Archive for the ‘Finance’ Category

You can buy securities for $100!

Something more new for when I have to teach Monetary Policy.

The U.S. government lowered the minimum amount for buying Treasury securities to $100 from $1,000 in a plan to broaden the market to more individuals.

Treasury bills, notes, bonds and inflation-protected securities will be available to purchase in $100 increments beginning next month, the Treasury Department said yesterday in a statement.

“The new, lower minimum Treasury amount will put marketable securities within reach of more savers and investors in the United States and around the world,” Anthony Ryan, the assistant Treasury secretary for financial markets, said in the statement.

This is probably way too little, too late, but at least it is. One of the big, big differencees between Reagan’s debt and that of this government is that Reagan at least borrowed money from American households – meaning that, yes, American household wealth appreciated as budget deficits expanded.

Now? People eat their seed corn, tapping into home equity for cars and flat-screen TVs. No more govenrment savings, no more household savings. It will be interesting to see what sort of capacity ordinary households have to take advantage of this.

Cafe Hayek, meet the Treasury Department

The US Treasury Department on Thursday said it agreed with Abu Dhabi and Singapore on a set of principles for sovereign wealth funds that specifies politics should not influence their decisions.

The foreign-controlled funds, many based in the Middle East, have aroused U.S. lawmakers’ concern because they have poured billions of dollars into large stakes in Wall Street firms and other businesses and fanned fears the U.S. was losing control of its destiny.

The Treasury has been pressing since last autumn for the IMF to develop the ”best practices” guide. The funds have become increasingly active in buying U.S. assets with growing foreign exchange reserves from oil and international trade.

And that would be Don Boudreaux of Cafe Hayek – who would most likely remind us of the practicalities of trade: running up monster deficits, needing and attracting capital, one gets the idea.

Mostly I’m just unsympathetic to such boorishness by a system that desperately needs the food, even while it bites the hand providing it. I sure do like to see tribalism weed its way into both international relations and international finance, though.

The IMF has a sense of humour like you won’t believe…

I mean, I’m assuming this was intended as a lesson to the rest of us about how dry wit can actually be. Right?

Commodity prices part speculative

The strength of commodities prices, such as crude oil, this year is explained in a large part by speculative factors such as investors piling into the new asset class and the weakness of the US dollar, the International Monetary Fund said on Thursday.

The IMF said that the constellation of dollar depreciation and falling short-term real interest rates “has pushed up commodity prices through a number of channels, including by enhancing the attractiveness of commodities as an alternative asset.”

“Overall, these financial factors seem to explain a large part of the increase in crude oil prices so far in 2008, as well as the rising prices of other commodities,” it said.

Laugh? I nearly died. Next they’ll be telling us that the problem with fund management is that managers aren’t actually investors – they just get paid to buy and sell things. Maybe their directors will just give a succession of progressively more curmudgeonly interviews in which they reminisce about their day, when markets trading according to fundamentals. Then maybe they’ll apologise to Argentina.

Green tech: USD20tr of fictitious wealth

According to Eric Janszen:

Eric Janszen is an angel investor and founder of the contrarian market website, which The New York Times credited with “accurately predicting that the [internet] bubble would pop.” Now Janszen believes the American economy needs a fundamental restructuring away from its foundations in finance, insurance and real estate. His prescription: a new bubble based on green technologies.

In a widely discussed Harper’s article in February, “The Next Bubble: Priming the Markets for Tomorrow’s Crash,” Janszen argued that clean tech is the only sector that could create enough “fictitious value” to replace the losses from the housing bubble, if only temporarily.

Much more interesting than the (so far, for me) dull world of current financial meltdown (meltdowns? Melts-down? I don’t know). Janszen made an interesting argument in his Harper’s essay:

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

“The bubble cycle has replaced the business cycle.” I shall have to remember that one, come macro (a few lectures hence). Back in his Wired interview, he had something even more creative:

Wired: What do you see as the nascent financing and credit vehicles that could come up with the trillions of dollars needed to finance clean tech without creating a bubble?

Janszen: One way to do it is to put a floating tariff on the price of oil and gradually raise the price up to $200 or $300 a barrel. As long as you do it gradually, the economy can respond to it. That’s the beauty of our system. It has responded very calmly to an increase from $20 to $100. The economy hasn’t collapsed. It’s definitely slowing, but it’s not wrecking it. You could create a process that gradually forced a lot of relatively painless transition without wrecking the economy.

That’d certainly make things a lot more interesting…

Numbers, numbers: the Fed has committed half its money so far

An answer, an answer! To my question about just how much “money” has been handed out at the altar of M3. From Krugman’s blog:

If Steve Waldman has his math right — that is, if we’re interpreting the Fed’s statements correctly — Bernanke and co. have now committed $400 billion to TAF, repos, TSLF. That’s almost half the Fed’s balance sheet effectively placed in non-standard assets. Wow.

That’s Steve Waldman of Interfluidity, whose extensive posts on the matter are most satisfying.

Krugman also mentions the latest foray (the quite daft Term Securities Lending Facility):

So basically the Fed is going to be swapping Treasuries for dubious securities, in an attempt to give the market a REALLY BIG slap in the face.

Similarly panned at the blog the Big Picture, who also advises going “crazy short” if the market’s spiv rally starts to fade (I would say “when”, but I’m a pessimist. “Spiv”, by the way, is an Australian term – actually it’s from all over, but used still in Australia to describe something that looks good on the surface, but whose sheen will soon fade as it falls to bits around you).

“Spiv” economy is, for me, a pretty decent catch-all for this government, its economy and all of its economic credentials (their orchestra isn’t too too bad). Good on the surface, talked-up like all good games but, faced with the famous question of Donald Sutherland:

Pinkley: [impersonating a general] Very pretty, General. Very pretty. But, can they fight?

No – it/they cannot fight. Oh, for a body of government that hadn’t eaten Fukuyama for bloody breakfast every morning for a decade!

GM’s kids are moving back home

Almost a decade after spinning off the auto parts maker Delphi and more than two years after Delphi filed for bankruptcy, General Motors is still grappling with the costly legacy of its former subsidiary.

With credit markets in turmoil and the clock ticking to save a $6.1 billion financing package needed for Delphi to exit from Chapter 11 protection by its target, the end of March, GM has stepped forward as a lender of last resort.

GM’s latest offer: $2.25 billion that had been scheduled to be paid out to the automaker in cash can instead be converted into debt for Delphi.

If the current exit deal falls through and another is not cobbled together, GM said, that could disrupt production, complicate its relations with the United Auto Workers, and drive up the final cost of its exposure to Delphi, which filed for bankruptcy in October 2005.

I find this story an excellent metaphor for the New Suburban Fable: save like mad (possibly assume debt); send kids to University; have them end up moving back home for want of money, affordable housing, the comforts of your middle-class life. Watching them consume your golden years while you wonder exactly what it was all for. If The Corporation can be individual, it sure as hell can be a besieged parent of boomerang children.

It is also a nice example of the wonderous over-investment of the 90s, as well as the magical financial re-tooling of corporate America that continued until, say, last Summer. All this anti-vertical-integration behaviour, using private equity groups as a weird sort of anti-middle man (rather than adding to the cost of doing business – the reason why vertical integration makes sense in the first place – their leveraged buyouts of spun-off corporate sections were supposed to generate so much cash for a company that everybody would get well in the long run) – it seems like a funny thing happened, on the way (laughing, for a little while) to the bank.

I shouldn’t be the least bit surprised to see parent company having to re-embrace formerly spun-off critical suppliers, over the next year or so.

Oh, if only the easy money had continued. We should have known all along that Dad was getting wise to us now

Microfinance loans – for Americans

Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.

The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.

Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.

In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.

Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.

Very amusing. And to think of all the bad press Hugo Chavez got with his oil. From a previous article:

The US presents a ripe market for Grameen, Mr Yunus claims, because it has a large population that sits outside the formal banking system. As many as 28m people, earning $510bn a year, do not have any relationship with a financial institution, according to the Federal Deposit Insurance Corporation.

Those who have no bank accounts rely on fringe banking services such as cheque cashers, pawnshops and payday lenders.

Payday lenders can charge as much as 1,560 per cent for a week’s cash ad- vance against forward-dated cheques, according to the Consumer Federation of America. Payday lenders made $48bn (€33bn, £24bn) in loans last year, while pawnshops’ business has been soaring as the US heads into a slowdown.

“You have the payday loans, you have the cheque cashing companies, and they’re flourishing, and they are pretty bold, the big advertisements in the newspapers, big ads on television . . . so this shows how much [of a] gap there is in the system,” Mr Yunus said.

I can understand the argument about the greater complexity of the tax system here – although that supposes that recipients are engaging with the tax system fully. A decent proportion of those Americans without bank accounts are Americans without papers, too, I would expect. One hopes his doesn’t wind up leading to a load of poor dream-chasers simply having those hopes dashed by the cruelty of the tax system (you know, the one that now doesn’t chase rich tax-evaders/avoiders, just middle-class-and-lower tax-evaders/avoiders).

Corporate bonds, LIBOR and the Fed target rate

Speaking of Paul Krugman (he’s discussing financial crises at Google, here):

Ben Bernanke has cut interest rates a lot since last summer. But can he make a difference? Or is he just, as the old line has it, pushing on a string?

Here’s the Fed funds target rate (red line) — which is what the Fed actually controls — versus the interest rate on Baa corporate bonds (blue line), which is probably a better guide to what matters for actual business spending.

It’s pretty grim. Basically, deteriorating credit conditions have offset everything the Fed has done. Doubleplus ungood.

This is an aspect of modern monetary policy. As we’ve seen since the Summer in practice, Central banks actually control less and less of what counts as Money Supply (since Money moved from Fiat proper to debt-backed) – meaning markets can run away from stabilising control a little quickly – not that utterly absent regulation over didn’t contribute mightily.

Krugman also discusses the LIBOR – the London Inter-Bank Offering Rate. It’s what banks charge to lend to one another, and we compare it so what banks charge to lend to the govenrment. Funnily enough, after having run so high through 2007, it’s now below the Fed target reate:


Perhaps we will see yet more rate cuts, then (since, by rights, it ought to be higher – I think. What do I know about finance, anyway?).

Could it also make interest-only loans more (meaning, of course, too) attractive to distressed mortgagees? Man, I hope not. Krugman estimates, up in that video, that the US consists of around 40% of households with negative equity in their homes.

Microfinance: the smart money

Microfinance: “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.”

Today’s International Herald Tribune (specifically, Daniel Altman, writer of the Managing Globalisation column/blog) discusses the insulation of microfinance against the trials of the world of non-microfinance.

Given this integration with the global credit market, you might think that episodes like the credit tightening of the past several months might have a more damaging effect on microfinance. But it still seems fairly insulated from the recent turbulence, and from that fact may spring an opportunity.

Several factors have insulated microfinance operations, Otero said. First of all, the amounts they seek from credit markets to fund their operations are relatively small, in the tens of millions of dollars. Second, they are also funded in large part by the savings of the poor, which is not so sensitive to the benchmark interest rates used by global investors. And third, when they do raise money, it’s often locally, in emerging economies that haven’t become completely synchronized with the major markets.

That’s the willingness-to-lend side of the microfinance equation. On the ability-to-repay side, there are also insulating factors, said Premal Shah, president of Kiva, a program that connects individual lenders in wealthy countries with borrowers in the developing world.

“Shocks to an economy, like a global recession, affect the informal sector less than the formal sector,” he said. “For the microfinance institutions, because their clients are in the informal sector, typically the portfolio quality does not decline.”

Waay back last June, microfinance was discussed with specific reference to the differential risk between it and global capital investment – and the fact that, while microfinance had transparency problems, it couldn’t possibly be worse than leveraged buyouts, monolines, CDOs, etc. Turns out that was a good call.

Anyway. I would not have thought that “episodes like the credit tightening of the past several months might have a more damaging effect on microfinance.” I hope that does not make me a weirdo. This gets back to Warren Buffet’s priceless line earlier this week:

The woes in the U.S. financial sector are “poetic justice” for bankers who designed and sold complex investments that have since gone sour, billionaire investor Warren Buffett said on Wednesday.

“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” he said.

“I wouldn’t quite call it a credit crunch. Funds are available,” Buffett said during a question and answer session at a business event. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.”

He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

You’ll note that Buffet is an educated man. He knows irony from poetic justice. His statement is, of course, entirely true: the issue is not with ‘easy’ money, but dumb money. Now, microfinance really doesn’t have dumb money. As Altman’s article discusses,microfinance is just that: microfinance. The scale of the thing just doesn’t lead to stupid things. The sustainability imperative of microfinance does not lead to that sort of thing and, ultimately, the point of microfinance does not lead to that sort of thing. Microfinance isn’t about the mad pursuit of unsustainable (financial) yields: it is about investing in small-scale core development-friendly infrastructure.

Scale-wise, I don’t know how far microfinance will go as a hedging bet – as more people try it, for example, its ability to perform that function will diminish. We should have expected it to weather the thoroughly non-sensible financial flows of the rest of the world though – sensibleness (I own that word, now) is one of the things that makes microfinance so clever, after all.

How to escape inflation: cryo-preservation

Context: I was reading this piece in Wired, about a photographer who shoots top-secret ‘things’. I highly recommend it: the pictures here include radioactive waste, a practice-field for the study of decomposing bodies and – seriously – a bottle of HIV. I believe I will purchase her book. I’m not expecting any alien autopsies, but it was quite strange to see such things even existing, let alone photographed with such ordinary composition.

Anyway. Amongst them is this (click for larger version):

Wired pic

The Cryonics Institute in Clinton Township, Michigan, currently preserves 74 legally dead human patients and 44 dead pets, charging the same price it has charged since its establishment in 1976: $28,000 with advance reservation.

And I paused. Of all the strange things in this set of photographs, a price that has remained the same since 1976 was truly the most odd. Jumping over to The Bureau of Labour Statistics’ Inflation Calculator, I found that USD28,000 in 1976 would get you USD102,031.21 in 2007. Now, the Cryonics Institute lists itself as non-profit, but that’s just crazy.

The package up for which one signs includes up-front and ongoing costs – but those, too, appear not to be indexed although they must be, surely. If they aren’t, then new cryonics clients (customers? Patients?) have to be charged more, to cross-subsidise the existing, too-expensive ones.

And what about the attendant services? Ah. Your USD28,000 gets you frozen. It doesn’t get you prepared for the freezing, and it doesn’t get you shipped to Clinton Township, Michigan, for storage.

CI fee schedule

Click the image for the larger version. So all the stand-by, transport services appear to be fully-indexed. Treatment, stabilisation, air-ambulance, etc. are all provided by Suspended Animation, though – another company entirely. Between municipal electricity, gas and water, not to mention land taxes, cleaning services, ‘parts’ (lightbulbs, paint-job, an electrician every now and then), etc., there is still no explanation for how/why the cryo-preservation service can remain the same price it was more than 20 years ago.

So, there you go. You can literally beat inflation by restricting your consumption solely to an apparently inflation-free basket of goods and services. Of course if you stay alive, you can earn money and get ahead of the entire game (for example if you’d invested your USD28,000 in 1976, you could enter cryo-preservation today with (at least) nearly USD75,000 in the bank, so there is that), so I wouldn’t recommend actually doing it.