Anyway, I also got up to speed with my Economists.  I was going to blog on the economic issues this week but before I could, this week’s print edition (August 6^th-11^th) arrived earlier than normal, on Saturday morning.  What delight – I could read the Economist on time!  Well the lead article (Time for a Double Dip?) was top drawer – just what I wanted to blog.  It concerned the signed “debt-deal” between Democrats and Republicans: I quote:

There was a deal to be head: keep up spending in the short term, with a stress on much–needed infrastructure investment, as well as extending the temporary tax cats, in exchange for a big medium-term reduction in the deficit, centred on entitlements and tax reform. Congress did precisely the opposite, failing to support the economy now and failing to find enough cuts over the next decade to stabilize America’s debt.

This paragraph concluded:

Would you build a factory today if you knew that taxes had to rise eventually, but had no idea which ones?

Bottom line is the deal that was signed was really a non-event.  Our politicians have let us all down.  The left wants to protect entitlements (we can’t afford too, so let’s talk about cuts) and the right wants to protect/cut tax rates (let’s make a fair tax system and cut out the fiddles).  An article on CNBC captured the point that this problem is not new, or short term, but was set in train many years ago.  In “America’s fiscal rot set in years ago“, HSBC chief economist Stephan King is quoted as saying, “Even before the financial crisis, the fiscal path was unsustainable: an ageing population combined with extravagant social security commitments suggested either the need for massive tax increases or draconian spending cuts.”  Both parties need to treat running our country as we try to run our households.  Someone needs to stand-up and stand-out for conservative rectitude.  But who?

My favorite peeve concerns how EVER business application should do a better job of managing its own data.  Some of the data in applications is shared with other applications – and some of this is master data (such as product, customer, etc).  However, these same applications use/publish/consume other data – that is specific to it.  This is NOT master data; though some may call it “application master data” or as I would prefer to call it, “application specific data”.  I am sure some of you fall into either (or other) camps.  The problem is, if we call it “master data” it becomes very confusing: what does MDM concern itself with – managing for re-use “customer” across all applications, or managing all data in all applications?  The former seems to be something we can do; the latter sounds like something we tried to do many times before and can never do well.  Maybe the latter follows from the former.  Anyway, I hope the note is popular.  It is certainly a popular question. 

On the political front, I seem to have struck a chord.  On December 9^th I commented on how Angela Merkel was saying things that were unhelpful with respect to long term safety of the Euro.  It turns out that some Germans in her own parliament are saying the same things.  Maybe with the right pressure Merkel will get a new vision.  If not, I fear that the Euro will suffer, and as a result Europe’s economic situation will worsen.  The article in the US print edition of the Financial Times today highlighted how the European Central Bank will, if things continue, become Europe’s (largest) “bad bank”.  A “bad bank” is a concept that separates the high risk (even near worthless) assets (in this case bonds) from those that have a future.  To think that a central bank could absorb “bad assets” to such a degree is hard to imagine – but it is good that some folks are talking about this risk.  If any of us had more spine, we would actually say that some European countries are actually bankrupt!  Already economists are looking at the value of debt that has to be covered in 2011.  And it’s not a pretty picture.

October 3^rd, 2010, was the official “end” to WWI.  The UK’s Telegraph reported that the final reparations payment was to be made on Sunday.  This would result in the official “end” of the war to end all wars.  I was surprised to read this story since I didn’t even know that Germany was still paying reparations.  Of course, I remember my history lessons that highlighted how reparations, an outcome from the Treaty of Versailles that was concluded at the end of military aspects of WWI, were part of the cause of WWII.  I thought about this for a while – and now I am left wondering where these repayments have gone!

Today, October 8^th, 2010, I read with interest an article in the US print edition of the Financial Times.  Mohamed El-Erian, chief executive and co-chief investment officer of PIMCO, penned a column entitled, “Stalled post-crisis reforms must be restarted”.  The article highlighted how the G7 and then the G20 leads came together at the peak of the crisis to affect change.  But now, with the worst of the crisis behind us, there is a severe lack of coordination that is needed to progress the economic re-balancing that is needed around the globe.  Unless China get’s used to domestic consumption (over exporting led growth), and unless the US get’s used to export led growth (over importing far more than is exported or made domestically), the historic imbalances that were part of the crisis will continue.  The recent talk of currency wars is the latest positioning around the world by interested parties as they signal their own intention to preserve their own historic balance, and position in the global pecking order.  These are still troubled times.

In the US print edition of the Economist, October 2^nd to 8^th, I read a fascinating article entitled, “Does fiscal austerity boost short-term growth?  A new IMF paper thinks not”.  The premise of the article is that recent calls for austerity measures have been driven by the generally accepted belief that by cutting back spending that continues to create debt will create a leaner, more efficient economy that is needed to help get things back to normal.  The problem is however, what is “normal” and what happens when spending (however it is funded), is cut?

The “normal” referred to in this conversation is the past economic cycle that was, for much of the western world, living beyond its means and fueling a debt ridden economy.  And any economist will tell you that by cutting aggregate demand, economists shrink.  But so called austerity measures have so far been painted as methods to create growth: if business is assured of a stable economy, it will increase investment.  A recent paper, explored in the article, suggests otherwise.  Ooops.  This could put some cold water onto the fire.

In February I wrote a book review of Hank Paulsen’s new book: 

Book of the Month (February): On The Brink: Inside the Race to Stop the Collapse of the Global Financial System, Henry M. Paulson, Jr, Business Plus, 2009.  Hank Paulson pulls back some of the curtain that exposes his view of what took place mostly in 2008, as he battled through all manner of issues to help “save the system”.  This book does not explain fully how we got into the economic mess we find ourselves (it is not meant to); but this book reads like a “thriller” as Paulson writes, day by day, what happened, and the reasoning for his actions.  I found the book well written, and hard to put down.  Given I had read recently on Bear Sterns (Bear-Trap), and Lehman Brothers (A Colossal Failure of Common Sense), this was a nice addition to further round out the view of what really happened.  Of note, President Bush get’s a lot of praise from Paulson for doing what was right, not what was expedient for his political party.  His interactions with John McCain and Barrack Obama, before and after the election, were illuminating.  After watching last week’s healthcare summit, where President Obama dressed McCain down “the election is over”, some of Paulson stories seem very believable. Paulson makes very clear that Treasury, during the saving of Bear Sterns, would help protect exposed losses of any acquirer from the overvalued assets.  This helps make the deal for Bear Sterns doable.  However, for Lehman, there is explicitly no such government support.  Paulson says several times, “this deal [Lehman] is different as there was no buyer”.  Of course there was no buyer!  When the Treasury says over and over again, “no support”, what else would you expect?  Paulson tried to encourage the market to save its own competitor (privately funded pool), but that is very different to what was on offer during Bear Sterns collapse.  Barclay’s certainly came close to buying Lehman, but again, this came way too late in the process.  If you read A Colossal Failure I get the feeling that Lehman’s chairman and CEO, Dick Fauld, did not get on with Paulson.  However, none of this seems reciprocated in Paulson’s book.  A Colossal Failure was written by an ex-employee of Lehman, so there is bound to be some sour grapes.  But Dick Fauld’s “they have to save me” persona seems to ring true.  I get the feeling Paulson decided sometime, “We can’t bail everyone out, so it might as well be Lehman that becomes the buck that breaks the cycle”.  The problem was no one could predict the impact.  In the last chapter of Paulson’s book he gets to talk about what he would do to protect the economy in the future; he talks about changes in policy, governance, and regulation.  I would love to hear Paulson explore this list with Ron Paul: that should prove an interesting debate.  Recommended 9 out of 10.

Bottom line – of course it was politics and policy that “failed” Lehman.  Dick Fauld seems to be a guy that took too many risks at a time when everyone around him was avoiding risk.  Worse, he did not seem to get on with Hank Paulsen.  The financial services sector was in such a mess that someone had to fail.  The question is, which would it be?  Bear Stearns was smaller; ATG too well connected (in a different sector).  If Lehman had been “backed” by the government in order to fund an acquisition, then Merrill Lynch would have followed, and probably the whole lot.  In fact the US government would have had to “fund” or protect the whole darn thing.  Oddly of course it does – but indirectly.  There was always going to be a failure; the US Government could not and cannot prop up the US, and ultimately, the global economy.  Lehman’s behavior (re adoption of hugely risky investments) and its inability to work well with its peers, seems to have been the catalyst that led to “policy”. 

Of course a day after the news article we see Dick Fauld in the press now claiming (I paraphrase), “If they had saved Lehman, we would have saved the economy.”  This is just not true – but indicative of Faulds view of the world, then and now.

The current plan calls for several payments, each in the low single digit billions, over the few years.  However, the plan calls for its US assets to return 8.5% year.  The question is asked – who is paying 8.5% for anything?  My savings accounts is nowhere near that, nor are US Treasuries (around 2.6%) or the stock market.  Jackson’s analysis shows that the actual cash needed, once realistic returns are taken into account, would swallow GM up.  So the author suggests that any investment in an IPO should not be seen as an investment in the auto industry, but more of a gamble on a high risk hedge fund.  I had not thought of such investments that way..but maybe he is right…

I read on CNBC today that this whole bail-out is likened to people arguing about who will eat a birthday cake that hasn’t even, can’t even, be baked!  So there is nothing to loose in supporting it; and plenty risk in not supporting.

But the most interesting point I spotted that was there is no clear line-of-sight for who holds the debt?  The question the article asked was this: Assuming Greece does default (read: planned re-negotiation of debt) which countries will be hit with large write-downs?  Since there is no master register that shows this, the Economist did its own analysis.  Interestingly France has a possible maximum exposure of upwards of €52bn of the remaining debt!  Germany has a possible maximum of €30bn.  Switzerland has a maximum possible exposure to €44bn; US €11bn, and UK €4bn. 

Switzerland’s GDP for 2009 was approximately $500bn (http://en.wikipedia.org), and public debt is about 40% of GDP.  So a possible loss of some of the €44bn represents a sizable chunk of cash.  By contrast, France’s national debt to GDP is something like 79% (http://www.economicshelp.org/blog/economics/list-of-national-debt-by-country/) but the absolute number is about $2 trillion (nominal).

• Railways and Slime Mold: A life of slime.  Research has shown that for a given set of constraints (nodes, as in a network of locations, and a need to travel between nodes), slime mold seems to develop a very efficient structure.  The testing applied slime mold to locations that mirrored towns and cities that were linked with rail roads.  Based on population density at the nodes, the mold organically figured out the most efficient set of connections in order to maximize through-put.  Should slime mold now design our city transportation systems?  Why not – can’t be much worse than what we get from man

Economist, print edition, January 30^th – February 5^th

• World Trade: Fading Trading.  Analysis showing that the recent up-tick and “return” to positive global trade seems to show signs of slowing down again.  Is this a sign of a “double dip”?  My recent dialog with IT vendors and users (IT spend) seems interesting also.  IT vendors seem to think that the recession is coming to and end, and many report increased in spending (on their services).  However, end user organizations as not as uniform in their views of recovery – that segments seems to be inconsistent in their views.

Much of the book explains a lot of history of Lehman, particularly with respect to how the seeds of our current financial crises, were laid.  There were three main causes: The repeal of the Glass-Steagall act in 1999 allowed banks to risk yours and my deposited funds in the stock market; post 9/11 the Federal Reserve maintained inordinate low interest rates, for a long, long time, in order to keep the economy going; encouragement (during the Clinton administration) of Fannie Mae and Freddie Mac (and Indy Mac) meant that less than qualified folks were brought into the property market.  This led to a perfect storm: Cheap money, sloshing around the place, feeding an insatiable growth in demand for property, by people that had little or no ability to support the creative mortgages on offer, managed by creative new financial instruments that spread risk around the globe. 

Obama’s actions are a painful step in the right direction.  I suspect the market will improve tomorrow (all other things being equal), but overall this is a good move for the infrastructure that supports our US economy.

Tomorrow: Data Quality does not equal Data Governance (can’t wait).

“In October, the UK’s Financial Services Authority introduced rules to increase the resilience of banks to liquidity crunches. These regulations, which conform to guidelines laid down by the Committee of European Banking Supervisors, aim to raise the quantity and quality of liquidity buffers by forcing banks to hold significant amounts of “high-quality” government bonds.

“Other members of the CEBS have followed the FSA’s example and more are expected to do so during 2010. Should that happen, further countries, including the US, will be compelled to emulate the FSA standard, making it global. This sounds like good news, in that the new liquidity framework has to be pervasive to stand any chance of succeeding. But such ubiquity will also amplify any adverse side-effects.

“First …this will hurt banks’ earnings and lending. Simply put, the former is caused by yields on government bonds being lower than the average interest rate charged by banks, while the latter is a consequence of banks needing to forgo commercial credit to make space for the government bonds that will stuff the liquidity buffer.

“Second, the rules may be self-defeating. An asset’s liquidity is not static: what is liquid today can become a dead weight tomorrow. Since the FSA’s liquidity buffers demand government bonds, should a liquidity squeeze arise, banks would stampede out of sovereign debt thereby creating a shortage of buyers that could make it hard for the banks to sell.

“Much of the global regulatory frenzy that has spawned the liquidity guidelines is a cathartic reaction to the Lehman Brothers collapse. Ironically, had Lehman access to the liquidity facilities available at the time on the same terms as commercial banks, it would have probably survived.

The article is short, but clear, and provides additional issues that may accrue as a result of these pending changes.  Overall we seem to be in a bit of a pickle.  The relationship between banks, debt holders, debt issuers, and buyers of debt is complex.  And in the rush to regulate, some organizations do not seem to be visibly thinking through the potential side affects of their actions.  Oh well, we can but hope.