Tuesday, December 29

The philosophy of money

Australian Aboriginals lacked an independent currency, but like other indigenous groups traded ceremonial artifacts, grinding stones, sea shells, ochre’s, shields, axe heads, spears and even ‘water rights’ along their trade routes marked by permanent waterways. Trade was a ‘United Nations’ of affinity to the land where scarce resources in one region were exchanged for another’s as one Australian nation shared nature’s bounty. The tribes all spoke different dialects and relied on carved symbolic message on a message stick accompanied by translators to negotiate trade agreements. Their existence as the longest uninterrupted culture for 60,000 years or more bears testament to their idea that the land owns us rather than we own the land-the only real wealth upon which we all depend.

Elsewhere in the globe as an independent currency money was created philosophers debated its merits and use. The philosopher Aristotle (340 BC) asserted money was best understood as a duality; to procure necessary goods or services of which he approved and as an accumulated corruptible means to obtain one’s fortune. His extreme view proved a reliable sage as money has bedevilled humanity in whatever form was adopted be it capitalism, socialism, communism or a mixture as is evident in modern day China.

It was the era of modernism around 1500 that heralded inventive trade to follow the advancements in science. The puritan work ethic from the Reformation cast money in a more favorable light to coincide with the idea hard work was virtuous. Oliver Cromwell subsequently enacted laws to bolster the 'mercantilist' system to give preference to the British enterprise and shipping companies. Although historically we have many monetary empires dating back to the fall of the Roman Empire none rivaled the Industrial Revolution in England from 1740- 1780, - a logical melting pot given the recently discovered Newtonian mechanistic world - as suggested by John Gribbin in ‘Science a History 1543- 2001’

The industrial revolution became the catalyst for western world industrialization, but was a two edged sword in terms of benefits. Whilst inventiveness, division of labor and productivity supported vastly improved living standards capable of supporting a much bigger population it was at the expense of massive exploitation of people and land- to become the genesis of our current ecological disaster.
During the Victorian era philosopher and moral ethicist Adam Smith published in 1776 his influential classical economic work entitled ‘Wealth of Nations’ to criticize the 'mercantilist' system. Smith articulated the view that money as the invisible hand of free markets will produce a satisfactory price return for land, labor and capital because the self interest in any free market benefits the whole of society as competition keeps prices low. Smith was aware any concentration in power would distort a free market and pointed out Merchants wielded monopolistic power afforded them as a consequence of bans on foreign competition. Mercantilism was also associated with a monetary system which used exported bullion to pay for imports- mainly from Asia- which reduced money supply to exert downward pressure on prices and economic activity at the expense of impoverished workers.

Mercantilism also adversely affected the colonies which were forced to use English ships, pay duties and only trade in commodities whose prices were set by the British Empire to effectively create an underclass of colonial citizens - a significant factor that led to world war and eventual American independence. The classical economics of Smith overturned the mercantilist system and his free market ideas remained popular up until the great depression of the 1930’s.

But the period afterwards saw the inevitable boom and bust cycles continue in tandem with the growth of the larger financial institutions such as banks whose occasional lending sprees exceeded loanable funds beyond the level of maintainable voluntary savings to cause social dislocations.

During the depression years in the 1930’s, John Maynard Keynes was to present a new radically different system to offer hope we could avoid recurrences of the painful boom bust trade cycles that had come to haunt modern day societies and brought upon an unsuspecting pre boom population the horror of the great depression. His theory was we cannot rely on markets to automatically adjust to ensure full employment so long as workers remained flexible in their demands. Rather his theory saw an active role for government intervention with both fiscal (taxation and spending measures) and monetary policy (control over the level of interest rates) to ensure economic growth and stability. Banks were to be regulated but enjoy ‘Lender of last resort’ from a reserve to ensure confidence was maintained in the system.

Keynesians thought it was imperative for government action during severe economic cycles to introduce government spending, tax breaks and reductions in interest rates during recessions but to reverse the situation during highly expansionary times. In other words to increase those same levers during inflationary times.
Following the outbreak of World War II Keynes's ideas were universally adopted throughout the western world with commensurate success so that by the time we reached the mid fifties all western capitalist nations mirrored his views to share in the relatively strong, stable economic fortunes of the immediate post war era.

Keynes's influence however began to wane from the 1970s, with the emergence of renowned economist Milton Friedman who was skeptical over the ability of governments to effectively regulate the economy with fiscal policy as suggested by Keynes, explaining that such measures were prone to be both costly and ineffective. Freidman relied on tight control of money to maintain price stability. His elegant theory was easily understood and very appealing at a time of high inflation but selectively seized upon by vested interests promoting a free market economy. Concurrent to that change in economic focus was a type of philosophical materialism which had taken firmer root to assert our wellbeing or happiness is only measurable in terms of money. This became linked to fundamentalist type religions who promised future wealth as if synonymous with salvation. Simply put -‘if it doesn’t make money it doesn’t matter’! A type of economic fundamentalism persuasively joined forces with branded religion to present a rather potent cocktail of political inspiration based upon a minimalist role for regulation, suggesting markets are sufficient as the sole arbitrator except for control over the money supply.

Economic fundamentalism gained traction from the power of entrenched interests under either party to be incorporated into decades of government policy reaching its zenith in more recent times. However the recent stimulatory moves made by Obama, Gordon Brown in England and Kevin Rudd in Australia may well have been taken directly from a Keynesian handbook which is likely to rekindle resurgence in renewed interest in his economics.


Any measures that might help avoid the sizeable crashes of 1987, 1997 and 2007- the latter coming perilously close to emulating a great depression, will, as would be anticipated represent the best of the old and new way of thinking. But ultimately you cannot legislate effectively morality but rather I think one can ensure a system is both transparent and fair. I think it would be fair to say the free market envisaged long before by Adam Smith bears little resemblance to the one now championed as free. The championed free market today in reality is so encumbered with a concentration in monetary power and sufficiently lacking in transparency to necessarily distort the beneficial outcomes envisaged by Smith.

Freidman’s ideas about the advantages of smaller government and reliance on monetary controls have been selectively seized upon to give credence to an economic fundamentalism. What we have witnessed has been a very loose monetary policy which made the cost of money (money being currency and easily liquefied bank deposits) very cheap and acted as a catalyst for the excessive leveraging of corporations whose failure precipitated a financial collapse of grand proportions. I agree with Economist Paul Krugman who suggests we will, going forward, increasingly revert to a Keynesian style of economics in preference to one grounded purely on monetarism.

That is not to say a need arises for a larger government sector or even for more legislation. In fact I think we are in danger of over-acting and imposing such increased regulatory controls with proposed increases in new capital ratios and stricter lending requirements as to risk curtailment of any recovery by inducing a reduction in liquidity just as stimulatory measures globally must be wound back.

What are needed in my view are more descriptive type provisions in tandem with improved regulation, coupled with transparency. Large financial institutions need to have their mainstay commercial business and consumer lending areas separated
into different entities to those involved in derivatives and any proprietary trading.

Additionally markets all need to be afforded transparency so that any derivative trading – particularly in relation to Hedge Funds – can be determined for markets to be informed and not left in the dark as was past practice.

The type of philosophical materialism which led to the idea that the stock exchange represents preferred repositories of money making entities which require freedom from regulation in order for those entities to create the wealth necessary to sustain our economies was always a discredited theory. However to the extent those stocks do represent a sustainable linkage of goods or services that may indeed be true. But because of the remoteness and lack of transparency to many of the corporate inputs the actual outcomes are oft far removed from such a reality. Sucked into a vortex of a money making machine where investors in AAA rated securities (and those securities derivations )were so far removed from those who actually owned the properties,it was hard to grasp initially how such schemes were concocted in the first place. Any renegotiation after default was thwarted by intermediaries who had no interest in any renegotiation or were restrained through legalities. The lack of regulatory oversight and need for improved transparency needs no further elaboration on my part. Any system which trades purely on the expectation of another’s failure is doomed to eventual failure, since integrity never envisaged insurance was to benefit from another’s failure or that one could make a profit from insurance.

However on a more positive note all of the major companies I have studied here in Australia – and from what I understand applies globally – are making strenuous efforts to ensure their business is sustainable and reflects the latest in good governance. Most refer to the savings in carbon reductions per employee and even in relation to their stakeholders. There is realization the old ways are not appropriate and regardless of any inaction by the government, a global transformation is already in full swing. It is also refreshing to read that many of the big banks were dismissive of the overtures of their overseas counterparts when offered trade in collaterised debt securities. That rejection was based upon the unnatural dichotomy between the security holder and the layers of wrapping that preceded the security in the form of the property. Some Banks still like to know who their customers are and to personally evaluate the risk- if you’re unable to do that alarm bells need to go off.

I will close with a link to where I began with the Australian Aboriginals. Money really is only a means of exchange so that we- ideally like our indigenous peoples- share to the extent as is necessary and sustainable.

Similarly our evolution was more dependent upon survival through cooperation - not on survival of the fittest as evolution’s most misquoted quotes suggest- since the way forward so far as our evolution is concerned has always depended upon cooperative efforts.

Best wishes for 2010 – may it offer more hope than the previous decade!

Friday, December 25

Christ “Hidden Beneath the Whitewash”

There is a story told in Holland, perhaps more mythical than true. It runs this way:
There was an old church. For many years, upon entering it, every-one would stop and bow in the direction of a whitewashed wall. No-body knew exactly why anybody did that, but everyone had been doing it for such a long time that nobody questioned it. It was tradition. Besides, there was something fitting about doing it. It felt right.

One day, the parish decided to renovate the church. Among other things, they began to strip the paint and whitewash off the old walls. While doing this, they discovered traces of a painting on the wall that everyone bowed to. They became very careful and peeled off the paint gently so as not to damage what was beneath it. Slowly, a very beautiful centuries-old painting of Christ emerged. Nobody alive was old enough to have actually seen it before. It had been white-washed over for at least a century. Yet everyone had been bowing to it, not knowing why, but sensing that there was good reason for the reverence.

There is a Christmas lesson in that. Western culture still bows towards the crib of Bethlehem. We may be post-Christian in our beliefs, our attitudes, our ethics, and our policies, but we still celebrate Christmas. Like the people in that church in Holland, we are not really clear any more as to why we are doing what we are doing. There is not much conscious faith left in our Christmas celebrations, just a habitual response to a tradition.

But - as the story of the painting recovered in a church in Holland can teach us - that’s not all bad. It’s better than not bowing to the wall at all. At least we still have the sense that there is something special beneath the whitewash.

If we are among the ones who still know that there is a painting of Christ behind the whitewash, our response should not be one of cynicism. The Christian choice at Christmas is not: do we celebrate or not? Of course we celebrate and we should be happy that the world is still making a big deal out of Christ’s birth, even if it isn’t so clear any more as to why.

Our task is not to stop the bowing or the celebration. Our task is to help peel off the whitewash, to help restore the painting beneath it, and to tell the story of who did the painting and why.

You criticize the bad by the practice of the better. The best way to help our culture to celebrate Christmas properly is not by criticizing how it celebrates, nor by ourselves ceasing to celebrate, but by celebrating in a better way.

Let our joy exceed that of the commercial world! Let our bow be deeper and more aware of the marvellous gift that’s behind the whitewash: the gift of the Incarnation of our God!

Reflection on the Epiphany by the Canadian Oblate priest Ron Rolheiser
Click here for his website

Sunday, December 13

Christian parallels with Buddhism

Both Buddha and Christ preached peaceful co–existence ; the amelioration of suffering by application of an expanded world view for compassion- to present similarities from markedly different cultures. Christ’s Jewish heritage was rooted in the Messianic expectation for the end of the world which leads to his eschatological message whilst Buddha’s concern was over indifference to suffering within a caste based societal system. There remain fundamental differences of substance between the two but personally, on a purely subjective note, I would proffer the view Christ’s sayings also have a distinctive Buddhist flavor to them. Certainly there has been a long history in contemplative Catholicism towards similarity in meditative practices, but I also think there is a tentative link to the way both respond to suffering.

The tenuous parallel link is evident in the expanded compassionate response to suffering. Christ’s ‘sermon on the mount’ was to establish a pacifist society, to end the eye for eye justification and to strive for a universal forgiveness by an active expanded role for compassion. In the Buddhist tradition the release from suffering through Nirvana – by ceasing to will, is the recognizable path to enlightenment. Christ’s account can best be understood by way of eschatology- to establish the spiritual kingdom for righteousness and expanded compassion. That love preached by Jesus was to be universal and to include all people, sufferers, oppressed, those sick, murderers, those found guilty or even your worst enemy. Buddha brought to all sentient creatures that same kindness, friendliness and sympathy but without a personal involvement of heart binded to earthly things.

However, just as the “historical Jesus ‘scarcely exists outside of the Biblical references – except for a fleeting historical reference - so the Buddha also is historically obscure or at least what is attributed to him remains a topic for debate by scholars. Both spent years of monastic contemplation- (Christ may have been a member of the Essenes) prior to a public ministry which attracted disciples and has subsequently spread throughout the world. Their first records and accounts were eventually written down by the disciples and followers. Many Buddhist traditions were orally maintained for over 400 years before any formalization took place. Buddhism may be considered a philosophy or a religion, but more so a religion in my view with Buddhist sacred scriptures and doctrines.

In China philosophical Taoism has influenced Buddhism, but religious Taoism has also been transformed by Buddhism; to include rebirth/ with systems of heavens and hells. (Ching Julia – from Kung Hans and Ching Julia. Christianity and Chinese religions. SCM Press, London 1989) Hans Kung also talks about a kind of Taoist church with priests, monks, cults, feasts, holy water, confession, penance, fasting, legends of saints and even a Taoist Pope. Importantly for both Taoist and Christian thought the innermost essence of Tao and God remains hidden from human beings. (Kung Hans and Ching Julia. Christianity and Chinese religions. SCM Press, London 1989)

Buddhism has been rediscovered in the west and gained popularity as an alternative to secular materialism in philosophy or fundamentalism in religion or for those whose spirituality sits uncomfortably with the various strands of Christianity. Such an interest might seem surprising given for the most part western rationalism which is unaccustomed to discussing such subjects as emptiness, karma, release from suffering through Nirvana – by ceasing to will, illusions of the mind and the idea of death simply taking on a different form of rebirth. But I think the reason Buddhism has gained popularity is it seems less authoritarian and, while its rationality may be debated it does suggest a rational pathway. However, when one examines the mystical bent of all religions and traditional ritual, richness in religious art and the vast body of canonized scripture held by both wisdom streams, I think we all read from the same hymn sheet; to listen to tunes set from fundamentally different cultures but who aspire to the same more positive outcomes.

Wednesday, December 2

Economic update

Introduction and risk assessment

As economic trends signal an end to the steep cyclical downturn, future sustained recovery remains problematical amidst conflicting signs. The US economy continues to digest a never ending cocktail of mixed signals to post meager gains which suggest sustainable economic growth is still probably a year or more away.

Globally tentative improvements remain buffeted by stiff headwinds; more conservative capital consuming banks,vulnerability in asset prices,the circumspect consumer and the unwinding of unprecedented monetary and fiscal stimulus packages which increased government indebtedness by 50%. The continued nuclear ambitions for Iran & North Korea also cast a shadow over global outlooks.

The consensus outlook by the Board of the Reserve Bank of Australia is slightly more upbeat for Australia, aided by the resilient economies of China and Asia recovering faster than expected. Australia benefits from these faster growing regional ties and a very modest level of government debt combined with a well regulated banking system. Our risks lie in the relatively high level of household debt secured on residential property; any pronounced weakness in housing prices exerts pressure on a banking system captive to overseas funding. Rising house prices have reduced home ownership affordability by 24% since April this year. Any risk of a pronounced housing price fall is low since housing stock is under supplied and demands continue to flow on from record levels of immigration. Banks reliance on overseas funding leaves the economy vulnerable to any credit squeeze imposed by overseas lenders, because,apart from forced superannuation saving and government surpluses, we remain a nation of spenders not savers. Increased saving remains a key initiative for the country to be more sustainable in the future.

Interest rates

The Reserve Bank of Australia today raised the cash interest rate 25 basis points to 3.75% to record a unprecedented 3rd straight monthly rate increase; expect another rate increase in February 2010 and a cash rates of 5% by 2010. Such increases represent an unwinding of a previous accommodating monetary policy stance in response to the GFC to one that returns to a position of neutrality. The rise in interest rates and in our exchange rate will contain the prices for traded goods and services but dampen growth in the trade-exposed sector of our economy. The Reserve Bank has also expressed some concern over rising house prices and hopes the interest rate increase will dampen consumer sentiment and propensity to continue to pay inflated prices for housing.

The current yield on the Commonwealth Government March 2019 bond is at 5.267 per cent while the yield on the April 2012 bond was at 4.430%.


Because of the continued weakness of the US dollar speculation is rife the US dollar may lose the world’s currency reserve status. Throughout the 18th and 19th century the English pound enjoyed reserve status before an elected dollar came to power, many years after the US had become the world’s largest economy.

Bearing in mind the reluctance for sudden changes, the requirement for deep markets and the need for ease of convertibility you can reliably conclude it will take several decades before any change become feasible.

In the meantime ongoing US Dollar weakness could be a catalyst for continued political and economic tension, particularly if China continues to avoid a Yuan appreciation, although I think fears here are overblown.

Lessons from the great depression and recent GFC after shocks

As the past tumultuous events of the global financial crisis continue to hover in our collective consciousness, inevitable comparisons continue amongst economic commentators and share chartists with the great depression. The great depression was preceded by the roaring twenties which tended to add a flavour of assumed speculation and bubble bursting scenarios to most of the economic commentary at the time and subsequently.

However an analysis of stock indices (earnings to stock price ratios) just prior to the massive falls of the thirties reveals stock price was not excessive except for one industry sector. That sector was the popular leveraged Investment companies whose specialty was utility stocks. As inevitably more realistic profit reports undermined inflated values of utility stocks the leveraged investments companies were forced to sell their entire share holdings to satisfy liabilities to margin lenders. That event triggered a train reaction as investors in their now defunct management investment companies were forced to sell their entire shareholdings to satisfy their margin lenders.

The operative lesson is the extreme danger of gearing. The final straw during the depression that led to the now famous double dip in stock prices was governments action taken to stem perceived greedy speculators initiated by tightening credit which caused widespread panic selling and subsequent larger scale insolvencies due to lack of liquidity.

I don’t think we are in danger of following that same fearful path today but the risk nevertheless remains, particularly whilst the US banking system (unlike Australian) is not adequately regulated and could still inflate a bubble from excess liquidity and leverage.

However Banks in Europe are 25% and in the US 20% bigger now than pre 2007 crash levels -when the cry was heard too big to fail ! This scenario provides is an ongoing challenge to regulators in relation to capital adequacey and to internal risk managers who need to be given authority to influence bank practices and policies.

Another lesson learnt in recent times was it only took the huge indebtedness of one tiny nation - Iceland to undermine the house of cards that had enveloped the globe. Investors are now more recently worried about Dubai; since it has borrowings of $US80billion to finance a 4 -year construction boom now subject to a pronounced property slump. Dubai world surprised markets when it called for a halt on paying back $US60 billion debt until next year. Dubai's debt problems will be well contained, but expect a few more surprises like this over the next year or so until we reach a point of renewed confidence.

US Banking system still inadequate in regulation.

Federal lawmakers and regulatory officials continue to grapple with what new regulations are needed to be introduced to avoid a repetition of the conditions that led to the Global Financial Crisis. Policies and proposed recommendations remain bogged down within the political process with the administration unable to obtain a bipartisan approach. The current US policy settings which ensure the benchmark interest rate remain near zero, carries the risk such an accommodating monetary policy setting, will fuel a surge in assets and the so called “carry trade” risks another bubble occurring. The unwinding of this “carry trade” would not be pretty. The Fed itself is aiming to better identify risks, drawing on its 220 PHD qualified economists to be more effective in identifying potential bubbles and improve regulatory oversight according to a recent article appearing on Bloomberg.

Federal Reserve Chairman Ben S. Bernanke said he doesn’t rule out using monetary policy to pop asset-price bubbles, while stressing that financial regulation is his preferred approach.

Corporate Profits

Disregarding the US fragile banking system the one bright feature is the recovery in corporate profits largely driven by cost cutting and stabilization in inventory levels previously slashed in response to faltering weak demand. However the cost has been high in widespread human misery and unemployment to leaves a continued deep scar well into the future. Given this caveat and apart from the banking sector, most of the corporate sector (with a few notable exceptions) are in relatively good shape and should continue to improve. Historically current stock price earnings ratios are only slightly in excess of long term historical averages to assume an inbuilt profit improvement inherent in 2010, which is also true for Australia and most of the western world.


You cannot legislate morality or a perfect a set of banking indices which alienate risk. Rather, what is needed is for regulators to be prepared through improved training - to get their hands dirty and carry out periodic due diligence's and exercise a common sense regulatory service which demands transparency.
If you can’t understand what is going on that is usually a clear signal that something is fundamentally wrong. If you’re subject to a financial services or banking license it is preposterous to think a company’s operations can rely on a complex computer generated model which generates huge profits and counterparty risk but whose risk profile remains unintelligible or a mystery to inexperienced regulators.

“Banking should be boring – it is boring. When banking becomes exciting, then it becomes very dangerous “

Quote from Mike Smith - ANZ's chief executive who operates one the largest and most profitable successful banks in the world today-'In the black' -December 2009

Gearing ratios vary according to the quality of the risk – if you’re gearing to invest in government bonds ratios of 20 or 30 to 1 won’t matter – if your investments are risky 4 to 1 may be far too much leverage. I am afraid there is no easy answer but a return to integrity and the constant need to evaluate different scenarios with industry experience.

Financial services as an industry also needs to ensure fees and charges are transparent and easy to undestand, just as regulators can incorporate such requirements into sensible regulatory oversight.

Insofar as transparency for operations are concerned free enterprise markets always needed to be transparent to be effective and equitable and nowhere is this more apparent than in the derivatives market. Since the crash we have merely increased market liquidity sufficiently by massive injections of funds to substitute existing counterparty risk with increased liquidity.

There also needs to be more regulatory measures for boards of directors of public entities to set sensible remuneration limits – particularly in relation to draw backs on share options arising in the event of subsequent failed results.

Classic Bank Run

President Barack Obama has blamed compensation tied to excessive risk-taking for fueling the deepest financial crisis since the Great Depression. The administration has named a special master to approve compensation packages at firms that have received the biggest government bailouts.