than my narrative. The circumstances we are entering appear, for the moment, to take the shape of a compressive deflationary depression with the cherry-on-top add-on of a hyper-inflation further down the road -- meaning initially that jobs, incomes, and pensions are lost, but that later on even the little money that people manage to get -- perhaps mostly from government hand-outs of one kind or another -- steadily loses its value. Every way you jigger things, it just ends up meaning the same thing: a much poorer society. It certainly will not be a society of recreational shoppers plying the Target store aisles for scented candles and home accents. Hyperinflation could make old debts meaningless, but it would also make credit meaningless and spending absurd.
Given the way our society has evolved to operate -- as an endless upward spiral of borrowings -- you can see an awful lot of things not working anymore, and an awful lot of people not working in them or at them. Maybe the governments of the G-7 will get lending unstuck at the upper levels, but who, exactly, is able to borrow now besides companies on the verge of bankruptcy -- and why continue to lend to them? (Except to maintain the pretense that "something is being done"). Besides, there is much too much previously borrowed money that will not ever paid back, and the "work-out" of all that debt only implies the continued distress sale of any-and-all assets -- so that the USA in effect becomes yard-sale nation.
Personally, I think all the re-jiggering in the world of numbers and indexes will not solve anything, and really only represents a kind obsessive-compulsive neurosis related to numerology that will do nothing to readjust our daily activities toward the production of things that have real and enduring value. In my narrative, the fate of industrial nations really depends on energy resources. The price of oil may be going down for the moment -- perhaps due to the de-leveraging of hedge funds, banks, and invested individuals, perhaps combined with a perception of "demand destruction" -- but the geology and geopolitics of oil have not changed since June of this year when oil was at $147. Let us say U.S. oil consumption is down one million barrels of oil a day. Within the next two years, we are liable to lose more than that in import declines from Mexico and Venezuela alone. The International Energy Agency's latest estimate is for only slightly less of an increase in worldwide oil demand than was previously posted. It is still a net demand increase. World oil consumption still exceeds world production now, perhaps permanently so. Finally, the current plunge of oil prices has suddenly halted the very capital ventures in exploration and development that were hoped to increase the worldwide supply of oil. All this portends an aggravation of oil supply and allocation problems in the five years ahead, and ultimately much more expensive, harder-to-get oil.
What we cannot face is the prospect that we might become something other than an industrial "consumer" society. My narrative includes the conviction that we will have trouble producing food for ourselves as petro-agriculture fails, and since society cannot go on without food production, I see this activity coming back much closer to the center of our daily lives. We are not ready to think about that. The downside of our unreadiness may be that a lot of Americans will go hungry in the decade ahead.
None of this is an argument for despair, by the way, but it certainly invokes the need for steeply revised expectations and serious attention to a national "to-do" list. We are on our way to becoming another nation, whether we like it or not. No amount of numerological augury or even hand-wringing will change that. The big question for, say the 24 months ahead is: how disorderly will we allow this transition to be?
WHATCHA GONNA DO WHEN THEY COME FOR YOU?
The U.S. government infamously outlawed the ownership of gold and forced its conversion to paper money at an artificially low price in 1933. Conventional wisdom is that that would not happen again. Steven LaTulippe is not so sure. If too many people figure out the money printing scam and start trying to protect themselves by buying gold and using it as a store of value, history could repeat itself yet.
I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section to do hereby prohibit the hoarding gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations ... ~~ President Franklin D. Roosevelt, April 5, 1933
Well, they went and did it.
Proving that they have learned nothing from history, Congress passed the massive $700 billion "bailout" bill that is allegedly going to save our insolvent banking system. I was hoping against hope that a populist rebellion might somehow stop the oligarchy from helping itself to the taxpayers' wallets, but it was not to be. In the end, the plutocrats got their money.
Frankly, the logic behind the House of Representative's final vote was incomprehensible. When the bill was a straightforward handout to the banks, they rejected it. But after the bill went through the Senate -- which added dozens of pork-barrel spending projects and granted new Orwellian powers to the IRS – the House approved it.
How on earth could anyone rationalize voting for the second bill after they had voted against the first one? Beats me.
Either way, our government took a fateful step down the road to perdition. This payment will not be the last, since the solvency problem is much bigger than a mere $700 billion. By some accounts, trillions of dollars of bad mortgage-backed paper is sloshing around in the financial system. Most of it has no market, because no one knows if any of it is actually worth anything.
What is more, the federal government is bankrupt. By any honest accounting, this year's budget deficit was already heading toward the $600–700 billion range. Since the government cannot pay its existing bills, where will it get the money for this bailout?
The feds will either have to find new suckers to loan them more money, or they will have to turn on the printing press and ignite a nasty bout of hyperinflation.
But the scary truth is that still more disasters are lurking just over the horizon.
First, as Senator Harry Reid let slip the other day, our insurance industry is teetering on the brink. AIG has already gone under, and at least one more major company is allegedly about to give up its ghost. Once that domino falls, who knows how many more will follow?
And close on the heels of the insurance meltdown is the impending debacle in commercial real estate. Greenspan's bubble not only inflated residential housing prices far above rational market levels, it also created a similar bubble in office buildings and shopping malls. Many banks and investment houses are just as awash in bad commercial real estate paper as they are in subprime mortgages. Is the federal government going to take on these bad loans too?
If that is not enough to raise the hair on your neck, the horror does not stop there. Since most state governments rely heavily on property taxes, their balance sheets are starting to drown in red ink. When housing prices drop by 25 or 30% and commercial real estate goes belly-up, so do tax receipts. Yet, unlike the federal government, the states do not control the printing press. They cannot inflate their way out of their predicament.
Governor Schwarzenegger of California has already asked the feds for a multi-billion dollar "loan." He will not be the last. (After having thrown huge piles of cash at banks and insurance companies, can the feds refuse to rescue a bankrupt state government? Politically speaking, I seriously doubt it.)
Also waiting in line at the pig trough is a gaggle of corporations. During last week's chaos, not many folks noticed that the big-three automobile manufacturers got a multi-billion dollar handout from the taxpayers. And now that a precedent has been established, look for other industries (the airlines, for starters) to belly up to the taxpayers' bar for a shot of free "liquidity."
Can the government possibly do this? Can it absorb the entire residential and commercial real estate losses, bail out dozens of state governments, resuscitate the insurance industry, and hand out cash to unprofitable corporations?
Not hardly ... at least not without resorting to the printing press, which will set off a tsunami of hyperinflation. As history has shown over and over, governments that spend themselves into a corner will inevitably try to escape their predicament with counterfeit money. Although this scam works in the short run, it causes much bigger problems down the road. Hyperinflation destroys the very basis of economic growth by poisoning the value of money. Without a stable currency, businesses and individuals cannot make long-term plans, since no one knows what anything will cost even weeks or months into the future.
Which brings us to gold.
Libertarians and paleoconservatives have been discussing just such a hyperinflationary scenario for years. For the most part, the consensus opinion has centered on precious metals. Since governments cannot counterfeit metal, gold generally holds its value whenever fiat currency is debased.
While this investment strategy is a good one, it comes with one major risk.
The reason governments inflate their currency is to surreptitiously confiscate wealth from those individuals who store their wealth in that currency. If too many citizens shield their wealth by investing in gold, they nullify the entire scam. Inflation "works" because citizens are forced -- by legal tender laws -- to store their wealth in a medium controlled by the government. As a government counterfeits its currency, it sucks wealth from all of those people who hold that currency.
The government cannot tolerate too many of its citizens successfully evading inflationary confiscation. In a worst-case scenario, a headlong rush into gold would destroy the dollar completely as individuals replaced it with gold as a medium of wealth storage and exchange.
This cannot be permitted under any circumstances, since it would undermine the very foundations of our governing elite's power.
That is not to say that hyperinflation is the government's only option. When faced with bankruptcy, the government could behave responsibly. It could bring its expenditures into balance with its revenue. It could slash the welfare state, defund the military-industrial complex, and withdraw it forces from the overseas Empire.
Unfortunately -- from the plutocracy's perspective -- such a policy would also massively undermine its power and is, therefore, completely unacceptable.
If responsible management of public finances is a non-starter, the only other alternative is to rescue the dollar by banning private citizens from buying or owning gold.
Given these two options, does anyone doubt which one the government will choose?
If history is any guide, those individuals who have correctly predicted that our government's policies will end in disaster -- and who invest heavily in gold -- will be demonized as "hoarders" and "extremists." In keeping with the theme of our age, such investors might even be accused of "terrorism" (Which, in a twisted way, makes sense. After all, if the government is going to continue to fight the "War on Terror," it needs money. And if the only way it can get money is by confiscating gold, then those who resist the confiscation are "aiding and abetting terrorism.")
Ominously, this logic would permit the government to invoke the Patriot Act and the infamous Military Commissions Act.
In practice, actual confiscation would be easy. Most gold is held in ETFs or bank vaults. The government could simply order these institutions to hand their gold over to the U.S. Treasury. In return, the depositors would be issued compensation in the form of increasingly worthless Federal Reserve Notes (probably at an exchange rate that heavily favors the government. After all, the feds could not allow "hoarders" to make "windfall profits").
Those citizens who hold physical gold would be somewhat more problematic. They would presumably be given a "grace period" to hand over their stash. After that, the feds might have to get a bit rough.
Since many folks would probably try to hide their gold, President Obama would ultimately have no choice but to send federal agents into the countryside and seize it. Given the recent demise of quaint Anglo-Saxon legalisms -- such as search warrants and Habeas Corpus -- this enterprise might not be as difficult as one might think. (Maybe this could be a job for those creepy, Mugabe-style youth brigades that have been popping up around the county.)
I realize that a potentially violent government seizure of private property seems farfetched -- or even apocalyptic -- but those who dismiss it out of hand should remember their history. After all, our government has done this before.
BRAZIL, ARGENTINA START BILATERAL TRANSACTION WITH LOCAL CURRENCIES
Brazil and Argentina have agreed to start conducting bilateral trade transactions using a direct Brazil real/Argentina peso exchange conversion, rather than both converting to U.S. dollars first and in effect conducting the transaction in dollars. This will save a layer of bank foreign exchange charges for both sides.
The system was agreed to in principle well before the current U.S. financial crisis. The main question that occurs to us is why did this all not happen sooner? Pure inertia, or has the U.S. lost some leverage that kept the U.S. dollar denominated transaction system in place?
Brazil and Argentina, two biggest economies in South America, Monday (October 6) launched a new payment system of bilateral transaction with their local currencies, aimed at eliminating the U.S. dollar as a middleman.
The new system was agreed by presidents of the two countries early last month to end decades of mandated trade in dollars. Argentine Central Bank President Martin Redrado and Brazilian Central Bank President Henrique de Campos Meirelles signed the enforcement of the agreement, the Payment System on Local Currency (SML) ...
Under the system, exporters and importers from both countries will make their exchanges with Brazilian reais and Argentine pesos. The trade on reais and pesos will mainly benefit the small and medium companies from both countries because it will avoid the payment of bank charges when converting to dollars.
According to the Central Bank of Argentina, the trade between Brazil and Argentina is about 25 billion U.S. dollars per year.
Brazilian authorities said that with the SML exporters will receive exactly the negotiated value on their currency.
Although this new system seeks to gradually eliminate the dollar from the bilateral trade, the dollar will continue at the exchange.
The central banks of Brazil and Argentina will set the exchange rate between the reais and pesos with respect to the dollar. Brazilian authorities said that the SML deepens the integration between Brazil and Argentina.
If the mechanism works out without incidents between Brazil and Argentina, it will be adopted by other countries of the Mercosur, like Paraguay and Uruguay, Brazilian authorities said.
Brazilian and Argentine authorities said that the partial elimination of the dollar in their bilateral trade does not have to do with the U.S. financial crisis since the SML was arranged a long time ago. Economist Mariano Lamothe from the economic website abeceb.com said that despite the financial crisis in the United States, the dollar is more stable than the peso or reais.
The new payment system has more political importance than technical importance because it will strength ties between Argentina and Brazil, the biggest economies of the Mercosur, Lamothe said.
OFFSHORE UNDER SCRUTINY BUT SECRECY TO SURVIVE
The current financial crisis is producing huge government bailout plans. One might expect this to lead to still more efforts by governments to enhance their tax collection efforts, including, of course, pressuring offshore financial centers further. This article claims the havens might bend some more but will not break. They serve lots of legitimate interests which have nothing to do with evading taxes. Lots of clients value privacy for its own sake. And offshore centers such as Switzerland offer political and financial stability in a structurally unsound world.
The financial crisis will heap even more pressure on tax havens to stop helping clients hide their money from the tax man, but offshore centers look set to retain favor for privacy and other attractions.
Germany infuriated Liechtenstein earlier this year with a probe into Germans stashing assets in the tiny Alpine state, while U.S. authorities are pursuing UBS for helping wealthy Americans hide cash in Switzerland to avoid tax.
Singapore, a growing private banking hub branded as Asia's Switzerland that is seen challenging older offshore centers, is also under pressure to open up from the European Union and due to a probe by Taiwanese prosecutors.
All this scrutiny is scaring away clients, raising banks' compliance costs and accelerating a move to onshore banking.
"The traditional private banking model based on hiding money is under attack," Teodoro Cocca, a banking professor at Johannes Kepler University of Linz, said at the Reuters Wealth Management Summit in Geneva. "Once the dust of the crisis has settled and governments have to finance their huge rescue packages, they will certainly bring the issue of tax competition on the table again."
UBS is expected to reach a deal with U.S. authorities in coming months that could involve revealing some client details, undermining famed Swiss banking secrecy, while Liechtenstein has also signaled willingness to cooperate more with other states. Singapore says it will not budge on its tough bank secrecy laws despite EU demands as it negotiates a free trade deal, but concedes it will act against money laundering.
"It is in our and the banks' interest to keep assets of criminal origin out of the Singapore financial system, thereby safeguarding the reputation of the financial center," a Monetary Authority of Singapore spokeswoman said.
Sebastian Dovey of London-based consulting firm Scorpio Partnership said regulators and politicians had decided that pursuing offshore centers was politically popular.
"Private banks need to use the situation to improve the way that they demonstrate their value to clients," he said. "There will be likely more burden on the banks ... They will certainly have to ensure that the source of wealth is compliant with the market where the wealth was made."
The Boston Consulting Group has forecast total offshore assets under management will climb to $8.8 trillion by 2012 from $7.3 trillion in 2007, but it expects offshore's share of total assets under management to fall to 6.4% from 6.6%.
Traditional offshore centers like Switzerland, the United Kingdom's Channel Islands, Ireland and Luxembourg still make up 2/3 of assets under management, but Singapore and Dubai are growing fast.
While tougher regulation pose the largest threat to traditional centers, the Boston Consulting Group says they are also under revenue pressure as older clients retire, while their heirs might prefer to shift investments onshore.
Bernard Coucke, deputy chief executive of ING Private Banking, said evading taxes was a dying business, but offshore centers still draw clients seeking confidentiality. "I know some clients who move their assets to Switzerland not because of tax reasons but because they do not want people in their village to know the net worth of their family," he said.
Cocca agreed: "Clients from the Middle East adore Switzerland for privacy reasons and not for tax reasons because they do not have to pay tax at all."
Julius Baer Chief Operating Officer Boris Collardi said Swiss banks had more to offer than just confidentiality, such as expertise and sophisticated products.
"This is not something you can find replicated in any of our neighboring countries," he said. "The client will continue to demand Swiss private banking."
Juerg Zeltner, UBS head of wealth management for north, east and central Europe, said protecting privacy would remain a key attraction of Swiss banking, along with political and economic stability and sophisticated regulation.
"People have good reasons to go offshore with their business: access to capital markets, access to privacy, access to know-how," he said. "Everybody tries to overemphasize taxes. That is wrong. There are many other reasons to go offshore."
U.K. BANKS SHOULD SHUT TAX HAVEN UNITS, SAYS LIBERAL MP
Naturally the worldwide banking crisis is being used as fodder for anti-tax haven harangues by their critics. Delusionary or illogical though they may be, this matters little in the current environment. In the name of protecting the integrity of regulatory systems or some such nonsense, critics will use whatever they can sell to get their way.
Liberal Party U.K. Parlimentarian Vince Cable, for instance, thinks that any bank receiving capital from the government should be forced to close their branches in tax havens such as the Channel Islands and Isle of Man. He makes a good point, although not the one he thinks. As we pointed out recently, "offshore" haven accounts in branches of banks headquartered in the U.K. are hardly insulated from HMRC inquiries and the like. Mr. Cable performs a valuable service in pointing out just how uninsulated they are.
The U.K. Treasury should tell banks receiving investment from the government to close their operations in offshore tax havens, said Vince Cable, a Liberal Democrat lawmaker who speaks on finance.
"It seems totally inappropriate for banks funded by the taxpayer to be systematically avoiding British tax or helping customers to do so," Cable said in an interview. "The anomaly of the nationalized banks will bring this issue to a head."
Prime Minister Gordon Brown's government plans to pay £37 billion ($65 billion) for stakes in Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc. Germany, France and the U.S. are working on similar programs to boost banking capital after the credit crisis choked off funding.
Tax havens including the Channel Islands between England and France weaken the U.K. government's regulatory and tax grip on banks and their customers, said Prem Sikka, an accounting professor at the University of Essex.
"Banking units in tax havens don't publish accounts, so you have got a real problem with transparency," Sikka said. "Parts of the banks escape regulation, thereby allowing tax havens to destroy regulatory systems."
With capital markets seized up, banks around the globe are turning to government to shore up their capital, parting with equity stakes in the process. In Britain, the government will hold as much as 60% of RBS and up to 43.5% of a combined HBOS and Lloyds TSB after the transaction is complete.
RBS's RBS International unit, based on the Channel Island of Jersey, serves the "offshore corporate, commercial and financial intermediary sectors," according to its Web site. Zurich-based RBS Coutts keeps accounts for wealthy customers and operates in Jersey, the Cayman Islands and the Isle of Man. ...
Lloyds TSB's offshore unit operates in Jersey and Guernsey, which -- according to the bank's Web site -- are "the leading offshore financial centers in the world," with judicial and fiscal independence, high standards of regulation and a tax neutral regime.
HBOS's Bank of Scotland International unit has offices in Jersey and the Isle of Man, according to the bank's Web site. The bank provides a relationship manager to clients with at least 300,000 pounds in savings or a 500,000-pound offshore mortgage.
"I would like to see the Channel Islands, the Isle of Man and British dependent territories in the Caribbean closed down as tax havens," said Cable, a former government adviser and Royal Dutch Shell Plc economist. "How can we have any form of tax integrity if territories under British jurisdiction are helping rich individuals and companies avoid the tax which other citizens pay?" ...
Britain's opposition Conservative party did not endorse Cable's view.
"We do not believe it automatically follows that banks receiving taxpayer support should be required to close down their international operations," said Philip Hammond, a Conservative member of Parliament who speaks on finance.
Unions and tax campaigners have criticized the government program, saying not enough has been done to assure taxpayer money is secure.
"Hard-working families across the country are having to pick up the tab for the greed and excess which caused the credit crunch," said Derek Simpson, joint general secretary of Unite, which represents bank staff. "The government must close the loopholes that allow super-rich individuals and corporations to avoid paying their fair share of tax."
John Christensen, director of U.K.-based non-profit Tax Justice Network, said U.K. financial regulation should be extended to Britain's tax havens.
"We need full disclosure of banks' activities in these locations so that we can see whether profits generated in the U.K. are being shifted artificially to avoid tax," said Christensen, who was economic adviser to the government of Jersey from 1987 to 1998.
NO COMPENSATION FOR U.K. ICELANDIC BANK OFFSHORE SAVINGS ACCOUNT CUSTOMERS
In what is a sign of the times in more ways than one, British customers of the UK branch of a failed Icelandic bank may lose some or all of their funds. On one hand, the UK equivalent of the U.S. FDIC insurance scheme clearly intends to teach those impudent offshore account holders a lesson about going offshore. On the other hand, in a rational world people would look to the bank and the bank's home country for protection in the event of a default. An Iceland bank's UK branch is still an Iceland bank.
British savers with money saved in offshore accounts stand to lose all, or most, of their money because the accounts are not covered by the UK's Financial Services Compensation Scheme (FSCS), it has been revealed.
Following the collapse of the Icelandic banking system, thousands of Brits might never again see the money that they have saved in offshore accounts in order to avoid paying tax on it.
Customers of Landsbanki Guernsey, for example, do not have access to the UK's compensation scheme and Guernsey does not have a compensation scheme in place, Although Guernsey's treasury and resources minister, Charles Parkinson, has said that he will do all he can to put a Depositor's Protection Scheme in place by the end of the year, this will be of little comfort to those who have already lost their savings.
Those with savings accounts based in the UK, however, will be protected up to £50,000 each, or £100,000 for joint accounts, and the UK Treasury has confirmed it will guarantee 100 per cent of savers with money frozen in Icesave -- the online savings accounts arm of Landsbanki, which was once Iceland's biggest bank, but is now nationalized.
Rick Garrard, who has been appointed as administrator of Landsbanki Guernsey Limited says that he is "taking all possible steps to safeguard the interest of depositors." but added that, "At this time it is unclear whether depositors will receive all of their deposits and accumulated interest outstanding."
Failing the appearance any compensation from the bank itself, the only other hope for Landsbanki Guernsey's customers is using court-appointed administrators to recover their money.
One angry Landsbanki Guernsey customer told the Guernsey Press: "We did not gamble on a horse, we put our money in a bank. Substantial amounts do not cut it. Anything less than 100% would be a severe travesty of justice."
The Isle of Man, on the other hand, has just increased its compensation scheme for savers from £15,000 to £50,000, covering all depositors, regardless of whether or not they live on the island.
OECD TAX BURDENS ON THE RISE
The OECD's 2008 "Annual Report of Revenue Statistics" is out, and shows a slight increase in the OECD aggregate tax-to-GDP ratio, to 36.1%, over the previous year. The trend has been steadily up since 2004, when the number was 35.2%. Denmark and Sweden top the country list with tax-to-GDP ratios to 48.9% and 48.2%.
The OECD's latest Annual Report of Revenue Statistics has shown that Denmark possesses the highest tax-to-GDP ratio in 2007, at 48.9%, followed by Sweden with the second highest at 48.2%. At the other end of the spectrum Mexico and Turkey remain the lowest-taxing countries.
Overall, the average tax burden in the 30 OECD countries, calculated as a proportion of gross domestic product (GDP), is close to its historic peak of 36.1% in 2000. In 2006, the latest year for which complete figures are available, the tax-to-GDP ratio was 35.9%, up from 35.8% in 2005 and 35.2% in 2004.
The Revenue Statistics report presents detailed and internationally comparable tax data in a common format for all OECD countries from 1965 onwards. The latest figures show a continued rise in revenues from corporate income taxes to an average 3.9% of GDP in 2006, compared with 3.7% in 2005 and 3.6% in 2000. In 1975, revenues from corporate income taxes amounted to only 2.2% of GDP.
Despite increases in average tax levels globally many governments have dramatically lowered their estimates for revenue projections in light of the global financial crisis. The OECD Secretary-General Mr. Gurría commented along with the report that "the current economic slowdown is going to put additional pressure on government budgets."
Tax-to-GDP ratios are a reflection of government choices in fiscal policy, which can play a redistributive role that evens out inequalities. Despite Denmark's high tax-to-GDP burden, surveys regularly report a high level of contentment among Danish citizens with the nation’s egalitarian society. By contrast, Mexico's low tax-to-GDP ratio reflects a lack of redistributive policies and hinders the government's ability to invest in the physical and social infrastructure that is required for a sustainable growth path.
In 2007, tax burdens rose in 11 of the 26 countries for which provisional figures are available and fell in 13 others, suggesting that the average ratio for the 30 OECD countries is likely to remain at recent high levels.
Other statistical updates from the latest report show:
- The biggest year-to-year increases were in Hungary, from 37.1% in 2006 to 39.3% in 2007, followed by Korea from 26.8% to 28.7% and Italy, from 42.1% to 43.3%.
- The biggest drop was in the Netherlands, from an estimated 39.3% to an estimated 38.0%.
- Since 1965, the contribution to total government revenues of corporate income taxes increased from 9% to 11% and that of social security charges has jumped from 18% to 25%. The share of personal income taxes, by contrast, has fallen back to below 1965 levels after rising in the 1970s and 1980s.
IRS TO TIGHTEN AUDIT SCREWS IN SEARCH OF NEW REVENUE
With the economy imploding and the U.S. federal deficit exploding, figure on the opposite of a kinder and gentler IRS, says the CEO of a company which helps people resolve disputes with the IRS.
With the U.S. economy slowing and the federal deficit rising, a much needed surge in tax revenue means that a growing number of taxpayers can expect to be audited, while Americans already burdened by tax debt will find it harder than ever to resolve their tax disputes with the Internal Revenue Service (IRS), according to one tax expert.
In fiscal year 2007, IRS audit rates were up from the previous year for individuals overall. Additionally, audits of S Corporations were up 26% and audits of partnerships increased almost 25% from 2006.
Tax expert Michael Rozbruch says that the IRS will continue to increase audits of corporations, partnerships and individuals. He recommends, however, that those in receipt of an audit letter should respond by the deadline in order to avoid being placed in the collection department.
"If the IRS garnishes your wages, they can take as much as 75% of your net pay and make you live on $168 a week," warned Rozbruch, founder and CEO of Tax Resolution Services, a company that provides advise to people in dispute with the IRS. "The IRS is the most brutal collection agency on the planet."
While taxpayers can expect renewed IRS compliance efforts, the national credit crisis will make it even more difficult for Americans to pay their taxes. But Rozbruch says that Americans who anticipate having problems with their taxes should know that there are ways to work with the IRS.
"Not filing your taxes is the worst thing you can do because you can incur a 25% failure to file penalty right off the bat," Rozbruch said.
A report by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University revealed that, while the audit rate for the largest corporations in the United States in 2007 plunged to its lowest level in the last 20 years, the number of small corporation audits climbed in the two years to fiscal year 2007.
The TRAC study, which was based on IRS data, found that the audit rate of small corporations which have assets of between $10 million and $50 million increased to 14.7% in 2007, significantly higher than either the 10.9% or 11.5% audit rates for larger firms in each of the next two higher asset brackets ($50 to $100 million, and $100 to $250 million).
"Moving the focus of the corporate auditors away from the large corporations and towards the smaller ones has been quite effective when it came to increasing the overall number of these kinds of audits," the TRAC researchers observed, although they concluded that this was actually a "counter productive" strategy for the IRS in financial terms.
U.K. TAXMAN TO TAKE SECOND BITE OF OFFSHORE CHERRY?
After failing to match HMRCs expectations the first time round, can a second amnesty make more progress?
The U.K. tax agency, HM Revenue & Customs, is considering a second amnesty for offshore account holders with unreported earnings. The first round took in £400 million, which is considered disappointing. With more publicity this time, combined with all the intervening news on offshore account investigations and scandals, it is thought another round might be more effective. Lack of a high profile tax evasion prosecution and accusations that HMRC lacks sufficient experienced staff to pursue all its leads adds further impetus for a second amnesty.
Plans to offer British taxpayers a second chance to come clean about offshore bank accounts could help speed up a complex crackdown on evasion.
HM Revenue & Customs has already granted one amnesty to those hiding money in offshore accounts to pay outstanding tax, plus interest and a 10% penalty. Last year HMRC raised £400 million after UK taxpayers with money in offshore accounts run by High Street banks were offered leniency in return for voluntary disclosure. Tax experts said HMRC raised less money than it hoped under the offshore disclosure facility, however, and have called for the second amnesty to be given more publicity.
A second amnesty on the income tax owed on interest earned in overseas accounts could help HMRC clear the backlog of cases in its offshore banking investigation, covering tens of thousands of investors with bank accounts in offshore centers ranging from Liechtenstein to Bermuda and Jersey.
Last month HMRC said it had opened enquiries into 12,000 accounts and would proceed with a further 79,000 over the next two years.
Plans for a second amnesty come as HMRC faces growing pressure to show a breakthrough in its investigations. It is keen to announce a high-profile criminal prosecution of taxpayers to act as a deterrent and show progress, but none has been forthcoming. Some experts have said HMRC does not have enough experienced staff to manage the investigation and much of the information it has obtained from banks is of poor quality.
At a meeting earlier this month with tax experts from the accountancy institutes and big firms, HMRC confirmed that it was considering a final offshore tax amnesty. It is expected to be based on information from a much wider range of financial institutions -- possibly more than a hundred.
HMRC has also told accountants that it is considering a series of offshore tax amnesties, although this is thought to be the less likely option. "It is aimed at clearing the bulk of low risk and low value [unpaid tax] cases," said one tax partner familiar with the HMRC offshore crackdown.
Tax experts expect the penalty for a second tax amnesty to be slightly higher than it was under the first one, probably at around 15%.
"If a client [with undeclared tax from an offshore account] phoned me tomorrow my advice would be to settle now rather than wait for a second offshore disclosure facility," said a director of tax investigations at a large accounting firm.
The prospect of a tax amnesty has been given a cautious welcome by accountants, although one told Accountancy Age that HMRC had spent too much time focusing on relatively small cases and not enough on large cases involving rich investors and companies.
HMRC has always insisted that the investigation remains on track, adding it has enough staff working on the investigation.
In an effort to clear some of the smaller cases, HMRC has written to around 5,000 individuals who are suspected of failing to make disclosures under the first tax amnesty. The letters are a more low-key approach to formal enquiries that do not involve large sums of money but can be expensive and time consuming.
HMRC is also relying on technology to help it close the net on offshore bank accounts used for tax evasion. Investigators are using powerful software to compile evidence of accountants linked to offshore tax evasion.
This could pave the way for prosecutions of accountants if they are shown to be complicit in a client's offshore affairs, HMRC has warned.
CARBON TAX BLAMED FOR LIBERALS’ DEFEAT IN CANADIAN POLL
Liberal Party polls lowest share of overall vote in its electoral history.
Canada's Liberal party proposed to tax greenhouse gas emissions and use the revenues to cut assorted other taxes. The party's tax and spend past evidently caught up to it. Our guess is that Canadian voters somehow doubted that the second half of the promise would be fulfilled.
The "green tax" was effectively endorsed by 250 of Canada's leading economists and academics, but, as this article archly points out, "it is the taxpaying millions, not a few score of academics, that decide who will govern."
It is thought that the Canadian Liberal Party's flagship carbon tax policy was largely to blame for its poor showing at the polls during Tuesday's (October 14) general election, which saw Conservative leader Stephen Harper elected to a second term as Prime Minister.
Early indications show that the Conservatives increased their number of seats in the House of Commons to 144 from 127, but have still fallen short of the 155 seats needed to form a majority in the 308-seat chamber, meaning that the government will still be, to a certain extent, reliant on the opposition to pass legislation.
However, while the result was not perhaps the resounding victory that the Conservatives had hoped for, it was a devastating defeat for the Liberal Party, which polled its lowest share of the overall vote in its electoral history and gained only 77 seats, down from 95. The result was also an indictment of its economic plans, and particularly those on tax, which it placed prominently in its election manifesto, and critics of Liberal leader Stephane Dion's much-touted "Green Shift" policy seized upon the result as evidence that taxpayers at large consider green taxes an ineffective means of combating pollution and climate change. However, the result might also reflect the fact that taxpayers are seeking a measure of certainly in these volatile economic times. Certainly this was a point that Harper was keen to drive home on the eve of the election.
"Dion's pre-occupation (because we know he can't set priorities) will be to run his risky carbon tax experiment -- an experiment that will destroy jobs and drive up the price of everything," he warned the electorate on Monday. "If you want a Prime Minister who will experiment with the Canadian economy, then give Mr. Dion a mandate to impose his carbon tax."
The basic premise of the Liberals' Green Shift plan was that taxes would be imposed on greenhouse gas emissions associated with fossil fuels and the revenues generated from these new levies used to lower other taxes. These extra revenues would have also allowed for the creation of new incentives in the existing tax system, such as accelerated depreciation, for industry to invest in more environmentally friendly and fuel-efficient equipment.
The Liberals also promised to cut a number of other taxes, including corporate and individual income tax, and introduce an array of new tax credits to benefit businesses and families. However, the electorate was clearly not impressed enough by these pledges to vote Dion into power.
By contrast, Harper stuck to a more cautious game plan, emphasizing the Conservatives' sound economic and fiscal management through two turbulent years for the global economy, a strategy which has evidently paid dividends. His only major tax proposal in the run up to the election was the distinctly un-green pledge to halve the rate of tax on diesel to curb soaring fuel costs in the transportation sector, which are ultimately passed on to the consumer through higher prices at the cash register.
While the Liberals' carbon tax plan was effectively endorsed by 250 of Canada's leading economists and academics in the run-up to the election, unfortunately for Dion, it is the taxpaying millions, not a few score of academics, that decide who will govern.
YOUR MONEY OR YOUR LIFE
Dozens of executives made off with fortunes just before their companies failed. Can the government claw the money back?
A lot of the earnings reported by financial services firms during the credit bubble were based on severely flawed accounting, to say the very least. Those past overstated earnings -- and more -- are being written off in a hurry today. Do those accounting flaws translate to outright fraud, especially when executive bonuses were based on those inflated profits?
Given the size of the unjustified paychecks and the low esteem in which Wall Street is currently held, this is no small question. To us there is clear cause for company shareholders to file suit to recover the overpayments. The Sarbanes-Oxley laws make explicit provision for recovering management bonuses if "misconduct" leads to a restatement of financials, but the failed financial companies managements could argue they were just stupid, not criminal: "Everyone got sucked into the mania. We were just following the crowd." But the fact that the accounting proved to be so egregiously wrong such a short time later could be grounds for civil recovery, without any need to prove willful misconduct.
Another angle of attack mentioned in this Forbes article uses the "fraudulent conveyance" concept. As we mention many places on this site, if you have incurred an actual legal liability, or a prospective one you should be aware of, it is illegal to try and escape it by conveying the assets that would be used for settlement to a third party, e.g., a trust. Do management bonuses made when a company is facing bankruptcy, or management should know that that is in the cards, constitute fraudulent conveyance? Perhaps, although the answer to a "What did management know and when did they know it?" question would involve a subjective judgement.
Of course we are including the U.S. government in the discussion here, so things like objective consideration of the facts and relevant laws are not actually constraints. One can easily imagine federal prosecutors threatening targeted executives with double-digit counts of fraud, conspiracy, money laundering, and what have you, and quickly eliciting an extortion payment ... we mean settlement. We doubt the properly aggrieved shareholders will end up with their proper share of the recovery in those cases.
It is now clear that much of the bonus pay awarded to executives on Wall Street in the past two years was richly undeserved. In the three years that led up to the recent collapse of seven big financial institutions, the chief executives of those firms collected a total of $80 million in performance bonuses and raked in $210 million in severance pay and earnings from stock sales.
The recently signed bailout bill limits future pay to bank bosses selling toxic assets to the government. Those new rules attempt to block future inequities but do not address the absurdities of the past.
What if the government got creative? Could it use existing laws to confiscate past paychecks? Maybe. And with a Main Street mob howling about Wall Street parachutes, the motive is there. The Feds could try out a rarely applied provision of Sarbanes-Oxley, the Enron-inspired legislation intended to criminalize accounting chicanery. A public company can recoup bonuses paid to its chief executive and financial officers if "any misconduct" causes the firm to restate its financials.
The Securities & Exchange Commission has applied the law only six times. Five of the cases were civil actions involving firms that backdated stock options and misreported their executive pay expense. To settle his case with the feds, former UnitedHealthcare chief executive William McGuire agreed to pay $468 million in bonuses and equity compensation back to the company.
But applying the Sarbox strategy to failed banks is a long shot, says Nader Salehi, partner in the securities practice at law firm Bingham McCutchen in New York. No court has ever ruled on exactly what "misconduct" means, he says. In the backdating cases companies knowingly falsified the date of stock grants. Here bank executives can argue that holding risky mortgage assets was simply a bad business decision.
Another tricky legal weapon can be found in bankruptcy code and federal bank insolvency laws. The feds could argue that a payment to an executive constituted a "fraudulent conveyance." That is the fancy way of describing a transfer of property out of a firm as it teeters on insolvency, to the detriment of creditors. As the conservator to IndyMac, the Federal Deposit Insurance Corporation would claim it was defrauded when the bank lavished pay on executives while already in the process of collapsing. Proving that the bank was already insolvent or that the executives intended to transfer assets out of the reach of creditors could be tough, says Edward Janger, who teaches commercial and bankruptcy law at Brooklyn Law School.
Faced with the iffy prospects, will federal prosecutors resort to more draconian -- and ethically dubious -- tactics? There is nothing like the threat of jail time to get an executive to write a big check to the government. The FBI is investigating Countrywide, IndyMac, American International Group, Fannie Mae and Freddie Mac.
Prosecutors have already secured indictments against Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, claiming that they defrauded the investors in their funds by failing to advise them of coming losses. (Cioffi and Tannin have pleaded not guilty.) The government could level charges of fraud against any executives who spoke in overly glowing terms about their company's prospects while privately acknowledging a different reality. Do you suppose an investigator could turn up an embarrassing e-mail or two in the files of a failed institution?
Judges may not sit still for this. Former Broadcom chairman Henry Samueli recently pleaded guilty to one count of false statements in a case stemming from the options-backdating investigation. In exchange for no jail time he agreed to pay the U.S. Treasury $12 million on top of the $250,000 maximum fine available by law. But U.S. District Judge Cormac Carney in Santa Ana, California rejected the agreement. "The court cannot accept a plea agreement that gives the impression that justice is for sale," Carney wrote.
A noble sentiment -- let us see how long it holds up.
SKYPE ADMITS CHINESE PRIVACY BREACH
Voice-over-IP telecommunications service provider Skype purports to offer end-to-end encrypted communications on its calls. However, the encryption protocol Skype uses is proprietary, so it cannot be independently confirmed whether or not it has "back doors." Past reports out of Germany and now this latest news from China might lead one to conclude that their encryption is less than ironclad.
VoIP outfit Skype has admitted that surveillance was carried out on instant messages sent using the service in China, blaming local partner TOM Online for the eavesdropping. The eBay subsidiary said that it only discovered this week that a text-filter used to block conversations containing sensitive keywords had been altered to store and log conversations, AFP reports. Skype publicly acknowledged the filter two years ago.
Skype had assured customers that messages containing sensitive words were discarded at the client end, and that full end-to-end security is preserved and there is no compromise of people's privacy. The VoIP provider said that the practice had been altered "without our knowledge or consent" and apologized.
The issue came to light after researchers from Citizen Lab, based at the University of Toronto, were able to establish that TOM-Skype was "censoring and logging" text chat messages containing certain keywords. These included democracy, earthquake and milk powder. Mentions of Falun Gong, political opposition to the ruling Chinese Communist Party, or support for Taiwan as a separate political entity also got the tapes rolling, the New York Times reports.
The logged messages were stored on eight insecure publicly-accessible servers, allowing Citizen Lab to read messages and expose the eavesdropping (PDF). The researchers discovered a million censored messages, and were able to work out a list of trigger words by sampling them.
Skype "urgently addressed" the situation with TOM, which closed the security hole. Skype president Josh Silverman said: "We are currently addressing the wider issue of the uploading and storage of certain messages with TOM."
Western firms operating in China commonly adopt the line that they are only local laws when caught kowtowing to the Chinese state's security apparachiks. Whatever Skype does, it is likely to continue to toe the party line.
Skype promotes its platform as offering end-to-end encryption, but the reports from China cast doubt on this assertion. Similar reports from Germany do no more to help the provider.
OPENOFFICE.ORG 3.0 IS AN INCREMENTAL IMPROVEMENT
Free and open source office suite OpenOffice.org has emerged as the principal competitor to Microsoft Office. The price is certainly right. The freely available source code and file format documentation means you are not tied to any one application provider such as Microsoft. And OO.o is sufficiently powerful for most personal and small business needs, if still on the bloated side.
In July we posted an entry previewing the then forthcoming OO.o major release, version 3. Version 3.0 is now out. For those perched on the precipice, the new features may encourage you to make the leap. Linux.com investigates, and lots of their readers chip in with comments based on real world experience.
OpenOffice.org 3.0 ... is not the great leap forward in look and feel that version 2.0 represented, but it justifies its label as a major release with dozens of changes, some major, some minor, but in all more than can be easily summarized.
A new start dialog, support for reading version 1.2 of the Open Document Format, limited support for importing Microsoft VBA macros, increased language support, easier use of multiple languages in the spell check, native support for Mac OS X, OOXML support -- these are just some of the across-the-board changes in version 3.0. However, the largest changes are specific to the major applications. Here's an overview of some of the most important changes.
New in Writer
Writer benefits from several major revisions. Two of the most basic are in the Zoom view. Not only does the status bar at the bottom of the editing window have a slider bar, allowing you to set the zoom as you like rather than relying on preconfigured settings, but by selecting View -> Zoom -> Columns, you can now set how many pages to display at once. Previously, the only way to view multiple pages together was by using Print Preview, which opened in a separate window, so this simple change is a major step forward for those who use Writer's desktop publishing tools, since most page design is based on a two-page spread.
Collaboration also gets a boost, in the form of a complete overhaul of the Note system. Instead of forcing users to hunt through documents for the smear of color that used to designate a note, Writer now displays notes in a side panel on the right of the editing window, with a line leading to their location. You can also use basic formatting in notes, such as bold or italic weights. When you are finished, you can not only easily delete the current note -- something almost impossible to do in previous versions, since it required careful selection with the mouse -- but all notes or all notes by the same user if you choose. Although you may have trouble with the note changing position if you enter it at the end of your typing, in general the new note feature is a significant improvement on the old one.
Probably the largest advance is with cross-references. In earlier versions of Writer, setting up cross-references was a cumbersome affair, requiring you to set the source of the reference, then add the reference itself. Nor could you refer directly to headings, as you can in most word processors, despite the fact that most cross-references are generally to headings. But in version 3.0, you can select your reference from a list of headings, making it far more efficient. Now, if OpenOffice.org would only include an easy way to add the text that introduces a cross-reference, so that you could avoid continually typing phrases like "For more information, see" without fiddling with macros, AutoText, or AutoCorrect, its cross-reference functionality would truly be state of the art. But, for now, the changes are a good start.
New in Calc
Of all OpenOffice.org's applications, Calc probably benefits the most from the improvements in the latest version, with countless minor tweaks to default behavior and to functions. Also, more than any other application, Calc benefits from the ability to add custom error bars, regression equations, and correlation coefficients to charts.
A small but useful change is that highlighting in Calc is now transparent, rather than being an impenetrable black. As basic as it is, this change is enough to enhance your work flow considerably, since you can now see what is selected without interrupting the selection process.
Another small change in Calc is the addition of an options button in Printer Setup, which gives you the option of suppressing blank sheets when printing, or printing only selected sheets. If you have ever tried to print a spreadsheet in a readable form, you may appreciate this extra degree of control.
A larger change in OpenOffice.org's spreadsheet is a revised Solver for formulae. The revised tool now allows you to set the Condition to Integer or Binary, as well as less than, greater than, or equal to, and includes a setting to limit the time spent solving for various variables. It also seems to include an option of choosing a solver to use, although for most people, the only choice will be the one that comes with version 3.0.
Perhaps the largest change in Calc is the increase in its scope, with 1,024 columns supported instead of the 256 in previous versions. If you are using that many columns, you should contemplate switching to Base or some other database, but many seem to prefer to stay with spreadsheets, and, for them, the increase puts Calc on par with Microsoft Excel.
New in Impress
In early releases, OpenOffice.org 3 appeared to be following the lead of Microsoft PowerPoint by removing its initial wizard. Given users' growing familiarity with slide shows, such a move might have been justified, but, in the end, OpenOffice.org stuck with the wizard.
The most important change in version 3.0 is that Impress finally gains the ability to add tables without the kludge of assembling separate text frames. Tables still cannot be nested to create complex layouts, and Impress gives them a background of the default color, which means that you probably have to edit them as soon as you create them, but this handicap can be overcome by creating a master slide or two for tables, then saving the file that holds them as a template. What matters is that, with the addition in recent versions of the ability to add sound across all slides from the Slide Transition pane, Impress has finally achieved total parity in features with PowerPoint. If it could only be shipped with an assortment of usable templates, then free software users would have very little left to ask.
In addition, tables are now available in Draw, which shares much its code with Impress. In Draw, the addition of tables enhances the application's ability to serve as a basic desktop publishing tool.
Beyond the default packages
Since version 2.0 came out, OpenOffice.org has developed a thriving extensions community. Those who want to look beyond the standard code will find that browsing the extensions repository well worth the effort. Many users already swear by tools such as Sun Report Builder and Sun Presentation Minimizer.
However, along with the release of version 3.0 come at least two extensions built specifically for the version. PDF Import Extension, which Linux.com has already reviewed, opens PDF files in Draw, allowing you to edit or recover PDF files. If you frequently deliver slide shows, you should also appreciate the Presenter Console Extension, which allows you to view your notes and the next slide privately while delivering the presentation.
Once you have the extensions of your choice installed, you will also find that version 3.0 has an automatic updater, just as Firefox does for its extensions.
One disappointment in version 3.0 is that no comprehensive effort has been made to improve interface consistency, or to revamp the dialog windows, which have a 1990s feel about them and look increasingly outdated and cluttered. Possibly, lack of attention to such concerns reflects the fact that the same code is used for StarOffice, Sun's commercial version of OpenOffice.org. In the marketplace where StarOffice operates, enhancements are bound to be greater selling points than an overhaul of key features. But, whatever the reason, those who want the interface cleaned up may have to wait at least another two or three years until the next major release.
At least OpenOffice.org's frumpy interface is familiar. And with all the changes in version 3.0, most users will probably discover at least half a dozen ways in which their office productivity is suddenly easier.
OpenOffice.org is available in English and a few other common languages from the project's download page. Versions for other languages should become available over the next few weeks.
KRUGMAN AND THE NOBEL FRAUD
The now Nobel Laureate is just another statist hack and nothing else.
The establishment of the Nobel prize in economics was always a problematic undertaking, in our view. Try as it might to challenge physics in arcane uses of mathematics, the economics profession is simply not a science like physics, chemistry, physiology or medicine. The prize could just as well be called the Nobel prize in applied mathematical literature.
Having said that, there is no question that over the years the prize has been awarded to many brilliant, scholarly, and often insightful men, such as Paul Samuelson, Kenneth Arrow, Friedrich Von Hayek, Milton Friedman, George Stigler, Gerard Debreu, James Buchanan, Robert Solow, Ronald Coase, Gary Becker, Amartya Sen, and Robert Mundell. And none of the lesser light awardees disgraced the profession or the Nobel name. Until now.
Songwriter and satirist Tom Lehrer famously said that the awarding of the Nobel Peace Prize to Kissinger in 1973 made political satire obsolete. Some similarly pithy quote applies to the awarding of Nobel Economics Prize to Paul Krugman -- we just cannot come up with it on short notice. The mind reels.
The award was nominally for Krugman's theories on international trade, but Krugman is far better known for his pro-state musings on the New York Times editorial page. One cannot escape the suspicion that the award was designed to confer legitimacy on these decidedly non-scholarly calls for yet more intervention. In the end the Nobel committee has damaged its reputation and name.
"What's wrong?" my wife asked anxiously as I looked at the computer screen. I did not answer, except to blurt out another, "Oh, no!" Finally, I looked at her and said quietly, "Paul Krugman has won the Nobel in economics."
"Whew!" she answered. "I thought maybe one of your parents had died."
"No," I replied. "This is much worse."
And, so an intellectual event matched only by the sacking of Constantinople in 1453, the Swedish central bank has announced that Krugman will take his place alongside F.A. Hayek and others as the Nobel laureate. Now, the bank announced that the prize was for Krugman's semi-discombobulated trade theories, not his incoherent, Keynesian columns that he writes for the Democratic Party, er, the editorial page of the New York Times.
Now, before going on, I must say that most of the people who have received the Nobel in economics actually were economists; this is the first time I have seen a pure political operative receive the prize. However, there is precedence for this outrage: last year, Al Gore won the Nobel Peace Prize for his crackpot movie on Global Warming. This year Gore preaches violence against those who might have different thoughts or who might be economic competitors of his own bankrolled "new technologies."
(If any executive were to call for violence to shut down his competitors, he would be vulnerable to being charged under the RICO statutes. Gore, of course, receives a free pass. That is what a Nobel can do.)
Thus, armed with his Nobel, Krugman almost surely will be able to set forth with his own crackpot economic "theories" and ride this prize to a high position in the upcoming Obama administration. Because he has been front-and-center in the latest debate on the meltdown in financial markets, perhaps it is time to see what Mr. Nobel believes will be our economic salvation.
What better place to start than with today's column in which he praises the British government for nationalizing the country's banks? He writes:
But the (Gordon) Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness has not been matched by any other Western government, least of all our own.
What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.
What can be done to stem the crisis? Aid to homeowners, though desirable, cannot prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then -- and the solution adopted in many previous financial crises -- is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.
This sort of temporary part-nationalization, which is often referred to as an "equity injection," is the crisis solution advocated by many economists -- and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.
As with so many other Krugman howlers, it is hard to know where to begin. First, this "liquidity crisis" exists because the banks found themselves owning worthless assets and, thus, could not raise the cash to make loans. This is kind of like my throwing my household money into pork bellies, losing my shirt, and then not having the cash on hand to pay my bills.
Krugman makes a huge assumption, and that is that governments actually have the spare change to raise the money to "inject" into the system. The $700 billion boondoggle (which he supported) means the government must float what surely has to be the largest single bond issue in history, with the seller on the hunt for suckers. (I do not even want to think of logistics of this nonsensical exercise, except to say that in the end, the Fed will purchase the bonds and monetize the whole thing.)
Thus, this is not an "equity injection." It is a backdoor attempt by the government to print money, give it to banks, and call it equity. Furthermore, the reason that these banks got into trouble in the first place was because they made a series of very bad loans, yet the government is insisting that they continue to march in the same direction, even though a very high and thick wall stands in their way.
However, Krugman saves the best for last. The problem, he declares, is that the Bush administration is too free-market oriented to be able to solve this crisis:
Meanwhile, the British government went straight to the heart of the problem -- and moved to address it with stunning speed. On Wednesday, Mr. Brown's officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday -- five days after the plan's announcement.
At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain's lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson -- after arguably wasting several precious weeks -- has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).
As I said, we still do not know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?
It is hard to avoid the sense that Mr. Paulson's initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as "private good, public bad," which must have made it hard to face up to the need for partial government ownership of the financial sector.
Now, I know that having a Nobel Prize gives one a certain amount of authority to speak in certain areas, but I must say that an administration that has ratcheted government spending to ruinous levels, effectively nationalized the financial system, and engages in systematic abuse of its citizens hardly qualifies as "free-market." Henry Paulson might be a lot of things, but a clone of Ron Paul is not one of them.
So, Krugman continues to peddle his snake oil, but today he gets to do it as the Nobel Laureate instead of just another partisan hack. Nonetheless, having a Nobel will enhance his stature as a guy who supposedly knows something. However, just as the peace prize does not make Al Gore a man of peace, neither does the Nobel Prize in Economics make Paul Krugman an economist. As I wrote five years ago:
... since my own writings have been extremely critical of the Bush Administration and both political parties, it does not bother me to read Krugman's anti-Republican rants. What does bother me is that the man pretends to be something he clearly is not: an economist.
That is correct. Let me say it again. Paul Krugman is not an economist. His colleagues in the economics profession and the editorial board of the Times may call him an economist, but that does not make him one.
This is harsh criticism, I realize, so I must explain my views in full. Yes, Krugman has a Ph.D. from MIT in economics, but his writings, both popular and academic, demonstrate that he does not believe in laws of economics. Instead, like most folks with socialist leanings, he believes that the state is both omniscient and omnipotent and simply by fiat can eliminate those pesky little problems caused by scarcity.
Whether it is the discussion of medical care or the nation's financial system, Krugman believes that the state through edicts and the use of force can eliminate scarcity, a point of view he has not changed throughout the years. The Nobel Laureate, in the end, is just another statist hack and nothing else.
Since we are approaching Halloween, perhaps Krugman can go to his parties masquerading as an economist.
Gambling, Economic Growth and Imagination
The man who should have been honored with the Nobel economics prize.
"Spengler" revisits the work of Reuven Brenner, who threatens to turn the standard economic and financial behavioral model on its head by arguing that risk-seeking behavior is fundamental to human action -- not risk avoidance. Spengler previously considered Brenner's newest book, A World of Chance: Betting on Religion, Games, Wall Street, a couple of weeks ago, as covered here.
Erudite as ever, Spengler avers that Brenner was a more deserving recipient of the Nobel economics prize this year than Paul Krugman. Spengler's work is not only pathbreaking; it is extremely relevant in explaining this year's economic tumult. The contributions Krugman was cited for by the Nobel people, on the other hand, merely refine the existing hackneyed and flawed body of mainline economic theory.
An old joke that once made its way around academic circles was that at a general meeting of social science representatives a proposal was made to combine the disciplines of sociology and economics. The idea was that the new merged field would have the relevance of sociology and the rigour of economics. However, the whole idea was scuttled when someone pointed out it might end up with the relevance of economics and the rigour of sociology! Of course the joke is stereotype-based, but like all stereotypes they do not just come out of the blue. And Brenner's work could not be more relevant.
Brenner's work also implicitly puts economics in its proper context, reminding us of that humans are far more than economic beings. They are imaginative beings. That imagination can make us or break us. It can lead to transcendence or pointless misery.
America's homeowners feel like busted gamblers after a bender in Vegas. They wagered not only the nest egg, but the nest, with the abandon of tulip-bulb traders in 17th century Holland. Americans are hard put to explain how the American dream turned into a chip on the craps table. The focal point of speculation was the asset one usually associates with secure domesticity. What happened to the risk-averse Economic Man of textbooks?
The textbook was misleading to begin with: we are all gamblers and always have been, argues Reuven Brenner, the Repap Professor of Business at McGill University. In a series of books beginning in 1983 with History: The Human Gamble and culminating with his latest volume, A World of Chance: Betting on Religion, Games, Wall Street, Brenner yanks economics inside-out by placing risky behavior at the center of the economic model.
Conventional economics describes an artificial world of slight deviations from equilibrium. Brenner presents the real world, in all its danger and uncertainty. Man lives not only by the sweat of his brow, but by the fortitude of his intestines, for survival demands that we take mortal leaps of a kind that are unknown to the conventional model. Men who would prefer to be timid risk everything to leapfrog their peers before they themselves are left behind.
Rather than award yet another Nobel Prize to an economist who put bells and whistles on the conventional model (Princeton University Professor Paul Krugman was honored this past weekend "for his analysis of trade patterns and location of economic activity",) the Swedish Academy should have honored Brenner, who gives us a model that makes sense in the real world of tumult and uncertainty -- 2008 should have been Brenner's year, given the cataclysmic breakdown of the conventional model. Only a few months ago, the governments of the world went about their business as if nothing unusual was at work; now they are lurching from one emergency plan to another and warning of a new Great Depression.
This sort of thing is not supposed to happen in the imaginary world of the consensus economic model. Radical changes, though, are the underlying premises of Brenner's approach, which "deals with jumps -- relatively large changes. The traditional economic models can deal with small changes, where people adapt passively but do not bet on any new idea," he writes. People take risks because they know that gambling may be the only survival strategy under given circumstances.
Why, for example, would Americans bet their homes? Within Brenner's framework, we need to look to the circumstances that prompt apparent risk-friendliness, rather than click our tongues over an outbreak of collective madness. As Brenner and his wife, economist Gabrielle Brenner, explain:
If people reach the age of 50 or 55 and have not "made it", what are their financial options to still live the good life? Except for allocating a few bucks to buy lottery tickets, it is hard to think of any other option. If people find themselves down on their luck and see no immediate opportunities to get rich, what can they do to sustain their hopes and dreams? Allocating a fraction of their portfolios on games with a chance to win a large prize is among the options. And when people are leapfrogged -- that is, when some "Joneses" who were "below" them jump ahead -- how can they catch up? They will tend to challenge their luck too for a while, taking risks that they might have contemplated before in business, financial markets, and other areas but did not follow up with action.
As it happens, a huge number of Americans began to turn 50 or 55 during the past 10 years, as the baby boomers approached retirement. Between 2005 and 2025, the number of Americans aged 60 or over will jump from around 15% of the population to 25%.
Between 1990 and 2000, that is, the baby boomers reached the age at which workers are supposed to earn their highest lifetime compensation and salt away most of their retirement savings. Americans who saved money during the 1990s put a great deal of it into the stock market and were bitterly disappointed. An American saver who invested in 1996, just as the boom was getting underway, would have given up all his gains by October 2002, at the stock market's [nadir] following the technology stock collapse. If the same investor held on to a broad market portfolio all the way to the present, he would only break even after inflation.
American asset markets did not offer returns high enough for the baby boomers to earn enough to retire. There are a number of reasons for this. One is that not only Americans, but Europeans, Japanese, and above all Middle Easterners are aging rapidly and seeking retirement assets, such that the price of all capital assets rose and their prospective rate of return fell. Capital markets, as I have argued in the past, come down to old people lending money to young people, and the declining numbers of young people in the industrial world during the past generation are reflected in shrinking investment opportunities.
The prospective retirees of the world had no choice but to take more risk in order to earn the returns they required. Riskier assets were brought to the marketplace, such as subprime mortgages and high-yield loans. Professional gamblers -- the hedge funds -- raised US$4 trillion to bet on the riskiest portion of pools of mortgages and corporate credit. Americans found that the global demand for mortgage bonds created an inexhaustible supply of cheap credit even for the riskiest borrowers.
With home prices rising 10% a year between 1998 and 2006, Americans found that they could use leverage to achieve triple-digit returns on their equity (if you buy a $200,000 house with $10,000 down and its price rises by 10%, or $20,000, your return on equity is 200%).
In retrospect, it may seem silly for the baby boomers to have assumed that they could double the price of their homes and then all sell their homes to each other and retire on the proceeds. Demographics ultimately destroyed the home price bubble.
As a group, the baby boomers did not have sufficient funds on which to retire, and, given the condition of American asset markets, could not earn sufficient returns on conventional assets. Instead, they chose to "leap into uncertainty", in Brenner's phrase. This sounds fairly general, but Brenner has elaborated his view in a number of startling ways. How, for example, do entrepreneurs set prices for new products, where demand is unknown? Brenner demonstrates (in "Rivalry") that the mechanism by which they do so depends on the creation of new markets. In effect, Brenner has replaced the view of human behavior at the center of economics, and from this elaborated a set of theories, each of which has enormous analytic power.
In Brenner's model, survival means maintaining one's social status, one's place in the pecking order or the corporate food chain, because falling behind decreases the likelihood of survival. Rivalry is the driving force, not an abstract measure of utility. There is something profoundly Biblical in this view: "I considered all labor and all excelling in work, that it is a man's rivalry with his neighbor. This also is vanity and a striving after wind." ~~ Ecclesiastes 4:4.
The Jewish sages of late antiquity spoke of an "evil impulse", variously identified with competitive or sexual drives, without which no one would build a house, start a family or open a business. The entrepreneur, in Brenner's view, resembles Goethe's Mephistopheles, who introduces himself as "the spirit that always wishes evil, but always does good."
Brenner strongly believes that the greatest contribution to welfare comes from letting individuals bet on ideas, pursue innovations, and overturn the existing order of things. A profound faith in a beneficent providence is required to draw this conclusion, for it is easy to argue that betting on ideas may produce apocalyptically harmful outcomes.
Rivalry between nations never was so clear cut as in the preparations for World War l. Each European nation feared being leapfrogged by the others. France feared Germany's high population growth rate, Russia feared Germany's intrusion into the restive western wing of its empire, Germany feared Russian industrialization, England feared the losses of its ability to control the continental balance of power, Italy felt left out, and so forth. All had excellent reasons to fight rather than be left behind, but the result was the collective ruin of all the European nations.
At the outbreak of the war in 1914, some of Europe's best minds exulted in the "leap into uncertainty." Thomas Mann, arguably the greatest writer of the past century, wrote a famous essay entitled "Thoughts in War" comparing the risk-taking attitude of the artist and that of the soldier. A great sense of liberation from the ordinary swept over Europe as its nations prepared to risk everything for their place at the head of the queue. The trouble is that they risked everything, and they all lost everything.
The stench of brimstone precedes the entrepreneur. As God told Mephistopheles in the Prologue in Heaven of Goethe's Faust, human beings tend toward unconditional rest, and to keep them on their toes God assigns them a companion who must act as and be perceived as a devil. The great theorist of entrepreneurship, Frank Knight, of the University of Chicago, is one of Reuven Brenner's spiritual ancestors. His 1921 book Risk, Uncertainty and Profit showed that entrepreneurs' compensation derives from the leap into uncertainty, that is, the assumption of unhedgable risk.
Knight, unlike Brenner, thought that entrepreneurship did not add enough wealth to justify the disruption that it occasioned. Joseph Schumpeter, who took from Mephisto the notion of creative destruction and applied it to economics, was pessimistic about the future of capitalism. He thought communism would triumph.
The apogee of gambling on ideas well might have been the Internet stock bubble of the late 1990s, when any undergraduate with a few computer science credits could launch a company on the equity market. It is hard to find the fault in the system from a pure economic standpoint, for America's markets were the world's most efficient. The trouble is that when we speak of a leap into uncertainty, we leave the realm of probability distributions and enter the realm of the imagination. The entrepreneur's vision of society five or 10 or 20 years ahead is what counts -- how lives, mores and tastes will change.
Thomas Alva Edison had one sort of vision of the future when he invented the electric light bulb and the phonograph. The Internet entrepreneurs of 1999 had quite a different one, in which the delights of youth culture would somehow substitute for cash flow. Once investors concluded that music downloads, multi-player games, chat rooms and pornography did not justify a market capitalization larger than America's manufacturing plant, the illusion was gone and so were the valuations.
For that matter, the ill-fated markets for structured credit and mortgages of the past 10 years had the undivided attention of some of the world's best applied mathematicians. Never before were risks so parsed, measured, cut, dried and marketed to different investor groups with different risk preferences. Professional gamblers, or "hedge funds", were enlisted to manage the riskiest part of the capital structure, while legions of mathematicians arranged other securities to be as safe as possible -- for example, AAA-rated securities backed by subprime mortgages that are now trading at 50 cents on the dollar.
We have no choice but to leap into uncertainty, where imagination takes the place of probability distributions. Standing still and doing nothing is the most dangerous strategy of all. The one thing we know about all places and all times is that if you stay in the same place doing the same thing long enough, someone is going to come along and rape the crops, burn the women and take you out of the picture.
But what if our imagination goes wrong? If Ecclesiastes (4:4) recognized that business stems from rivalry, as Reuven Brenner maintains, this must be balanced against Jeremiah (7:24), which warns that the people "walked in the counsels and in the imagination of their evil heart, and went backward, and not forward". Brenner has given us as much as economics possibly can: He walks us to the moment of the mortal leap, describes the conditions that motivate it, and reminds us that we have no choice.
But it is important to keep in mind that economics does not explain everything. If we decline to raise a next generation, and abandon ourselves to so-called youth culture, ultimately we will encounter imbalances that economic policy cannot cure. Our imagination is the basis on which we make leaps into uncertainty, and how we cultivate this imagination ultimately may be of greater import than economics as such.
Guernsey real estate agents lash out at new anti-money-laundering laws.
Guernsey real estate agents will soon be required to run clients through a host of extra due dilligence checks in preparation for a purchase or sale transaction. This imposes extra costs and will undoubtedly discourage some transactions. No surprise that the agents take exception to the new requirements.
Estate agents have lashed out at new anti-money-laundering laws being imposed upon them. Firms have until 5 December to get in line with legislation that is being introduced by the Guernsey Financial Services Commission to combat the financing of terrorism.
The rules mean estate agents will have to perform a host of extra checks when they act for a client in relation to the purchase or sale of property.
Martel Maides director Keith Enevoldsen (pictured) said the law was piling financial pressure onto firms at a time when costs were already rising. "We are effectively being asked to employ an extra part-time member of staff to deal with this who is not generating any income. A small company like us cannot afford it in the current climate, so I am having to do it myself. The majority of estate agents in Guernsey are not big enough to absorb the cost of this. However, it is the law and we have no choice other than to comply -- but we are not happy about it."
Luxembourg Finance Minister Says U.K. Will Consider Adopting Euro after Crisis
The Luxembourg Finance Minister claims the U.K. will consider giving up its beloved pound and adopting the euro once the current crisis passes. Given the poor fundamentals of the UK economy one can see why this might be so, but we will believe it when it happens.
Luxembourg Finance Minister Jean-Claude Juncker told German newspaper Rheinischer Merkur the U.K. will consider adopting the euro once the credit crisis abates.
"The British prime minister had to beg to be let into the room in which the euro group was meeting," Juncker told the newspaper in an interview published today. "I am sure that when the storm is over, the British will think about whether they shouldn't become an equal in all decision-making bodies."
"The sole aim and purpose of all negotiations" by world leaders "was to win back trust of financial markets and investors," Juncker said. "We have obviously achieved that. Now it is about maintaining this trust on markets in a lasting way."
Juncker, who chairs a group of counterparts from the euro area, said he does not think "it is necessary to make a clean sweep of the executive floors" of global banks after the credit crisis. "I am demanding, however, that everyone remembers after the crisis, who solved it. Politicians did and not bankers."
This last statement is true "gag me with a spoon" material. The banking industry in its current form is an almost pure creation of politicians. End of story.
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