66 Japan's internal debt - its relation to Current Account Surpluses and $ purchases

(1) Japan's internal debt - its relation to Current Account Surpluses and $ purchases
(2) IPhone - China Mobile and Taiwan's HTC to Develop Ophone to Compete with iPhone
(3) Taiwan chip designer sues Apple over iPhone's infringement of U.S. patents
(4) IPhone Maker In China To Pay Family In Suicide Case
(5) Made-in-China Faked iPhone that You Won’t Believe
(6) Taiwanese hardware suppliers ... provide most of the parts for Apple's hardware
(7) Martin Wolf criticizes Richard Duncan for depicting China as passive victim of $ Hegemony
(8) East Asia's Revenge: The Crash of the Housing Bubble
(9) US must restore "Glass-Steagall" separation between retail and investment banking
(10) The moral dimension of boom and bust
(11) The return of Government & end of Central bank independence
(12) Paul Volcker: we need a World Currency, but $ will have to suffice in the meantime

(1) Japan's internal debt - its relation to Current Account Surpluses and $ purchases

Geoffrey Gardiner, former director of Barclays Bank's international division, wrote:

{quote}
you cannot transfer money from one country to another, only swap it.  A movement of money in one direction has to be exactly matched by a transfer in the other direction. All real transfers of value have to be in the form of "real" things.

The Japanese car maker is receiving Australian dollars for his product. To bank it in Japan he has to change the dollars for yen.

That means he has to find someone willing to take his dollars in return for yen. So a deposit in dollars still remains, but owned by someone else. If the Japanese economy is in surplus with Australia, the holder of the deposit is likely to be Japanese.

It is all a result of the inexorable law of double-entry book-keeping that for every debit there must be a credit.

Of course the deposit may be used to buy other Australian assets, and Japan gradually comes to own all Australia's capital assets.
{endquote}

Japan's Exporters bring Yen home (by swapping their Dollars for Yen) to pay their workers, reinvest in further production, disburse as dividends etc.

Given Japan's sustained Current Account Surplus over many decades, the demand for Yen, as Exporters brought their proceeds home, would push up the Yen and the $ down.

To counter this, Japan's Central Bank (BOJ) has often intervened to buy those Dollars, paying for them with Yen it created ex nihilo.

This, however, increases the money supply in Japan, and can be inflationary. And so the BOJ has often Sterilized the excess Yen.

Robert Skidelsky explains that Sterilization is performed by BOJ issuing Yen Bonds to soak up the excess Yen created when it buys $s from Exporters to keep the Current Account Surplus from pushing the $ down.

These Yen Bonds put the Japanese Government in debt - internally, to wealthy Japanese, and at close to 0% interest - but at the same time the same the Japanese Government (BOJ) acquires (with the $s it bought from the Exporters) US Dollar Bonds paying higher interest.

Yet it may never get the principal back from the US - it's unrepayable. It does this to keep the Yen down, so that exports keep flowing and Japanese industry stays at the top of the heap. Meantime, the US becomes de-Industrialized (or PostIndustrial, if you want to put a gloss on it).

The situation is not obvious, because Japanese products have often been re-badged as American products; or present as hi-tech components in imported products; or components in nominally American products, such as Boeing aircraft. Or they are machine-tools with which China builds factories.

Apple's iPhone is assembled in China using mainly Taiwanese hardware. Chinese clones are selling over the internet - cutting Apple out. China Mobile is teaming up with Taiwan's HTC to develop Ophone to compete with the iPhone: http://iphone.tmcnet.com/topics/iphone/articles/62670-china-mobile-taiwans-htc-develop-ophone-compete-with.htm

The Yen Carry trade, by which foreigners took out (on a large scale) Yen loans at close to 0% interest, to speculate elsewhere (say in $ denominated assets) at higher interest returns, also helped keep the Yen down.

In the process, the BOJ created more Yen, sold them to these foreign borrowers, who sold them for Dollars, and the BOJ must have soaked up these extra Yen by issuing Yen Bonds (internally) to wealthy Japanese.

Via these Yen Bonds, Japan has the biggest internal debt in the world. But it's at very low interest; and balanced by Japan's holding large assets abroard.

(2) IPhone - China Mobile and Taiwan's HTC to Develop Ophone to Compete with iPhone

By Jessica Kostek, TMCnet Channel Editor

August 21, 2009

http://iphone.tmcnet.com/topics/iphone/articles/62670-china-mobile-taiwans-htc-develop-ophone-compete-with.htm

Mobile carrier China Mobile, announced that it will begin developing smartphones with Taiwan’s HTC in an effort to compete with Apple’siPhone ( News - Alert), Taiwan media reported on Friday.

China Mobile will launch its Ophone running on the Open Mobile System platform with HTC, China Mobile chairman Wang Jianzhou (News - Alert) said.

The Commercial Times reported China Mobile could also set up a procurement center to raise its purchases from Taiwan suppliers.

According to U.K. magazine PC Advisor, the handset will support Time Division Synchronous Code Division Multiple Access, a domestically developed 3G standard that the Chinese government has tappedChina Mobile ( News - Alert) to promote and market.

Company officials said that the Ophone, will be the first to use both technologies and add a sleeker 3G phone to China Mobile's offerings, combating the lack of attractive handsets that analysts say has helped keep down adoption of TD-SCDMA.

The reports come a day after China Mobile posted its slowest interim profit growth since it listed in 1997 and said it expects average revenue per user to slide in the months to come.

Jianzhou will begin a nine-day trip to Taiwan starting Friday, visiting the chairs of HTC and Mediatek, the island's top chip design house, he said.

China Mobile said in April it was buying a 12 percent stake of Taiwan's Far EasTone for $592 million, making it one of the biggest investments by a Chinese firm in Taiwan.

Apple been held talks with China Unicom (News - Alert), one of the country's state-owned mobile carriers, for months about releasing its iPhone in China. Analysts said Apple might be getting closer when the company, last month, submitted an iPhone to Chinese regulatory authorities for tests to obtain a network access license, according to analysts.

Jessica Kostek is a channel editor for TMCnet, covering VoIP, CRM, call center and wireless technologies. To read more of Jessica’s articles, please visit her columnist page.

(3) Taiwan chip designer sues Apple over iPhone's infringement of U.S. patents

http://www.macworld.com/article/139898/2009/04/elan.html

Apr 8, 2009 9:08 pm

Taiwan chip maker sues Apple over iPhone, iPod touch, MacBook

by Dan Nystedt, IDG News Service

Taiwan chip designer Elan Microelectronics said Wednesday it is suing Apple over the infringement of two U.S. patents.

The company is asking a U.S. court to prohibit Apple from producing, using and selling iPhones, iPod touches and MacBooks, over the patent violation.

The company filed the lawsuit in the U.S. District Court for the Northern District of California, Elan said in a statement to the Taiwan Stock Exchange.

Apple could not immediately be reached for comment.

(4) IPhone Maker In China To Pay Family In Suicide Case
PETER ENAV | 07/28/09 09:37 AM

http://www.huffingtonpost.com/2009/07/28/iphone-maker-in-china-to-_n_246074.html

TAIPEI, Taiwan — The Taiwanese employer of a young Chinese man who killed himself after being interrogated over a missing iPhone prototype has agreed to pay compensation to his family, a company official said Tuesday.

Sun Danyong, 25, jumped from his high-rise apartment in southern China last week after officials of Foxconn Technology Group questioned him about the whereabouts of the iPhone model that was in his possession.

Sun was responsible for sending the device to U.S.-based Apple Inc., which contracts with Foxconn, the world's biggest contract manufacturer of electronics.

Sun alleged he was beaten and abused by Foxconn security personnel, who denied it.

Sun's suicide cast unwelcome attention on Apple's notorious culture of secrecy, which tries to create a big pre-launch buzz about the company's products and upgrades. Apple is also a constant target of prying journalists, rabidly faithful customers and competitors who want an early peek at its latest gadgets.

A Foxconn official in Taipei said Tuesday the company would pay Sun's parents a lump sum of 360,000 yuan ($52,600), plus 30,000 yuan ($4,385) every year as long as either of them remains alive.

The official spoke on condition of anonymity because he is not authorized to deal with the press.

Earlier, Foxconn apologized for the incident and suspended the local security chief who headed up the Sun investigation.

Gu Qinming, the suspended security chief, admitted he grabbed Sun once by the shoulder but denied beating him.

(5) Made-in-China Faked iPhone that You Won’t Believe

Written by Kenson on December 10th, 2007

http://www.handcellphone.com/archives/made-in-china-faked-iphone-that-you-wont-believe

It seems like American not only need to keep away made-in-china toys, they also need to sue Chinese companies for copyright infringement. Pictures shown are another “wonderful” iPhone-like black market phone that comes with features and specifications that you won’t believe.

This faked iPhone features a big touch screen (400 x 240 pixels), a 1.3-megapixel digital camera, video player that that supports 16?9 widescreen display, MP3 music player, and Stereo Bluetooth Output (A2DP).

Even, iPhone’s icons are copied 100%. Bravo ! ==

Buy iphone Direct from China

http://iphone.china-direct-buy.com/

(6) Taiwanese hardware suppliers ... provide most of the parts for Apple's hardware

Apple Working On New Business iPhone & Wireless Speakers

By David Richards | Wednesday | 11/07/2007

http://www.smarthouse.com.au/Phones/Industry/V6L8T6S9?page=2

Chang cited rumours from Taiwanese hardware suppliers, which provide most of the parts for Apple's hardware, and an application with the US Patent and Trademark Office on 5 July for a "multifunctional handheld device with a circular touch pad control".

(7) Martin Wolf criticizes Richard Duncan for depicting China as passive victim of $ Hegemony

Fixing Global Finance
by Martin Wolf

Reviewed by Wayne E. Yang

15 August 2009

http://www.upiasia.com/Bookshelf/1006/

In Fixing Global Finance, Martin Wolf (the must-read Financial Times columnist) argues that China and the emerging markets have hoisted a "global savings glut" onto the United States. China's savings, as measured against its gross domestic product, have reached an unhealthy level, it is generating too much excess capacity and the country needs to encourage its people to consume more. The country is in the odd historical position where it is both the world's fastest growing economy and its largest exporter of capital.

That strange status stems in part from the tack that China took after the Asian currency crisis of 1997. China saw the crushing speed with which "fast money" (speculative foreign investment dollars) left the Southeast Asian economies, bursting the region's market bubble. Putting that experience in the rearview, the Asian economies, and subsequently, an emerging China, decided that the best way to defend against such financial fickleness was to build overwhelming foreign reserves. To Wolf's mind, China drew the wrong conclusions from the Asian economic crisis, however. Though China started from a lower baseline, the restarting of its large economic engine has distorted the global economy as it has accumulated and recycled a torrent of U.S. dollars back into the United States. Wolf says that China is much too large to follow the model of smaller economies like that of Korea and Taiwan.

In his critique of China's role in the global economic imbalances, Wolf seems to largely absolve the United States. He criticizes Richard Duncan and other writers for believing that our problems stem from a "money glut", a position that essentially paints China and the other emerging markets as passive victims of U.S. dollar "hegemony". According to Wolf, monetary growth until fairly recently was considered to be contained (a debatable point, depending on what measure of monetary growth you use) and inflationary expectations have remained muted (suffice it to say that the verdict on that score is still out). The United States, in the short-term at least, still benefits from the perverse idea that U.S. Treasuries are a safe investment, even though the country is leveraged to the hilt. Wolf admits that the money glut thesis is not without merit, since "American policy makers had at least some influence on whether the counterpart of the inflow would be consumption or investment." True, he admits that the United States has an "exorbitant privilege" in being able to issue debt in its own currency, the world's de facto reserve currency, but he readily buys the idea that the United States acts as a good citizen in accepting and recycling surplus dollars, a dynamic, which in reality has helped birth the many asset bubbles that we have experienced in recent decades.

The U.S. Federal Reserve does not accept and carry out its role out of any great largesse for the rest of the world; the overly protracted, loose credit policy that it effected during the early part of the decade was a self-protective response to the bursting of a U.S. stock market bubble, and subsequently helped to create a new bubble in U.S. real estate. If it also helped to re-stimulate various export-oriented economies, it was at the cost of further propping up Pax Americana, the myth that U.S. assets and financial instruments were worth more because the evermore deeply-in-debt American consumer was somehow the engine of growth for the world. The global stock market collapse in 2008 should have shattered that illusion. The United States has chosen to be a borrower; China, a lender.

The misfortune is that Wolf's book has come out before this crisis has run its full course. Despite the arguments of raging bulls, who have been fueled by a too-quick return in stock market values, we still face the prospect of rising U.S. unemployment, an exploding amount of U.S. government debt, a weakening U.S. dollar, and the specter of rampant inflation. Charles Kindleberger warned that when a government faces the hard choice of asking its citizens to sacrifice and strengthen the country's financial position or to debase the currency, governments seem to inevitably choose to debase the currency. In the same way that Rome once debased the precious metals contents of its coins, the United States and Western Europe have begun running its printing presses at a lightning clip. Brazil, Russia, India and China -- the so-called "BRIC" nations -- have begun expressing more concern over the U.S. dollar. China, in particular, has been trenchant in its criticism of the United States' exploding debt.

Wolf's real mission in Fixing Global Finance, however, is not to assign blame but to highlight the alarming economic imbalance. His proposals include growing the still nascent bond markets of the emerging markets and issuing bonds denominated in emerging markets currency baskets. The mid-year purchase of International Monetary Fund (IMF), special drawing right (SDR)-denominated bonds by the BRIC nations was relatively small, but in a sense, it was a warning shot across the bow of the developed world.

If, as Wolf says, "the essential role of government is to supply the institutions that create and sustain trust in financial promises," the profligacy of the United States is irresponsible, given its key role in the global economy. What we all fear is that a day of reckoning could be coming. "Sophisticated and dynamic modern economies depend on pyramids or promises far more impressive and complex than those of stone constructed by the pharaohs almost five thousand years ago," writes Wolf. "Yet the confidence that sustains them could all too easily prove misplaced. People would then end up with promises not worth the paper they are no longer printed on."

-- Wayne E. Yang lives and works in New York. His writing has appeared in The North American Review, The Christian Science Monitor, Dim Sum and other publications.

(8) East Asia's Revenge: The Crash of the Housing Bubble

By Dean Baker

March 9, 2009, The Guardian Unlimited

http://www.guardian.co.uk/commentisfree/cifamerica/2009/mar/09/usa-useconomy
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/east-asias-revenge-the-crash-of-the-housing-bubble/

In the matter of a few short weeks in the summer of 1997 the thriving countries of East Asia saw their economies overwhelmed by a financial tsunami. First Thailand and Indonesia, and then South Korea and Malaysia, saw investors panic and watched capital flee. Their currencies plummeted in value and their biggest companies wrestled with bankruptcy.

After being held up as models of successful development, these countries were suddenly denounced by the IMF and prominent economists everywhere for their lack of transparency, poor accounting standards, and crony capitalism. The IMF came into the region with a rescue plan that imposed harsh conditions. It demanded that these countries impose austerity plans and allow foreign investors to buy up their businesses at depressed stock prices. 

The other part of the story was that the IMF insisted that these countries repay their debts. The only way that they could do this was to export like crazy. This route was opened to these countries by the plunge in the value of their currencies, most importantly against the dollar. The result was that goods from the region became very cheap to consumers in the United States, leading to a flood of imports to the United States.

There was a second route that the IMF could have followed for debt repayment. In recognition of the severity and extraordinary nature of the crisis, the IMF could have allowed for substantial write-downs of debt by the countries of the region. But it chose not to go this route.

Of course the IMF was not an independent actor. The IMF takes it lead from the United States. At the time, the folks calling the shots were the trio that Time Magazine dubbed the "Committee to Save the World (CSW)": Alan Greenspan, Robert Rubin, and Larry Summers.

The IMF rescue for East Asia had important ramifications for the rest of the developing world. The message that developing countries took away from the IMF's East Asia "rescue" was that they never wanted to be in a situation in which they were forced to turn to the IMF for help. The one way that they could prevent being forced to turn to the IMF was to accumulate massive amounts of foreign reserves as a defense. The only to accumulate foreign reserves is to run a balance of trade surplus.

This effort by developing countries to accumulate reserves meant that it was not only the countries of East Asia who were exporting like crazy, but rather the whole developing world (including China). Reversing the conventional view in economic theory, in the years after 1997 there was a massive flow of capital from the developing world to the wealthy countries, with the United States being the biggest recipient.

This capital flow from the developing world created the hot house in which the U.S. housing bubble could flourish. The jobs lost to imports created weakness in the labor market. Even though the 2001 recession officially ended in November of that year, the economy continued to shed jobs for nearly two more years, in part due to the loss of jobs to imports. Seeing this weakness in the labor market, the Fed continually pushed interest rates lower, reaching 1.0 percent in the summer of 2003.

Low interest rates in turn sustained the bubble far longer than otherwise would have been possible. The bubble itself helped to conceal many of the excesses and outright fraud perpetuated during these years. In a world where house prices are rising by more than 10 percent a year, and generating enormous profits for the firms in the real estate and banking sector, many sins can be concealed.

But bubbles inevitably burst. The bursting of the housing bubble will erase $8 trillion in housing wealth (more, if prices overshoot) and will leave many of the country's pre-eminent financial institutions bankrupt. More importantly, it is throwing the U.S. economy into its worst downturn since the Great Depression.

In history, we never get second chances, but it is still worth asking the question of what the world would look like if the CSW had taken the other path. Suppose Greenspan, Rubin, and Summers had instead arranged for the IMF to write down a large portion of the East Asian debt so that they were not forced to place the same priority on exports.

Furthermore, a less onerous rescue would not have created the same rush to accumulate reserves across the developing world, as did the bailout designed by the CSW. We can't know exactly how things might have turned out if the CSW taken this alternative path, but it's likely that Mr. Rubin's shares in Citigroup would be worth considerably more money today.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.

(9) US must restore "Glass-Steagall" separation between retail and investment banking

Economic reform needs a dose of reality

Robert Skidelsky
Project Syndicate | Monday, July 13, 2009  

http://www.skidelskyr.com/site/article/economic-reform-needs-a-dose-of-reality/

Mainstream economics subscribes to the theory that markets "clear" continuously. The theory's big idea is that if wages and prices are completely flexible, resources will be fully employed, so that any shock to the system will result in instantaneous adjustment of wages and prices to the new situation.

This system-wide responsiveness depends on economic agents having perfect information about the future, which is manifestly absurd. Nevertheless, mainstream economists believe that economic actors possess enough information to lend their theorising a sufficient dose of reality.

The aspect of the theory that applies particularly to financial markets is called the "efficient market theory," which should have been blown sky-high by last autumn's financial breakdown. But I doubt that it has. Seventy years ago, John Maynard Keynes pointed out its fallacy. When shocks to the system occur, agents do not know what will happen next. In the face of this uncertainty, they do not readjust their spending; instead, they refrain from spending until the mists clear, sending the economy into a tailspin.

It is the shock, not the adjustments to it, that spreads throughout the system. The inescapable information deficit obstructs all those smoothly working adjustment mechanisms – ie, flexible wages and flexible interest rates – posited by mainstream economic theory.

An economy hit by a shock does not maintain its buoyancy; rather, it becomes a leaky balloon. Hence Keynes gave governments two tasks: to pump up the economy with air when it starts to deflate, and to minimise the chances of serious shocks happening in the first place.

Today, that first lesson appears to have been learned: various bailout and stimulus packages have stimulated depressed economies sufficiently for us to have a reasonable expectation that the worst of the slump is over. But, judging from recent proposals in the United States, the United Kingdom, and the European Union to reform the financial system, it is far from clear that the second lesson has been learned.

Admittedly, there are some good things in these proposals. For example, the US Treasury suggests that originators of mortgages should retain a "material" financial interest in the loans they make, in contrast to the recent practice of securitising them. This would, among other things, reduce the role of credit-rating agencies.

But there is no indication as to how much of the loan they would be required to hold, or for how long. Nor do these official responses to the crisis envisage limiting the amount of loans to some multiple of the borrowers' income or some proportion of the value of the property being bought. This, it is feared, might slow recovery. It would have been better for both recovery and reform to promise to introduce such limitations in (say) two years' time.

Most disappointing to reformers has been the official rejection of the "Glass-Steagall" approach to banking reform. This would have restored the separation between retail and investment banking, which was swept away by the deregulating wave of the 1980s and 1990s.

The logic behind the separation was absolutely clear: banks whose deposits were insured by the taxpayers should not be allowed to speculate with their depositors' money. Instead, the reform proposals have opted for a mixture of higher capital requirements for leading banks and pre-funding of deposit insurance by a special levy on banks.

There seems to be little appetite for proposals to vary capital adequacy requirements counter-cyclically. This would enable capital buffers to be created in good years, which could then be drawn down in bad years.

Admittedly, there are difficulties with all proposals to restrict the scope of "risky" banking, especially in the context of a global economy with free capital mobility. As is frequently pointed out, unless banking regulations are identical across frontiers, there will be plenty of scope for "regulatory arbitrage". Similarly, banks would have incentives to "game" capital-adequacy requirements by manipulating how capital and assets are defined. Indeed, investment banks like Goldman Sachs and Barclays Capital are already inventing new types of securities to reduce the capital cost of holding risky assets.

The underlying problem, though, is that both regulators and bankers continue to rely on mathematical models that promise more than they can deliver for managing financial risks. Although regulators now place their faith in "macro-prudential" models to manage "systemic" risk, rather than leaving financial institutions to manage their own risks, both sides lumber on in the untenable belief that all risk is measurable (and therefore controllable), ignoring Keynes's crucial distinction between "risk" and "uncertainty".

Salvation does not lie in better "risk management" by either regulators or banks, but, as Keynes believed, in taking adequate precautions against uncertainty. As long as policies and institutions to do this were in place, Keynes argued, risk could be let to look after itself. Treasury reformers have shirked the challenge of working out the implications of this crucial insight.

(10) The moral dimension of boom and bust

What has got us into this global financial mess is the false belief that market economics is a purely technical business

Robert Skidelsky

guardian.co.uk, Sunday 23 November 2008 12.00 GMT

http://www.guardian.co.uk/commentisfree/2008/nov/23/economics-economy

After the first world war, HG Wells wrote that a race was on between morality and destruction. Humanity had to abandon its warlike ways, Wells said, or technology would decimate it.

Economic writing, however, conveyed a completely different world. Here, technology was deservedly king. Prometheus was a benevolent monarch who scattered the fruits of progress among his people. In the economists' world, morality should not seek to control technology, but should adapt to its demands. Only by doing so could economic growth be assured and poverty eliminated.

We have clung to this faith in technological salvation as the old faiths waned and technology became ever more inventive. Our belief in the market – the midwife of technological invention – was the result. We have embraced globalisation, the widest possible extension of the market economy.

For the sake of globalisation, communities are denatured, jobs offshored, and skills continually reconfigured. We are told by its apostles that the wholesale impairment of most of what gave meaning to life is necessary to achieve an "efficient allocation of capital" and a "reduction in transaction costs". Moralities that resist this logic are branded "obstacles to progress". Protection – the duty the strong owe to the weak – becomes protectionism, an evil thing that breeds war and corruption.

That today's global financial meltdown is the direct consequence of the west's worship of false gods is a proposition that cannot be discussed, much less acknowledged. One of its leading deities is the efficient market hypothesis – the belief that the market accurately prices all trades at each moment in time, ruling out booms and slumps, manias and panics. Theological language that might have decried the credit crunch as the "wages of sin", a comeuppance for prodigious profligacy, has become unusable.

But consider the way in which the term debt (the original sin against God, with Satan as the great loan shark) has become "leverage", a metaphor from engineering that has turned the classical injunction against "getting into debt" into a virtual duty to be "highly leveraged". To be in debt feeds the double temptation of getting what we want as quickly as possible as well as getting "something for nothing".

Financial innovation has enlarged both temptations. Mathematical whizzkids developed new financial instruments, which, by promising to rob debt of its sting, broke down the barriers of prudence and self-restraint. The great economist Hyman Minsky's "merchants of debt" sold their toxic products not only to the credulous and ignorant, but also to greedy corporations and supposedly savvy individuals.

The result was a global explosion of Ponzi finance (named after the notorious Italian-American swindler Charles Ponzi) which purported to make such paper as safe and valuable as houses. By contrast, the virtuous Chinese, who save a large proportion of their incomes, were castigated by western economists for their failure to understand that their duty to humanity was to spend.

The key theoretical point in the transition to a debt-fuelled economy was the redefinition of uncertainty as risk. Whereas guarding against uncertainty had traditionally been a moral issue, hedging against risk is a purely technical question.

Future events could now be decomposed into calculable risks, and strategies and instruments could be developed to satisfy the full range of "risk preferences". Moreover, because competition between financial intermediaries steadily drives down the "price of risk", the future became (in theory) virtually risk-free.

This monstrous conceit of contemporary economics has brought the world to the edge of disaster. Obviously, the traditional moral taboos surrounding money had to be loosened for capitalism to get going centuries ago.

Without the development of debt finance, the world would be a lot poorer than it is. Yet, going from one extreme (keeping one's spare cash under the bed) to the other (lending out money one does not have) is to cut out the sensible middle.

The prudential supervision regime initiated by the Bank of Spain in response to the Spanish banking crises of the 1980s and 1990s shows what a sensible middle way might look like. Spanish banks are required to increase their deposits in proportion to their lending and set aside capital against assets in their off-balance sheets.

With little incentive to manufacture "structured investment vehicles", few Spanish banks created them, thereby avoiding excessive leverage. As a result, Spanish banks typically make provision to cover 150% of bad debts whereas British banks cover only 80-100%, and Spanish homebuyers must pay between 20% and 30% as a deposit on a house, whereas 100% mortgages have routinely been given in the United States and the United Kingdom in recent years.

HG Wells was only partly right: the race between morality and destruction encompasses not just war, but economic life as well. As long as we rely on technical fixes to plug moral gaps and governments rush in with rescue packages that enable the merry-go-round to start up again, we are bound to keep lurching from frenzy to frenzy, punctuated by intervals of collapse. But, at some point, we will confront some limit to growth.

(11) The return of Government & end of Central bank independence {I welcome both - Peter M.}

Much ado about central bankers

July 3, 2009 1:28am

by Martin Wolf

http://blogs.ft.com/economistsforum/2009/07/much-ado-about-central-bankers/

Will no one rid me of this turbulent central banker? Gordon Brown, the UK's prime minister, may be asking just that when he learns of yet another critical comment from the governor of the Bank of England. For Henry II, king of England in the 12th century, the troublemaker was Thomas Becket, his own choice as archbishop of Canterbury. For Mr Brown, it is Mervyn King, whom he has reappointed to an equally impregnable position. The parallel is clear: central bankers are cardinals in the cult of monetary stability.

Becket was murdered. Mr King will not suffer that fate. But a later king of England brought the church and his archbishops to heel. Could the Bank suffer a similar fate?

Indeed, one of the results of this crisis is to imperil central bank independence, not just in the UK. This is so for three reasons: at close to zero official interest rates, the boundary between monetary and fiscal policy erodes; governments are running huge fiscal deficits, particularly in the UK and the US, which threaten monetary stability; and, finally, those in charge wish to divert blame for the disaster. ...

(12) Paul Volcker: we need a World Currency, but $ will have to suffice in the meantime

From: The Banker newsletter <The-banker@ftmail.ft.com>  Date:  25.08.2009 06:21 AM

How will the world look when the dust settles?

By Paul Volcker | Published: 04 August, 2009

http://www.thebanker.com/news/fullstory.php/aid/6777/How_will_the_world_look_when_the_dust_settles_.html

The order in which the world will emerge, post-recession, may still be unclear, writes Paul Volker, but a long slog can be expected. However, when the dust settles, there will still be few competitors to challenge the US dollar as the world's predominant currency.

A couple of decades ago, there were serious banking difficulties, but the US was benefiting from increased price stability and strong growth. China was still in the ranks of emerging countries, not yet considered a major economic force. Our perspective today is quite different.

Powerful compensation practices and complex financial engineering have been introduced into our markets and institutions. Now it is evident that those changes have not protected us from a succession of bubbles and busts; rather, they appear to have contributed to them. Years of growing economic imbalances within and between nations have given way to the worst recession in living memory. Once-proud banks and investment banks have disappeared or found themselves reliant on government support. We look hopefully to the 'new' China, now economically powerful, as one of the few countries of growth in 2009.

So the questions multiply. What about the outlook for the US and the world economy? Are there not implications for the management of both the domestic and international systems? Can there be any question that the broken financial system needs extensive repair?

A healing process in financial markets seems to be under way, an expectation of some growth late this year and next year in the US seems reasonable. Prospects for a really strong recovery, typical of most recessions, seem unlikely; instead a long slog can be expected. Continuing high levels of unemployment seem to be in store. For most of the developed world, sources of strong spontaneous growth are hard to envisage. In the US, as elsewhere, even modest growth remains dependent on strong fiscal and monetary stimulus. The financial system, even if out of the emergency room, remains in intensive care.

Destabilising bubbles

There is an active and useful debate in the US and elsewhere about how and when the monetary authorities should respond to potentially destabilising 'bubbles' in financial or commercial markets. The challenge of restoring fiscal and monetary restraint will need to be front and centre as the economy recovers. There is also growing discomfort about whether the financial crisis and the spreading sense of 'too big to fail' may be leading to a degree of government intervention inconsistent with effective, competitive private markets. Put simply, the old concern about moral hazard looms even larger.

To me, the ultimate logic of a globalised financial system is a world currency. This is far from a reality in any formal sense. In its absence, the US dollar has provided a workable, pragmatic approach. Its widespread acceptability, the fluidity and breadth of its markets, and its relative stability in its massive domestic markets, has made it a common means of payment, an agreed unit of account for much of world trade and a widely used store of value.

At the same time, deep and ultimately destabilising imbalances have been prolonged, specifically the growing and seemingly irresistible current account imbalances between China (and much of the rest of Asia) and the US. All of that points to the need to deal effectively with the imbalances that underlie excessive growth of dollar balances.

The fact is that there are no practical alternatives today, or for many tomorrows, to the US dollar as an international currency. I think it should be clearly understood that the central responsibility of the US - in its own interest, in China's interest, and in the world's interest - is to maintain both the purchasing power of the dollar at home and in international markets, and a strong and open financial system.

Of more immediate concern is reform of the financial system. Key elements of the reformed system must be internally and internationally consistent - for example, capital and leverage requirements, accounting standards, clearance and settlement arrangements for over-the-counter derivatives, and practices with respect to disclosure and the sharing of information. Converting the substantial agreement in principle into the specifics of national legislation and administrative arrangements will be a big challenge.

In approaching reform more generally, there are potential risks extending beyond individual institutions. Some authority should be alert to identifying systemic excesses or weaknesses that might impair market performance and institutional stability. Also, there is a strong case for reviewing the application of so-called 'fair value' accounting standards to commercial banks, insurance companies and perhaps certain other regulated financial institutions.

The problem is not only the difficulty of measuring value in disturbed markets, but strict mark-to-market accounting appropriate for trading operations and investment banks may introduce a degree of volatility in reporting incompatibility with the basic and essential business model of banks which inherently intermediate maturity and credit risks.

Paul Volcker is the former chairman of the US Federal Reserve and chairman of President Barack Obama's economic recovery advisory board. This article is an extract from the keynote speech given at the Great Hall of the People in Beijing at the Institute of International Finance Spring Meeting on June 11, 2009.