Confucius & Equilibrium

"Let the states of equilibrium and harmony exist in perfection, and a happy order will prevail throughout heaven and earth, and all things will be nourished and flourish."--Confucius

Democracy

"Democracies die behind closed doors.”

"Selective information is misinformation." --

Judge Damon Keith Federal appeals court ruling in 2002

Berlin & Dublin

Berlin

Sankt Oberholz is a wonderful cafe located on Rosenthaler Straße in Berlin. The cafe has a lot of history and has being a meeting place of the art and culture scene of Berlin since the twenties.

The cafe is contained in a two storey building, that has a very high ceiling and gigantic windows on its west and north face that allows both floors to be filled with light. The furniture is a mix of different styles that complements the creativity of its patrons.

The cafe is always full, but the tone is very mellow with most people spending their time flicking through the communal magazines or accessing the free Wi-Fi. It is perfectly acceptable to squander an afternoon in Sankt Oberholz having only purchased one coffee. It feels more like a shared public space than a cafe.

Dublin

This cafe is very far removed from the usual fare that is regularly served up at local cafes in Dublin. In recent years, there have been very few Cafes and Bars established in Dublin that provide something original and unique that one could not find elsewhere. Such innovation and novelty has been transcended by the power of the market as it would of been impossible to establish a unique cafe because the likelihood of failure is so great when rents are so excessive.

Moreover, many cafes and bars have closed as former proprietors who were involved in the business for many years shut shop so that they could pocket some of the recent property valuation increases. These closures are further evidence of the loss of reality and economic equilibrium. Similar behavior was also observed during the South Sea Bubble as noted by J.K Galbraith in his book The Great Crash 1929 'Statesmen forgot their Politics, Lawyers the Bar, Merchants their Traffic, Physicians their Patients, Tradesmen their Shops, Debtors of Quality their Creditors and Divines the Pulpit"

"There Was Blood"

The Irish Stock Exchange was a bloodbath today. The ISEQ index closed down 7.43 %, as indicated by the above graph. Specifically, AIB lost 58.62% and Bank of Ireland 54.67%. These are massive losses and suggest that the market has no confidence in their survival without complete nationalization.

All of these banks have a considerable amount of debt that is maturing within the 2-3 years. Especially Bank of Ireland as suggested by the below table

http://spreadsheets.google.com/pub?key=pkTuK8Mqkg-TXqYpr4ISmbA




But all banks are having great difficulty in financing any debt at present. As a consequence government is now entering the market place to plug these chasms.

Yet, against this terrible back drop, Irish banks are also getting hammered because international investors have lost complete faith in the financial regulator and central bank. This is lack of confidence was highlighted by the LEX in Saturday's Financial Times.

" Bank of Ireland and Allied Irish Banks may be marginally safer bets now that the government has removed the sector’s main systemic risk. Time, then, for Ireland’s cosy coterie of bankers and politicians to resume discussion of their golf handicaps in the club bars. But not for too long: neither bank has a price/earnings ratio of more than one, which speaks volumes about investor confidence in the sector’s prospects"

Anglo Irish Bank

On Thursday, the Finance Minister Brain Lenihan finally put an end to Anglo Irish PLC.

However, the market had decided months before that Anglo Irish was nothing more than trash as indicated by the above share price graph profile.

Loan Book

Between 1995 and 2005, Anglo Irish Bank increased its loan book from 1.4 billion euro to 34.4 billion, with 26 billion of this lending occurring in the five year period between 2000-2005.

This lending continued to grow at this astonishing rate, with up to 72 billion euro on their books in 2008, according to their annual report.

Moreover, the Irish Independent notes that " virtually all of Anglo's €72bn loan book was to builders and property developers". As a consequence there was was no diversifitcation of its loan book and thus its fate was inextricably linked with that of the commercial property market.

The huge level of growth in their lending book was mainly funded through whole sale funding sources. This source is perfectly suitable and appropriate as long as the market has confidence in the company.

The Crash

However, confidence in Anglo began to ebb once the property sector stopped its upward growth shift and the much heralded soft landing did not materialize.

Instead property values fell of a cliff, as pointed out by CBRE in its Irish commercial property market report stating that "the value of prime development sites in Dublin fell by at least 40% during 2008". Moreover, that in 2008 "less than €500 million invested domestically compared to some €1.9 billion in 2007"

Based on this crash, the market determined that it was very unlikely that Anglo Irish Bank clients would be able to pay back the huge sums which they had borrowed, as the calculations in relations to returns which developers had done in 2005 simply did not add up in this new economic climate.

However, Anglo could not cover the hole in their accounts by seeking new capital through the bond market and then begin the process of writing down the value of their loan book with this new capital because Anglo Irish bank had so much toxic and poisonous debt created by lending on commercial property, that the level of capital required to ensure their survival would be impossible to finance in the existing market.

Blame

Anglo should never of got into this scenario. Their fanatical lending on property lending should of being controlled, regulated and stopped by the relevant authorities. But with such intervention a fall of confidence in the property sector would have definitely occurred.

Finally, it is important to highlight that the collapse of Anglo Irish Bank was not caused by the Sean Fitzpatrick loan scandal. Yes, these loans are deeply embarrassing and are another example of “cosy Irish capitalism" as described by the FT, but they are peanuts when compared to Anglo total loan book of 72 billion euro.

Most of the blame lies, with the non existent government regualtion and stupid lending practices.

pu⋅sil⋅lan⋅i⋅mous

pu⋅sil⋅lan⋅i⋅mous-- lacking courage or resolution; cowardly; faint-hearted; timid.

Novus Modus Operandi

Below Robert Peston outlines how the economic crisis is affecting the flow of capital cross borders and leading to a reduction of the pace of globalisation.

"Banks all over the world are repatriating the focus of their operations. They are concentrating their resources on their domestic markets, because of the intense political and popular pressure they face to support their home economies.

What we're seeing is reversal of the financial globalisation that was such a feature of the past 20 plus years."

The Irish Aristocracy

"Tánaiste Mary Coughlan said that dynasty politics was practical because of an inbuilt reputation. “They know you understand the system and are accustomed to how it works. You know the life and have the contacts,” she said. In other political systems this is known as an aristocracy. An inherent-ocracy produces a political generation where safe constituencies immunise political leadership from the necessity to inspire debate because of the assumption of automatic re-election."-- Elaine Byrne, Irish Times

Leaves!!!!!!

Irish National Debt

The above is a graph representing the spread between 10 year Irish goverment bond yields over German government bonds.

The widening gap between is an indication of the increasing risk of the Irish government defaulting on its debt.

Greenspan and Truth

“I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders,”--Alan Greenspan

This comment by Alan Greenspan, the former chairman of the Federal Reserve in relation to the cause of the economic crisis is perhaps surprising and completely unexpected. In it Alan Greenspan admits that his belief that companies would not be willing to make decisions that would significantly increase their risk profile and place the future of their business in question was "wrong".

These views held by Greenspan were influenced by a close friend of his called Ayn Rand. Rand was Russian born but emigrated to the US in 1925. In America she became a writer and later developed philosophical ideology that became known as objectivism. Her fundamental principle is that self interest is the true standard of morality and that altruism is profoundly immoral. While, in relation to capitalism she declared

"When I say 'capitalism', I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism."

These ideas greatly influenced Greenspan, as he dedicated much of his career to ensuring that government intervention in the market was optimally minimal. As an example, in 1997 the then commsioner of the Commodity Futures Trading Commission Brooksley Born told the congress committee that the existing financial deriviates "threaten our regulated markets or, indeed, our economy”.

Her views on the financial derivatives market were treated with disdain by Greenspan. According to the NYT Greenspan was of the "view that that too many rules would damage Wall Street, prompting traders to take their business overseas". Robert Rubin, Clinton's Treasury Seretary shared Greenspans view.

Greenspan's opinion was accepted. As a consequence, nothing was done to curb the excesses of this these financial enigmas. Brooksley Born left her postion in 1999 and the commodity futures trading commission lost its regulatory authority over derivatives as recommended by Greenspan.

Greenspan began studying economics at New York University after studying the clarinet at Juillards. A fellow student of Greenspan said of the environment at the university during a BBC profile of the him that "What really bound us together was the sense that economics was undergoing a transition and we were there at the frontier. Anyone who was studying economics at that time was determined that there would never be another major depression. The depression of the 1930s had led to World War Two, and so there we were imbued with the sense that we couldn’t let this disaster occur again."

Greenspan felt thoughout his career that truth was on his side, that the ideas and policies that he was implementing would ensure that there would not be another great depression. The passing of time may prove otherwise, but can we ask any more of officials whether in the private or public sector but to carry out his/her work with an idealogy that they feel will place humanity on a better path.

Short Termism-Micheal Lewis, NYT

"The leaders of public corporations, especially financial corporations, are as good as required to lead for the short term. Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble."

Development Levies

"In fact, county councils themselves were guilty of granting permission in order to pay debts - their own. A county like Meath that experienced a massive population explosion but no matching increase in central exchequer funding found itself under particular pressure. Levies paid by developers to the local authority on grant of permission were a tempting source of finance. Many suspect that some permissions were granted with the levy rather than the merits of the application in mind."--Sarah Carey, Irish Times, highlighting the need for local authorties to be released from their dependence on development levies for funding.

FEAR & HATE

The scenes in Palestine and Israel are horrific. Any solution to their problems will only come about when the fear which both parties have for each other is diminshed.

2009 Resoultions

In yesterdays Irish Times Jim O' Leary wrote  of our economic situation that:

"The pace at which things unravelled was alarming and the speed of deterioration set new records. The volume of retail sales, for example, fell in every month bar two in the period to October by which time it stood 7.3 per cent below its year-earlier level - the largest annual fall since 1984. The Live Register rose in every single month, and by a cumulative 107,000 in the 12 months to November, the biggest annual increase on record"

Such levels of unemployment will create significant economic and social pressure on governments throughout Europe. There will be many within these societies roaring for the simple options. These include

1. Changes of government even though there will no transformation from the status quo but simply an adjustment of the aesthetics.
2. To ditch the Euro and resurrect the Punt so as to regain the ability devalue their currency and thus mitigate issues in relation to their exports. However, this myopic behavior does not recognize the trouble any country would be creating in relation to their debt financing. 
   
3. Voting "No to Lisbon" even though it would sideline our role in the international community and greatly reduce the role which we could play on the global stage. Multilateralism is our only option.
4. Falling victims to racism or xenophobia as people become bitter about our deterioating social and economic situation.

Therefore in 2009 we should all have one resolution: that we do not fall victim to stupid short termism and placing all our energy into easy populism as advocated regurally by the Sunday Independent.

Instead, we must be courageous and recognize that long term thinking is required to solve our problems. Such thinking would perhaps lead us to recognize that we can retrieve our economic competitiveness not by ditching the euro but by reducing our cost of living and thus creating downward pressure on wages. Moreover, we would realize that it would be foolish for us to display our discontent by voting no to Lisbon.

Condensation Cube, Hans Haacke

No object, no matter how neutral it may seem, even for example a simple plastic perspex cube can exist independent of its surroundings