31 October, 2008

If Mr. Greenspan has been blinded by his ideology, who hasn't?

(Published as a Letter to Editor in Financial Times on 31 October, in response to the article, "Add 'financial stability' to the Fed's mandate" by Mr. Stephen Roach, CEO of Morgan Stanley Asia)

It is now fashionable to lay the blame on the doorsteps of every central banker, with Mr. Alan Greenspan coming out foremost. Still, it is a slight surprise to see that comes from Mr. Stephen Roach of Morgan Stanley, the reputable Wall Street bank that, together with its peers, benefited from, contributed to and eventually paid for the bubble.

Was Mr. Greenspan to blame for his blind ideological faith in the self-discipline of free-market capitalism? Yes, and indeed he helped to fuel, if not create, the housing and derivative bubble with excessively low interest rate. But was Mr. Greenspan the only one to have embraced this ideology? Certainly not.

To the list, we must add all the Wall Street bankers, analysts, commentators, ordinary stock and real estate investors/speculators (people like you and me), and legislators (of course) who had vehemently defended the deregulatory frenzy of the go-go era, and scornfully rejected many sound regulatory proposals as left-wing heresy.

This ideology assumes not only the automatic goodwill of CEOs, an boundlessly efficient market, but also growth to perpetuity. Take a look at any finance models of standard MBA textbooks that have nurtured a generation of business executives, you could hardly find a business case not appended with ten-year double-digit earning growth forecasts (and then perhaps a "slow" 8% perpetual growth until the Judgement Day). Anyone familiar with the decline-and-fall logic of human civilization would be astonished at first but soon realizes it is no more than an assumption. For if it were ever true, any such company would eventually have outgrown the entire universe. And as with any assumption, when it goes wrong the conclusion can be catastrophically wrong.

Mr. Roach suggests adding "financial stability" to the Fed's mandate. But isn't it already there? The Federal Reserve Act contains provisions on banking supervision and even the Fed itself acknowledges that part of its role is to provide the nation with a "more stable monetary and financial system". Indeed, the goals of "maximum employment" and "stable prices" in Mr. Roach's article cannot be maintained without financial stability.

The real difficulty and omission of the past decade is not congressional mandate but the moral courage to defy market expectation and greed and withstand the jester of Wall Street bankers or analysts, as much as Mr. Volcker did in 1980s when pricking the inflationary bubble. In fact, Mr. Greenspan mentioned "irrational exuberance" as early as December 1996. He only failed in standing by his words. Far from taking the "Greenspan-Bernanke reactive post-bubble clean up approach" as coined by Mr. Roach, he was from time to time hailed as the hero that helped to prolong the bull run with timely interest rate cuts (or "manipulation" in hindsight).

If anything, Mr. Greenspan erred on the "proactive" side of being too favorable to Wall Street expectation. After all, what we have just lived through was an era that even a 40% eps growth would disappoint the market if it fell short of analysts' consensus, and we all know senior executive pay is tied to the share price. What could be cheaper and faster to get a big bonus for myself than leveraging on low-interest loans, jerking up the return on equity and all that?

So let he/she who is without sin, cast the first stone.

26 October, 2008

Money Supply

(A friend posted me a question which I guess maybe of some general interest at this time:
It appears that the US government is financing the bailout and other fiscal stimulus by issuing Treasuries. They certainly have the option to just out right create new US dollars. Why are they borrowing instead of printing money? What are the effects/implications of each approach? Does it has anything to do with MV = PQ?)

Yes, the US Department of Treasury is issuing treasury securities (bills, notes and bonds) to finance the bailout. But I do not know whether the Federal Reserves is buying them. The theoretical difference, according to my rusty undergraduate macroeconomics, is as follows.

If the US government is selling those treasury securities to the public (inc. foreign investors), the total liability of US government increases but not the money stock of US dollars, because they simply change hand from private sectors to the government.

The Feds itself holds a large portfolio of treasury securities. If it is buying these new issues of securities, then the federal reserve balances is increased because the Feds needs to create new balances to the seller of these securities. This is what they call Open Market Operations. In this case, money supply is increased (but I'm not sure if the Feds literally prints new paper money; maybe this is a metaphorical way to put it.) In any event, total money supply as you know is not just the paper money or coins in your hand but an aggregate of many things including your bank balances through a complicated multiplier process. Suffice it to say here that the federal reserve balance is the very basis on which the multiplier effect depends.

In terms of effect, it is possible that the first approach may increase the money held by the government but at the expense of the private sectors. Such contraction limits the availability of funds to private sector and thus I guess is not what the US government is currently doing.

The second approach could be said to be creating liquidity out of nothing. It helps to provide new money for fiscal spending to stimulate the economy.

One would say that "printing" new money reduces the long-term value of money. This causes inflation. But even if you're just adopting the first approach, I think the long-term consequence is the same; a government putting on more and more debt will have its credibility called into question. Eventually, these debts need to be serviced, either by hard work of the next and next and next generations to repay them (in the form of taxations), or treachery (literally printing more money, or outright confiscation, commandeering or expropriation of your properties - like what the Argentinian governmnet is now doing). And owing to human weaknesses and the very nature of government, it's more likely that they would opt for the latter.

23 October, 2008

Subprime witch-hunting

With the subprime fallouts spreading across the globe, more and more once-admired financial celebrities and godfathers come under public spotlight. Today, the Hong Kong legislature is considering to probe into the Citic Pacific forex scandal to see if there is any contravention of law.

Meanwhile, regulators themselves are being scorched in the US with the once venerable Mr. Greenspan and Mr. Cox appearing before Senate. Whereas I have no personal liking for Mr. Greenspan, believing that he's the man who let loose the regulatory string, Senators seem to have forgotten again their complicity. After all, Congress passed the law that encouraged mortgage lending to those who hitherto would not have obtained credit on the ground of assisting the underprivileged. Congress also as lately as after 2000 legislated to pre-empt any future regulatory contraint that might have impeded growth in banking and financial industries.

Nonetheless, Mr. Greenspan, with his usual incomprehensible language, turned a question on his responsibility into a definitional debate on the role of individual ideology. Here is the man who was once so popular that he did not hesitate to comment on the policy of his successor and make a fortune on that (by public speaking engagement) after retirement. Here is the same man now widely perceived to be the culprit.

As Napoleon said after his defeat at Moscow, "there's only one small step from the sublime to the ridiculous."

A moral crisis that looms larger than a financial crisis...

Watching the testimony of the heads of America's top credit-rating agencies on Bloomberg, one cannot help feeling that what this country faces is far more than a financial crisis but a moral crisis.

These fallen angels have lost all their past aura of (perceived) objectivity and authority. When you could give the same BAA credit rating to loans with a 2% chance of default in 5 years and CDOs as high as 24%, you simply cannot explain yourself out of the absurdity with whatever modelling or analyses. As one of their own managers wrote, either they're incompetent or have sold their souls to devil.

But that doesn't mean I have much respect for those finger-pointing Congressmen now coming in as the saviors of the American Enterprise. It was widely reported even at this part of the globe that Americans had been taking out 100% mortgages (i.e. no upfront downpayment) without any equities of their own as early as 2006. Banks were lending to people without solid proof of jobs and incomes and they would not need to pay off on principals at the beginning.

If even we in Asia know about it, what excuses have these Congressmen not to know it? Shouldn't they, as representatives of the people, have stepped in earlier to avert a crisis when it's still at formative stage? Aren't they, as the elites of America, supposed to be more prescient in judgment? And now they're scrambling to emerge before the public (and election) as the guardians of the nation. If anything, they're no more vigilant and competent in guarding the interests of the voters as the rating agencies are of the investors.

America has some of the strongest institutional setup designed in anticipation of human weaknesses. But still it cannot fully countervail the weight of moral decadence of a people. Maybe this is the true plight that Obama should be looking into instead of merely the Republican legacy. For the moment, the rest of the world should simply give a laugh to those so-called ratings or "trailing" target prices that lash as fast as the stock prices. Just take a look at the latest scandal of Citic Pacific and you would know.

22 October, 2008

Hong Kong's positive intervention

(The following was published in the Letters to the Editor section of the the Wall Street Journal Asia on October 22, 2008)

In your Oct. 16 editorial "Free-Market Hong Kong," you criticized Donald Tsang's administration for stepping away from the time-tested success formula of "positive nonintervention."

Whereas the Tsang administration is becoming increasingly unpopular, it is hard to reconcile your critique of his "interventionism" with your acceptance, if reluctant, of the U.S. government's bailout of banks. It is perplexing to see two editorials of two divergent philosophical undertones appearing in the same day on your pages.

The Hong Kong "minibonds" incident actually reflects lax regulatory oversight allowing traditionally prudent high-street banks to sell derivative products of unknown risks to ordinary depositors. This should not have happened, had the banks been properly regulated. Even critics of the Tsang administration cannot deny the banks' remedial action as necessary to clean up their tarnished reputation.

You referred to three infrastructure projects that have been delayed for years as examples of overintervention. Indeed, they are widely perceived by the local population as signs of incompetent governance. But, many previous colonial administrations invested tremendously in infrastructure projects that laid the foundation for the very success of Hong Kong's prosperity. Not all "government pork projects" are harmful to economic development.

Similarly, when the Hong Kong government intervened in the stock market during the Asian financial turmoil, it was also heavily criticized for having abandoned its laissez- faire policy. Now, when politicians and people worldwide are pressing their governments to contain the subprime fallout, what happened ten years ago should perhaps be reviewed with a fresh eye.

Lik-king Shiu

Hong Kong

OFTA: PCCW's surrogate

After years of procrastination, the government finally pledged to introduce a general competition law (of some sort) to Hong Kong in this legislative year. I sincerely hope that this law will have some meat in it. That it will restrain the excessive market power of oligopolistic (and hereditary) business conglomerates that have unduly dominated the economy at the expense of newer and more vibrant enterprises.

It doesn't take an economics PhD to recognise that the local economy is not a level-playing field as the government would have us believe. At least not between big buisnesses and consumers. Yes, you can produce volumes of statistical studies disputing my notion but sometimes intuitive observation of an ordinary consumer is closer to truth (by ordinary I am naturally not referring to those who only shop at IFC or its likes).

Take the example of telecom service. Anyone that has the experience of signing up those long-term contracts will be frustrated by the many hidden bundled services. Consumers simply have no freedom to opt out. In Europe, such practices would be outright unlawful. But curiously in this international city aspiring to be on a par with New York and London, our telecom regulator - the Office of Telecommunication Authority (OFTA) - has no interest to look into it. Obviously, they're more concerned with suppressing the civil liberties of "unlawful" broadcasters than anything else.

Not long ago I got a "free" SIM card sent to me by PCCW. It's free for the first two months, after which I had to pay a minimum tunnel licence fee whether I use or not. PCCW claims that this card came as a bundled service of my broadband contract. In spite of my repeated calls for cancellation, this company kept sending me "reminders" of the money I owed them. What's more infuriating though is that when I complained to OFTA, they simply parroted the story made up by PCCW!

Sometimes I wonder whether these bureaucrats get their paychecks from PCCW instead of taxpayers like you and me!

19 October, 2008

Monkeys roaming around...

While we watch everyday "monkeys" roaming around on TV and radio programmes, Hongkong's beautiful countryside is being colonised by real monkeys. Even the most inattentive passers-by to the Shing Mun Reservoir or the Kowloon Reservoir in New Territories cannot fail to see that these creatures are just everywhere.

I know not where exactly they originally came from but their number has been multiplying by geometric progression for the last ten years - coinciding with the eras of the Tung and Tsang administrations and maybe yet another sign of this city's deteriorating governance in general.

There are signs everywhere in the country parks that feeding wild animals is an offence and liable to fines. The reality? Just like many other warnings put up by the government, they go unnoticed and unenforced.

Indeed, it's more likely that you'd see a monkey than human these days in those places. And it's more likely that you'd see a human than an official from the Agricultural, Fisheries and Conservation Department enforcing the law.

At a time when the government is so scared of bird flu and other infectious diseases, one simply cannot understand why the Department allows such thing to happen. The monkeys could well be a breeding ground of unknown diseases. They're now not only scavenging human wastes, but go straight away to snap your plastic bags at BBQ sites or when seeing you walking in small number unguarded. It's only one small step forward for them to attack humans, as researchers show that increased encounters between humans and wild animals can embolden the latter and invite an attack.

It is time for the government really to do something, lest the problem gets out of control. Maybe one reason why this problem has been tolerated with for so long has something to do with the locations of these country parks - far away from the rich and powerful Happy Valley or idyllic Island South, these parks are frequented not by expatriates living on the Peak but ordinary local folks from public housing estates.

Last, I would advise the Department not to quote any humanitarian reason for inaction when we're exterminating stray dogs on the street.

18 October, 2008

Lehman minibond

The Hong Kong Monetary Authority has finally referred to the Securities and Futures Commission a number of suspicious cases of alleged irregularities in selling Lehman minibonds for further investigation. (Don't ask me why the banking regulator is asking another regulator to look into banking irregularities - all I know is that they've been kicking the buck to and fro for awhile. It's often the case that when you have two agencies overlapping each other, you're paying twice the taxes but only for half of the job done, if at all).

A more meaningful moot point is a view I've heard again and again. That these minibond-holders should have looked carefully into the terms of their "investment". That the government has already done its job by issuing guidance notes to banks "at very high frequency", and that institutions have been asked to disclose the risks.

Allowing banks - which we believe are prudently regulated - to sell these products (which they probably don't understand themselves) to ordinary people on the street is like having dairy farms selling melamine-tainted milk products to you and me by putting a label, "these diary products may or may not contain harmful chemicals. Buyers should carefully consider the inherent risk involved and if necessary, consult a professional chemist and have the product tested at accredited laboratories before consumption". Then the companies walk away unabashed with this "risk disclosure" and the government can say, "stupid, they've warned you".
Yes, if everyone were a PhD in chemistry and had a testing laboratory, that's fine.

By the same token, it's fine if these investors were HBS graduates working at Goldman Sachs (just as an example). But these days what does the risk disclosure contain? First, there's the mumble-jumble prayer that "investment may rise or fall in value...etc. and etc." and then comes a bundle of documentation that I heard even lawyers can't understand.
The very purpose we have a government and paying for the regulators (yes, you pay for their salaries) is to ensure that these products are properly stratified and sold by the appropriate institutions to potential investors that can swallow the risks. There's no need to ban the use of melamine but the government needs to ensure that it's used by the right persons for the right purpose.

If all the private sector should left completely to its own devices (as some right-wing laissez faire politicians would have you believe), what do we need of this government?

17 October, 2008

further on the slip of tongue by deputy minister

I do not mean to be mean. But in times of crisis, a wrong choice of words can spell disaster. And why were they picked in the first place? Were they not supposed to be good in carrying the message of the government to the public? Were they not supposed to be good in public communication? Were these not essential qualities we look for in political appointees?

Well, if they were trainee AOs, it's fine (afterall, we're told that AOs are not supposed to handle political job?!). But they are politically appointed deputy ministers purportedly with sound political acumen and good at public speaking. They are the very people supposed to be doing the job.

If the government thinks they need more training, why doesn't it just spend the same money to train the AOs (recruited through examinations) or the legislators (elected)? It is difficult to understand why we should be so generous to these political trainees, paid as handsomely as US presidents, when the normal HK people have to struggle to secure their rice bowls in economic downturns.

13 October, 2008

bad chinese or freudian slip?

"財經事務及庫務局副局長梁鳳儀出席電台節目時指,本港有逾千億美元的外匯儲備用來穩定港元匯率,有必要時會用盡彈藥穩定金融市場。" (Mingpao online)

I cannot help but tremble over such a statement made in public. It sounds to me like a curse rather than a reassurance. So far I have not yet got an English transcript of this but I hope it wouldn't come up as "depleting" all our ammo to stabilize the financial market. If it were so, it clearly runs against the reassuring (or to be precise, self-reassuring) utterances made by other government officials in recent days.

Having to fight to the last bullet, though heroic in rhetoric, is pathetic in reality. It should never be said by a commander unless the battle is fought to the final showdown. If Ms Leung wished to reassure the public or ward off the speculators, she could simply have said, "the government is determined to mobilize all resources at hand to stabilize the market".

Heaven forbids, but if Hong Kong had to use up all the reserves (saved by decades of hard work of ordinary people like you and me), what sort of situation would it be? And more importantly, what else is the government left with to stabilize the economy after such a coup de grace?

I sincerely hope that this is simply bad chinese (not surprising these days, isn't it?) and not a Freudian slip reflecting the true assessment of government top officials. Otherwise we're all fooled.

(N.B.: this article was first published on facebook)