Wednesday 15 July 2009

World Bank volte-face on finance and development?

Oh to have been a mouse in the corner last Friday morning in the World Bank’s Finance and Private Sector research department! In a guest article for this week’s The Economist, World Bank chief economist Justin Yifu Lin argued that “small, local banks” are the best entities for providing financial services in developing countries where SMEs are critical to growth.

Not ground-breaking stuff you might say. Heterodox economists have been making this point for years. Developing both relations with local businesspeople and project assessment skills are critical if local banks are to support the development process. Big international banks tend to cherry pick large corporate clients, and use their technological advantage in credit scoring to rapidly increase household indebtedness (witness Mexico).

But the Lin article takes on more importance in the context of nearly two decades of Bank research and policy advice which has advocated a position contrary to his own. From Clarke et al. (2001) (‘Foreign bank penetration improves financing conditions for enterprises of all sizes’) to the much-cited Claessens et al. (2001) to Beck et al. (2003) (‘a larger share of foreign-owned banks removes financing obstacles’), and much more beyond, the Bank has been a cheerleader for the benefits of big banks in little countries.

Moreover, the Bank’s private sector arm, the IFC, has eagerly supported the development of loan securitisation, mortgage-backed securities, collateralised debt obligations and originate-and-distribute banking models (dos Santos, 2008) - hardly the “simple banking systems” whose merits Lin extols.

(Lin also praises Japan, South Korea and China for resisting the rush to prematurely develop stock markets or integrate into international financial networks. Again, not new (Ajit Singh has made this case for over two decades), but decidedly against the World Bank flow.)

Could this be a portent of good things to come at the Bank? Or will Lin be slapped down by Wall Street via the US Treasury (a la Stiglitz) or quietly sidelined (cf. Bourguignon’s inequality agenda)? Perhaps Lin’s carefully chosen words later in the article (‘small, private domestic banks’) will have been just enough to avoid rocking the boat. After all, HSBC is the ‘world’s local bank’…

(nb. I’m not the only one to be struck by Lin’s editorial – a vigorous debate of the great and the good, including several former Bank economists, has broken out on The Economist)

Monday 13 July 2009

Head and Shoulders Update: Could this be a new definition of Financialisation?

So as I type the S&P is up around 2.5%, and the puts I was talking about earlier are now trading at .28 / 1.28 - so a massive loss so far if you bought them this afternoon... dooh.

So financial markets are up because Goldman Sachs took enourmous profits from trading in financial markets.... THIS is financialisation!

Head and Shoulders

Lots of talk in the last week or so of “head and shoulders”. Many markets are forming this legendary trading pattern and several mature markets have “broken the neckline” – meaning this could be the moment for the fall in equities that many predict. Moreover as this piece points out, the Vix is doing strange things with it’s moving averages.

It might be thought that this is the equivalent of reading coffee grains but if the game is to guess what everyone else is guessing about everyone else’s guesses … then why the hell not!

If we follow this then the stock market is not the result of an objective random news generator, the process of which analysts set out to discover, but rather an exercise in group psychology! If only it were that simple.

Talk has also re-surfaced of the dark forces of the Plunge Protection Team. This is the White House appointed team has the right to intervene and support US stock indices. Widely assumed to have been very active at the start of the crisis in an attempt to prevent the stock and housing bubble bursting at the same time. Their presence is most often invoked when quiet end of day trading on down days gets sudden boost, usually when Europe and Asia have gone home and volumes are thin. Wilder rumours also hint that certain insiders get tipped off, they presumably would then lend their weight to the rally and earn the profits of doing so. Who knows?! The political economy of the US certianly includes close ties between state and finance capital as the appointments and events of the crisis have shown.

In the coming week or so we have option expiries and earnings announcements. If financial proces are as arbitrary as the above isn’t it earnings that will bring them back in line with the forces of production? Well, not really when what really matters is i) where expectations have been managed to, and ii) what the companies tell us they are predicting for the future. So still a decent amount of guess work in there.

Once you start seeing head and shoulders it seems it’s rather catching and you start to see them everywhere... MacroMan sees one in the MSCI today although the neckline isn’t broken yet.

Today you could buy 850 strike, July expiry, S&P puts for $2.8 on igindex. This is a statement of fact not investment advice. As discussed, prices might go up, might go down, might be politically influenced, might not. Pretty arbitrary actually.

Monday 6 July 2009

How the dead live...

You thought it was dead but it seems it's having another go-around. Securitisation is back, only this time it's better, smarter, safer... honestly! Barclays Capital are calling it "smart securitisation", Goldmans "Insurance". From what we can see it seems to follow the complicated formula: diversify, improve rating. Apparently this time it's ok though as the instruments are taking existing assets from bank's balance sheets not generating new ones. Well, my friends that's how securitisation started the first time around.

It seems similar moves are afoot in the market for Commercial Real estate Mortgage Backed Securities (CMBS). Here the incentive seems to be from S&P who are to downgrade a load of bonds such that they will no longer qualify for the FED's TALF liquidity facility. Not that anyone went anywhere near it the first time around - the banks need capital not liquidity. Instead the private side is constructing what they are calling "re-Remics". I quote Risk Magazine: "This involves splitting existing CMBS into new tranches with fresh ratings." (Who is buying this stuff?!). Crucially this "might also provide regulatory capital relief for banks and insurance companies". Well they won't be doing otherwise!! Groundhog day anyone? Let's go round again?

Lack of meaningful action by regulaltors is leading to private side innovation to fill the space they are creating, be it Sovereign CDS indices, re-Remics or whatever. The financial press at least this time around can see that this is somewhat peculiar, and understand the instruments better than previously (note the altered the phrasing around "ratings instability"). But on it goes never-the-less. Do we really want another go-around?

Friday 3 July 2009

A Rolling Stone gathers no moss...

A few stories have caught the eye in the last week that potentially tell us a little about where derivatives / financial markets are going.

Firstly this week saw the launch of Indices for sovereign CDS. The Alphaville Blog post and comments really summarize this, in particular the first comment which begins, “This is a pointless punting instrument”.
- What exactly could you hedge with this?
- Who would you buy the hedge from?
- Which currency would you denominate it in?
In short this is a very awkward hedging tool and a very useful trading / speculating tool.

If that is the private side response to the current situation the public one is not too dissimilar. The US and others are still calling for more standardized derivatives as a key part of the regulatory overhaul. Indeed we have seen standard CDS coupons put in place in the US and in Europe.
- Does standardisation bring derivatives closer to production, giving capitalists a risk management tool to help them manage their specific business risks? NO.
- Does standardization help those that want to trade vast volumes of derivatives? YES
- Does standardization and large volume trading help speculators? YES
- Does anyone still think that the problem with CDS pre-crisis was not enough volume? That price efficiency will follow if we can just make the market ‘purer’? SURELY NOT!?

Finally, in the same vein of financial instruments divorcing further from production and becoming simply investment vehicles Bloomberg noted that correlation between asset classes is at all time highs. “The Standard & Poor’s 500 Index … is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds.”

The fact of ever increasing numbers of asset prices moving in lockstep would be consistent with the rise of anything and everything as an investment vehicle. Now the forces of supply and demand for the investment outstrip the forces of demand and supply from production. Herd mentality, risk aversion and so on rule the roost (incidentally, fear is often said to manifest itself in the VIX another abstractr index; Macro Man notes “for the first time in quite a while, the ambient temperature in SE England is higher, in degrees Celsius, than the VIX.” – a vital technical???)

Why does this matter? Well first of all the alleged benefits of derivatives and financial markets are risk sharing, hedging and so on. Surely these are best served if derivatives move towards and not away from production, become more hedger friendly not less. Secondly the further from production the more fictitious financial prices become and the more open to herd behavior, bubbles and outright manipulation. This leaves financial capitalists in the position we find them now of trading the hell out of the markets as they rise and resisting the fall by either getting out at the top or using their political clout to avoid the consequences.

Which leads finally to a piece in Rolling Stone magazine highlighting the activities of those Masters of the Universe, Goldman Sachs. It shows in irreverent language but damning detail how bankers inflated and rode the dot com, the housing and the oil bubbles, have come out of the crisis bailout as shiny as ever and how they are now looking at global warming, carbon markets and the rest as the new “asset class”.

Thursday 7 May 2009

Aspects of Financialisation in Greece: what’s next?

by George Lambrinidis

In 2008, there were 360.000 unemployed workers, 350.000 in temporary employment, 270.000 part-time workers, 400.000 in employment with very low, if any, rights and 600.000 were working without insurance. At the same time, 400.000 workers have to have a second job or cover basic needs through borrowing under burdensome terms[1]. Just for the record, the labor force of the country is no more than 3.9 million.

Following the gist of our previous posts, the unemployment situation sketched above can be partly attributed to the capitalist restructure and reformation of the 1990s, as well as to the political dominance of the social democrats. Both processes tipped the scales in the interests of the bourgeoisie. Nevertheless, this would not be possible had it not been for an underlying ideological process. This is no other than the process of destroying ideologically the belief that solutions for the working class can come about only through collective action. It cannot be ascribed solely to the social democratic party, but the latter undertook successfully its political realization and overview. This very process is quite significant for financialisation.

Still, a major break was needed for any savings of the wage earners to be swept up and to damage seriously the ability of the social network to provide solutions at times of difficulty. Operation “stock market”, orchestrated by the social democrats, sold by them as the arrival of “popular capitalism” climaxed in 1999 and channeled savings of over one million people to the pockets of the capitalists. Apart from the direct effect on the latter’s profitability, the operation exposed workers, mostly, and low income self employed to the grip of the banks.

The entering of Greece in the EMU accelerated these processes. Capitalist restructuring was driven now through integrated competition and new opportunities. As for the latter, one has only to take a look at the position of Greek investments in the newcomers of the EU, and especially those in the neighborhood. In the same spirit, one may understand Greek foreign policy toward the entering of Turkey in the EU. Further, the EMU provided the framework as well as the political alibi for those ventures to flourish.
It is now evident that the individual seeking of solutions is a dead end. The alternative though is still misty. It seems that there is a turn to collective action, while the bourgeoisie is turning to the militarization of everyday life. This is also one of the major pillars of the political crisis that accompanies the economic one and the events of December should be understood under this light.

I would risk arguing that processes in Greece were not slow, its not logn since the early 1990s when most banks were unable to accomplish their role in the era of financialisation and under state – although never public – ownership. Greece had to run through all the evolution of financialisation in much less than half the time of the leading capitalist countries. This hardly implies that Greek capitalists didn’t do well, it’s just that the situation is now very complicated and not easy for them to manage politically, let alone economically.

To return to where we started and the events of December, it is evident that these scenes will be repeated: the time for elections is approaching, with the ability of the two identical parties – the social democrats and the new liberals – to switch government strongly contested and the workers movement is rising, despite its recent weakness.. Another December will inevitably be provoked to justify the violent imposition of the political power of the bourgeoisie. The ground is ready for the next round, the margins are much tighter and each will be ready for the fight.

[1] Interest rates for credit cards are no less than 17% and, recently,banks were obliged to stop charging interest on a loan when customers have been paid 3 times the value of original loan.

Tuesday 28 April 2009

The UK budget: What is really going on…?

by Juan Pablo Painceira

The debate on the nature of the UK budget has been hot over the last week in all media. The main issues addressed are the taxation on the wealthy, Darling’s economic forecasts and the huge climb in public debt since October 2008. The rise to 50% taxation on the top income earners (over £150,000) has been called a revival of class war, a return to Old Labour policy or even a populist measure targeting the next election.

The UK growth forecasts of a fall of 3.5% and rise of 1.2%, respectively, for 2009 and 2010 have been ridiculed by many analysts. It does seem a bit unrealistic given that the IMF and consensus forecasts are a drop of 4% in 2009 and growth of only 0.3% in 2010. Besides, it is well known that governmental forecasts are always more optimistic than the market’s: if a finance minister forecasts less than the market for sure they should be fired! It’s all about information and expectations my dear! Surely we can all agree that growth forecast of 3.5% to 2011 is somewhat exaggerated. According to the debate in the media the other areas to focus on included a rise in the annual limit for tax-free ISAs to more than £10,000 - to come in from October 2009 for the over 50s; the stamp duty holiday for homes up to £175,000 is to be extended to the end of the year; and there will be more job help for the long term young unemployed.

The rise of public sector borrowing and, consequently in public sector debt have raised concerns about the sustainability of the UK’s finances over the coming years which is affecting the pound and is reflected in a possible downgrade by a rating agency from AAA. Since last Wednesday there has also been capital outflow from the Gilts with the benchmark yield Gilt-10 rising more than 20bp.

Basically, the economic debate on budget which has played out in the media has been whether the UK government has to cut more on public expenditure or to increase taxation in the coming years. It sounds familiar, doesn’t it? This is the same old debate re-heated.

What we haven’t heard so much about is the huge public exposure to the bank bail-outs which is around £1,000 bn. since the Northern Rock rescue. It’s off the agenda already?!?!

Or even the cuts in planned public spending, where the public sector, in particular the NHS is expected to generate savings, but which are being labelled efficiency savings.
It is a strange world where via a cut in spending, the system suddenly becomes more efficient and generates cash! We can only imagine how this will work at the micro level…

The Economist's reaction to the budget is at least harsh. They are calling for a more realistic budget where the government should say explicitly to the British nation that the costs for getting the UK out of the financial crisis and recession should be shared (or paid) by everyone, including you!

In the same rhythm, the IMF is just as concerned by the extension of fiscal stimulus in Spain, talking of the need for institutional reforms (mainly in the labour markets) in order to keep the sustainability of the Spanish long-term economic growth. There is no free lunch.

Yet for all the criticism, slowly events are potentially generating a situation and political environment where the fiscal adjustment could be implemented, the cost borne by the tax payer, perhaps with some neo-liberal reforms thrown in to convince us it won’t happen again. That way the fiscal expansion could be calibrated according to the needs of banking system and we can get back to business as usual…

For the time being…as we have addressed in past posts, it seems ‘plus ca change’… let’s see how the GDP predictions turn out and if they really have enough in the tank to plough on through…