Central Banker Of The Year: Raghuram Rajan

Trigger

On 10/29/2013, I read following article in the Neue Zuericher Zeitung titled “Was Bernanke von Indien lernen kann” (German language; translated: What Bernanke could learn from India).

This article is indeed very critical of the Fed chief’s irresponsible policies in contrast with India’s central bank. The Swiss as having two major global financial centers and a notoriously long-term stable economy may know a thing or two about finance and economics.

Bankers From India

The current co-CEO of the German Deutsche Bank is a Jain. The former CEO of City Bank was from India.

Economist From Chicago University

Got to watch out for these alums! Mr. Rajan was a professor at this university. He was also a previous chief economist of the IMF. Before that he studied at the Indian Institute of Technology, Delhi, India.

Raising Key Interest Rates And Economic Reform

In contrast to the reckless and irresponsible Fed chief, the colleague from India raises key interest rates despite potential risk of food riots etc.

Mr. Rajan is being reported as demanding significant structural reforms and more competition as well as fiscal discipline for India. this contrasts favorably with the Western approach of printing more and more money to finance large fiscal deficits.

A Savior Of Capitalism from the Capitalists?

This a paraphrase of a book title authored by Mr. Rajan and Mr. Zingales published in 2003. The full title is “Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity”.

Here is an excerpt from Wikipedia about this book (emphasis added):

“The book is neither a defense of pure laissez-faire capitalism, nor is it an anti-capitalist polemic. Instead, the authors develop the following arguments in the book:

[1)] The free market is the form of economic organization most beneficial to human society and for improving the human condition.

[2)] Free markets can flourish over the long run only when government plays a visible role in determining the rules that govern the market and supporting it with the proper infrastructure.

[3)] Government, however, is subject to influence by organized private interests

[4)] Incumbent private interests, therefore, may be able to leverage the power of governmental regulation to protect their own economic position at the expense of the public interest by repressing the same free market through which they originally achieved success.

[5)] Thus, society must act to "save capitalism from the capitalists" -- i.e. take appropriate steps to protect the free market from powerful private interests who would seek to impede the efficient function of free markets, entrench themselves, and thereby reduce the overall level of economic opportunity in society.

The authors offer the following recommendations:

[1)] Reduce incumbent capitalists' incentives to oppose markets, especially by limiting the concentration of ownership of productive assets.

[2)] Provide a social safety net for the economically distressed to help maintain broad political support for free markets.

[3)] Keep the borders of the economy open to support free trade and maintain a high level of competitive pressure on incumbent firms.

[4)] Educate the public regarding the benefits of free markets to build political support for free market policies, or more specifically, oppose governmental interventions in the market designed to protect incumbents at the expense of overall economic opportunity.”

Kudos

We honestly wish Mr. Rajan lots of success! Set the Indian people free!

Highest Court Of Australia Handles Sex On Business Trip

Trigger

This blog post is on the lighter side of life! :-)

Yesterday (10/30/2013) I read following article (German language) in my home town newspaper. Here is an English language article about it. Here is the High Court of Australia rule.

It is about a case decided by the High Court of Australia in a matter of a female public servant suing her employer (i.e. a “human relations section of a commonwealth government agency”) for injuries suffered having sex on a business trip. After a dinner together, she invited an acquaintance to her hotel bedroom to have sex.

The Employer Had To Fight Very Hard

“The Administrative Appeals Tribunal found the injuries were unrelated to her employment but, on appeal, the Federal Court of Australia set aside the tribunal's decision.

This was upheld by the Full Court of the Federal Court, which found the woman's injuries occurred in an “interval or interlude” during an overall period of work and must be considered to fall within the normal course of her employment.

By special leave, Comcare [employer] appealed to the High Court, with the matter seen as an important test case.” (emphasis added)

Incredible, in this case the lowest court made obviously the right decision, but a higher court in two separate rulings defied common sense.  You wonder sometimes about judges.

The Hotel Room Door

Well, in their infinite wisdom the supreme judges of Australia declared that the liability of the employer ends at the hotel room door. Too bad for the plaintiff! An employer is not liable for the sex games of their employees. Common sense prevailed! What a surprise!

Proverbs Old As Bacon

Prologue

This is a blog post on the lighter side of life! :-)

A Paraphrase Of President Franklin D. Roosevelt

Many people remember his famous expression “Nothing to fear but fear itself” from his first inaugural address in 1933.

Well, Francis Bacon said “Nothing is terrible except fear itself” in 1623. We tend to regurgitate and ruminate and most people will not notice because of our lousy public education.

Throw Enough False Accusations, Some Will Stick

A well liked and often applied technique by our fine politicians, who are then elected not by the silent majority. Few politicians are like Teflon, so their opponents keep hurling mud at them.

Well, Francis Bacon said “Hurl your calumnies boldly; something is sure to stick” in 1623.

LIBOR Manipulation Scapegoat

Trigger

Today (10/30/2013), I read another article (German language) about the alleged manipulation of the all-important LIBOR interest rate by commercial banks. This time it is about e-mails exchanged between traders etc. of the Dutch Rabobank and other banks involved.

Since the so called LIBOR scandal surfaced, I have read numerous articles about it. Therefore, I wanted to write a blog post about this subject. In this blog post, I will try to summarize instead of supporting every argument with facts etc.

Prosecutors And The General Public Have No Clue About Traders

Yes, the language used in those published emails is very suggestive of all kinds of malfeasance. Simple minded people like many prosecutors jump to conclusions when they read stuff like this.

Traders are very peculiar people not unlike philosophers or poets, but quite different. They too live in a different world. Most of them are fairly young people. I don’t want to excuse any trader, but I suppose the language is something like vent for their stress at work or a kind of can do attitude or else. I could probably say more about the psyche of traders, but for sake of brevity I leave it at that.

Everybody Knew For Many Years That The LIBOR Was Prone To Manipulation

The method that, I believe is still employed, to determine the LIBOR rate of the day is very primitive and is based on the participation of a selected number of banks. It relies on submitted quotes at a particular time of day.

The Method To Determine LIBOR On A Daily Basis Was Totally Outdated

Why in the 21st century, everybody still relied on such an outdated method is simply incomprehensible. For at least a decade, exchange rates are quoted round the clock even in sub-minute intervals. Even amateur individual traders can get real time quotes delivered to their home computer at any time of the day.

One could have simply sampled these quotes multiple times a day to come up with close of day LIBOR rate, which would have been much less subject to any manipulation.

Opportunity Makes The Thief/Trader

It follows from the discussion above that this totally outdated method was an opportunity for traders to potentially manipulate the LIBOR. However, the financial industry is highly competitive, though over regulated and over supervised by big government, that any extensive manipulations in one direction or so over possibly an extended time period are quite impossible to persist.

Do You Need An ATM For Bitcoin?

Trigger

Today (10/30/2013), I read an article (German language) in my online home town newspaper that there is a first ever ATM like machine available now in Vancouver, Canada of all places. I am sure lumberjacks appreciate such a machine (this is not meant to be condescending, I like them). Anyway, the article did not say why in Vancouver, sloppy journalism as usual.

An Unfortunate Regression

Why on earth would you need an ATM, a legacy technology, from the perspective of private, electronic, digital money.

I don’t want to be a purist and I don’t want to spoil the quick adoption of this new money, but this new private money should remain exclusively electronic and digital. All you need is an app for any computer.

The Future Of Private Electronic, And Digital Money

It is about time that the people take back from big government the power to issue and control money.

Since the latest severe financial and sovereign debt crisis and subsequent Great Recession, most people should be aware that government is the cause of of it through profligate fiscal spending, unsustainable fiscal deficits, recklessly low interest rates and debt financing by central banks.

German Central Bank President Criticizes Government Debt Financing By Commercial Banks

Sources

First article is about the article by the German Bundesbank President titles “Can the 'disastrous nexus' of banks and governments be controlled? No.” (1) published on 10/24/2013.

The second article is by Mr. Jens Weidmann himself published as a “central bankers’ speeches” by Bank for International Settlement (BIS) titled “Stop  encouraging banks to load up on state debt” (2) published on 10/1/2013 in the Financial Times.

An Incestuous Relationship

In the age of fiat money and even before that, governments have frequently abused central banks to finance their deficits. It is one of mankind’s scourges. E.g. Germany in the first half of the 20th century, or several Latin American countries in the 20th century. Or take the irresponsible Fed chief and Harvard economist Ben Bernanke.

Salient Excerpts

Excerpts and comments (emphasis added):

“Loans to sovereign governments are granted favored status by bank regulations and indeed are promoted by them, as having no risk-to-one-borrower limits for example, as well as very low or zero capital requirements, and being often referred to as "risk-free." But in fact nothing is more common in financial history right up to now than defaults by governments on their debt. There have been about 250 defaults on sovereign debt since 1800, including widespread government defaults in the 1980s and the 21st century defaults by Greece and Argentina.” (1)

“The answer is apparent: the regulators who write the rules are themselves employees of the government. They are hardly likely to limit or criticize banks' lending to their own employer.” (1)
[This would certainly apply to the so called Basel Accords. I blogged here about it.]

“The archetypical case is the establishment of the Bank of England in 1694. The deal was straightforward: the bank got its charter by promising to lend money to the government, much needed to finance King William's wars at the time, and the government would give the bank profitable special privileges, especially a monopoly of issuing currency. (It didn't hurt that the Royal Family was among the shareholders of the new bank.)” (1)

[This sums it up quite well!]

“Preferential regulatory treatment makes it highly attractive for financial institutions to invest in

government bonds – and those of their home countries in particular. During the crisis, this

has become more attractive still. The share of euro-area sovereign bonds in total bank

assets in the eurozone increased over the past five years by one-third – from 4 per cent to

5.3.” (2)

[5.3% does not sound like much. I was surprised Mr. Weidmann quoted such a low number.]

“Large sovereign bond exposures might also harm the real economy. Rises in sovereign risk

are transmitted into reduced bank lending. Banks that were highly exposed to strained

European sovereign debt have reduced their lending to the private sector.” (2)

[This well known crowding out effect is not a matter of “might” it is a fact.]

“Thus, the current regulatory treatment is incompatible with the principle of individual

responsibility; the market interest rate no longer reflects the riskiness of the investment. I am

aware that banks as well as governments are afraid of rising funding costs as a result of

ending the regulatory privileges afforded to sovereigns.” (2)

[Well, Mr. Weidmann was until recently an economic advisor to chancellor Merkel.]

“The current regulation’s assumption that government bonds are risk-free has been dismissed

by recent experience. The time is ripe to address the regulatory treatment of sovereign

exposures. Without it, I see no reliable way of breaking the sovereign-banking nexus. ” (2)

Sovereign Debt Financing By Central Banks

Unfortunately, Mr. Weidmann did not say anything about this subject.

German Athlete Protests Doping Witch Hunt

Trigger

Just (10/22/2013)read following article about a top female German athlete, i.e. Claudia Pechstein, titled “Scharfe Kritik an Sportrecht” (German language).

She sued the International Skating Union as well as the German Skating Association over their two year long suspension from competing.

She also initiated a petition criticizing agreements athletes are required to sign. Under these agreements athletes have abide by out of court judgements by sports organizations. Only by signing these agreements athletes are allowed to compete in prestigious national and international competitions. This petition was signed by a large number of fellow well-known German athletes.

Doping Accusation

Ms. Pechstein was suspended, because the doping police found suspiciously abnormal results in her blood. She claims it is the result of a hereditary ailment.

Strict Liability

The above article also points out that agreements by organizations like NADA (U.S. National Anti-Doping Agency, a prime witch hunter) require strict liability on part of the athletes and German organizations appear to follow in this respect. The above German article wrongly translated this as reversal of burden of proof, but this does not completely miss the point.

Wikipedia explains this term as follows: “A rule specifying strict liability makes a person legally responsible for the damage and loss caused by his or her acts and omissions regardless of culpability (including fault in criminal law terms, typically the presence of mens rea).”

Given the many problems with doping tests it is quite astonishing that they resort to such a drastic legal weapon against athletes. therefore, witch hunt is the right name for it. This reeks of the presumption of guilt.

The Doping Witch Hunt

I have previously written a number of blog posts on this subject and in particular about target no. 1 Lance Armstrong here, here, here, here and here. The last blog post is a more general discussion of the topic.