Central Banks: A Question of Governance

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Fiscal year 2015 is upon us, and is fast becoming the year of historic monetary policy changes in light of an appreciating US currency and, in turn, a blanket decrease in European and Asian economic growth.  Since late 2014 and in full swing 2015, the Danish central bank, the Swiss National Bank, and  the Bank of Russia cut key interest rates, with probable Turkish Central Bank short term rate cuts to follow. The Bank of China has recently reduced its requirement ratio as well to encourage growth. In the US it is expected that the Federal Reserve raise short term rates by mid-year 2015, a policy change that has not been effectuated for over three years. It is apparent that governments are depending heavily on central banking to modify economic growth patterns as a short term solution.
While the spotlight is fixed firmly on central bank monetary policy to control the global economy, should central banks be fully responsible for financial stability? From a governance perspective, central banks act first and foremost as an independent or fully state-run agency to ensure adequate capital liquidity.  The gist of central banking is to control the effects of growth expansion or decline, and not necessarily to be the institution to structure economic growth itself. In addition, one of the tenets of central banking is to oversee a sovereign’s commercial banking system, and be thus supported simultaneously by government legislature.
If this foundation of central banking was kept constant, we would not have had such financial turmoil in 2008. However, lack of commercial bank corporate governance due to lobbying influence has vastly undermined central banking effectiveness in the long term.
In layman’s terms:

  1.  Short term upon short term upon short term monetary rate fixes does not equal proper long term decisions. Decisions that should be made with no biased influence from legislature.
  2. The global monetary system has moved from fully secured to almost totally unsecured asset-backing over the past 40 years. Most world currencies are much less asset-backed than ever before.

Both very simple reasons listed above explain why at anytime an industry receiving the most ‘creative’ cash flow (derivative upon derivative) will experience the dreaded bubble. And, while it is natural in the scheme of a global economic cycle to have peaks and troughs, the mass non-collateralization of currencies, followed by a now endemic financial culture of sophisticated derivative creation leads to unsustainable growth. It’s less long term growth and more adrenaline rush. We have more monetary policy magicians at work than real doctors of the art.
The Bank for International Settlements examined the central bank’s role in being the overseer of global financial stability in its May 2009 publication, Issues In The Governance Of Central Banks. The article points out that while central banks are needed for monetary stability, having the central bank be the main institution for overall financial stability gives unwarranted responsibility, and unnecessarily overlaps with government functions:
Governance arrangements for the financial stability function are generally less settled than for the monetary stability function…apart from the lender of last resort function and various regulatory powers, there are no central bank policy instruments that are uniquely suited to ensuring systemic financial stability. Instruments that might influence financial stability have other primary roles…Using such instruments for ends other than their primary purpose inevitably involves trade-offs.
It is therefore ill-advised policy to depend solely on the central banking model for ongoing global financial stability. Yet, from a governance perspective can individual banks be allowed full deregulation? Deregulation makes sense in a free market economy. However, judging from the shenanigans of 2008, we need checks and balances in our global banking system. In the US, bank regulation took a dive in December 2014: Section 716 of Dodd-Frank financial law, which would have forced big banks to keep their derivatives mostly separated from their insured deposits, was repealed by the U.S. Congress, with planned repeals to follow in FY2015. Can a global economy with rampant recession afford the repercussions of a huge financial crisis within the next two years? Probably not: short term policy issued by a sovereign’s central bank cannot fully override financial policy decisions made by legislature, based on corporate influence.

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My Personal Reflections on Davos 2015

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In just a matter of years, we’ve seen the digital revolution transform business, politics, media and society right across the world.

The Davos fest early this year only confirms the trend where this revolution is clearly driving a shift from ‘old’ to ‘new’ power in the world.

A new power’ world characterized by a shift away from unthinking consumption to people being ever more involved in creating, sharing, funding and owning products, services and ideas.

Where old power business models are defined by what one company has that others haven’t, new power models are renewable because they are driven by the passions and energies of the many.

Take a close look at Bitpay and Blockchain, both shaking up the banking industry by giving more people access to a new currency in a secure way, without the permission of governments and institutions…. Along with Sidecar with their true marketplace experience challenging Uber and Lyft to get people moving.

Although new power doesn’t necessarily mean for the better, I think the shift will force old power models to adapt and will most importantly lead to interesting collaborations between old and new power models.

What are we to make of all of this?

I believe the battle ahead, whether you favor old or new power values, will be about who can control and shape society’s essential systems and structures.

Let’s face it, many of our systems need a real shake up. Why wouldn’t you upload the power and talent of billions to do it?

Do we have what it takes to make it happen?

Well I certainly hope so because if you had to reflect on Davos’ recent gathering of world leaders, I am afraid the mood this year was more pessimistic than in 2014, when the euro zone seemed on track to recover from its deep financial and economic crisis. Since then, a range of geopolitical risks have surfaced and growth in Europe has stalled.

Further, reviewing the global economic outlook at the Conference, speakers from the IMF, the ECB, the Bank of England and the Bank of Japan said their ultra-loose monetary policy could only buy limited time for politicians.

My hope is to see word leaders not succumbing to pessimism over the state of the world economy.

A year before, no one had foreseen the fall in the oil price, which has dropped more than 50 percent and reached levels last seen during the financial crisis.

While producer countries in OPEC and beyond were suffering, much of the world could benefit and develop.

In fact , I believe the plunging price of oil and gas provides a once-in-a-generation opportunity to fix bad energy policies.

We just need confidence and less uncertainty and focus on “transitioning growth” from consumption to investment.

Share your thoughts….

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Salvaging the US shale boom

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Many oil analysts have attributed the recent increase in global oil supply to increased production from US shale producers, which has ramped up sharply in the last couple years.

Is the shale boom today on par with the dot-com boom or is it all a power play with OPEC to ensure US energy independence?

I believe OPEC’s objective is to “clean up” the US shale market, and that oil prices will eventually rise – in my opinion though not before early 2016 – when OPEC completes its objective of cleaning up the American marginal market.

The more obvious losers in the current oil climate are Iran and Russia — the former of course being Saudi Arabia’s archrival in the region, and the latter being no great friend of the Saudis’ either.

The pinch to shale may just be “a wonderful byproduct to screwing the Iranians and the Russians. Doing nothing has actually been a really smart move by the Saudis. With every move further down in price, the actions of the Saudis become more closely watched, reinforcing the country’s position as the world’s oil superpower.

Some US producers are surviving right now because they hedged their oil production at $90 a barrel, though these arrangements will eventually expire making life “much more difficult” if not “impossible” for these companies.

So while it is clear to anyone with a half brain today that OPEC is using lower prices as a war against US shale producers, the million dollar question remains: How low can those producers go before they start shutting down?

Maybe it is high time for the US to start subsidizing or somehow helping the US oil producers until OPEC blinks?

Let’s be brutally candid: There is nothing more important to our future international political strategy than the freedom of not having to import our oil from OPEC nations. For those that would question this and bring up the cost factor into the equation, at least consider the cost of this versus the cost of Middle East wars and increased military presence. A quick analysis would find that a proactive support of US lead oil of any/all kinds would cost so much less than the other alternative mentioned and by a significant order of magnitude.

Another option would be to maybe partner with the fringe OPEC members and have them break away from the cartel – which would almost force the remaining core OPEC members to lower prices. This would of course mean getting into bed with strange bedfellows such as Venezuela for example and even Russia – not an OPEC member- but bring OPEC to reconsider their strategy?

At the end of the day, who is the worst of foes in here or better who is going to help us win the Oil war- the biggest commodity play on Planet Earth? Venezuela/Russia or OPEC?

Share your thoughts….

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What Would Our Founding Fathers Think if They were Alive Today?

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I believe the Founding Fathers would surely be proud of the vastness and strength of the United States, but they would be strongly disappointed with how we’ve come to interpret the Constitution.

Furthermore, they would be even more disappointed with the fact we have created a central bank that artificially foments growth and debases our currency through fraudulent monetary policy.

The Framers warned about our country and capitalist structure suffering from a central bank that purposefully imbalances the market in order to create phony credit and fake booms in the business cycle. The size and scope of the federal government, the incredible power of the Federal Reserve, and our empire overseas all would be considered perversions of the U.S. Constitution.

Surely they would be very proud that the United States has built some of the most amazing cities that the world has ever seen. They would in fact probably be surprised that the country they founded went on to become the greatest economic machine in the history of the world, and they would be absolutely astounded by things like our interstate highway system and the Internet.

However, there are quite a number of things that they would be horrified about as well and they never would have believed this would ever happen to the United States of America. Things such as …

  1. The Federal Reserve devaluing the U.S. dollar by over 95 percent since 1913 and using this strategy to create the biggest mountain of government debt in the history of the world.
  2. The U.S. Court of Appeals for the Ninth Circuit ruling that U.S. government agents can legally sneak onto your property in the middle of the night, place a secret GPS device on the bottom of your car and keep track of you everywhere that you go.
  3. The U.S. government accumulating a national debt that is rapidly approaching the 18 trillion dollar mark.
  4. Americans now owing more than $1.1 trillion on student loans, which is more than the total amount that Americans owe on their credit cards.
  5. Americans wasting an astounding amount of food. According to a study by the California Integrated Waste Management board, 63 percent of the average supermarket’s waste stream is food. When you break that down, it means that each supermarket wastes approximately 3,000 pounds of food each year.
  6. Manufacturing employment in the United States falling by 40 percent since 1979.
  7. The number of Americans with manufacturing jobs today in 2014 being smaller than the number of Americans who were employed in manufacturing in 1950.
  8. Over 45 million Americans enrolled in the food stamp program now considered “the new normal” and Americans continuing to drop into poverty in astounding numbers.
  9. Barak Obama backing a proposal to create a national database that will store the DNA of all individuals who have been arrested, even if they end up not being convicted of a crime.
  10. The average American worker now paying literally dozens of different kinds of taxes each year.
  11. Christians now being arrested and thrown in jail in some areas of the United States for quietly passing out Christian literature on public sidewalks.
  12. Nearly half of all Americans now using prescription drugs on a regular basis.
  13. Americans now spending large amounts of cash now viewed as “potential criminals” by the U.S. government in 2013.
  14. New full body security scanners going into airports all across the United States now actually seeing through our clothing and producing very clear and very detailed images of our exposed bodies as we walk through them.
  15. The U.S. government spending an amount of money equivalent to approximately 25.4 percent of GDP this year.
  16. 10,000 people making today 30% of the total income in the United States.
  17. 61% of Americans between the ages of 44 and 75 saying today that running out money was their biggest fear. The remaining 39% saying death was scarier.
  18. 28% of all U.S. households – according to one recent survey – having at least one person that is currently searching for a full-time job.
  19. Major international organizations actually proposing that the United States start considering the adoption of a truly global currency.
  20. One group of high school students making national headlines recently revealing that a security guard ordered them to stop singing the national anthem during a visit to the Lincoln Memorial.

It is clear that most of the challenges that are found in the US today and for that matter, throughout most of the developed world stem from a number of causes including but not limited to the facts that:

  • industrialization is maturing, which creates a huge systematic failure as there were no proactive measures taken to address it – middle income jobs are and will continue to disappear, which creates a huge hole in a society
  • values have shifted since the founding fathers, including a world of much more self-interest and creativity versus hard-work and benefit ‘for all’
  • many individuals with no conscience are now running government and businesses – on the surface they will give the appearance of caring but actions speak louder, and clearly others do not matter
  • financial system has become very mature and is run by brilliant self-serving individuals that have one goal – higher and higher profits short-term, which creates systematic failure and risks that sooner or later will break the system
  • governments inability to run such a large system, as what the US has become – goal is to get re-elected which creates huge problems given their perception (and maybe reality) that the populace wants benefits today, not the future
  • overall values of people have shifted from community to self; from giving to receiving; from kindness to aloof – we may be forced to change back
  • Unparalleled hubris and arrogance getting people in more trouble, and the US is unfortunately perceived that way – empires have fallen based on such beliefs
  • general level of unhappiness in society and people, shown by such things as the masses on anti-depressants to try to get through life; or the addictions in society including drugs, alcohol and television – all clearly not leading to a productive society

But perhaps most of all, our founders would be absolutely disgusted that the land where Americans could once be free to pursue life, liberty and the pursuit of happiness has become so tightly regulated and controlled that Americans dare not even squeak without the permission of the federal government.

Needless to say, our founders would certainly not understand many of our institutions or many of the advanced technologies that we have today….. But without a doubt they would be able to grasp how far we have fallen as a nation and how far we have strayed from the fundamental principles that they enshrined in our founding documents. The United States is a much different place today than it was in 1776, and unfortunately many of the changes have been for the worse.

The Founding Fathers did THEIR job, and now it is up to us to do OUR job!

Are you up to it?

Share your thoughts…

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Is Greed Good for the Goal of Improving Society?

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Remember the infamous quote of villain financier Gordon Gekko in the movie Wall Street…back in 1987?

“I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed–for lack of a better word–is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms–greed for life, for money, for love, knowledge–has marked the upward surge of mankind. And greed–you mark my words–will not only save Teldar Paper, but that other malfunctioning corporation called the USA”.

I guess in this context, Gekko is using “greed” to define the constant desire for more, whether someone else has it or not.  He likens it to an evolutionary drive, that the need for more makes us figure out how to get it faster, more efficiently, and ultimately, easier.  And that this, in turn, results in benefits to everyone.

This is clearly a very particular definition of greed, and if you look at it from that perspective, it is indeed “good” in that it is a simple motivator that derives benefits beyond the individual actor.  In essence, it’s an “ends justify the means” argument.

Though this was quoted over two decades ago in one of the most controversial Hollywood movies ever, it resonates more than ever today… The only difference is that it is occurring at a much bigger scale.

So what do you make of it? Is greed good?

I guess as with any question like this, we need to start with the word “good.”

It is a fault of our language that “good” is most often used in an unqualified way. This is a symptom of our natural preference for dualistic thought. So what does unqualified ‘good’ mean?

Is greed good if your goal is monetary gain?  Absolutely, it’s the prime motivator.  Is greed good if your goal is running a successful soup kitchen?  Probably not.

Is greed “good” for the goal of living a happy life?  It could be, because it motivates you to improve your life in very real ways; on the other hand, there’s a fair amount of research that indicates over-attachment to material belongings draws your focus from other aspects of life that pay higher happiness dividends (personal relationships, self-improvement, etc).

Is greed “good” for the goal of improving society?  I doubt it.  I suppose it could motivate you to amass more resources, which you could then apply to humanitarian causes, but a very greedy person would probably also be unlikely to part with it.

Another way to use the unqualified “good” is as a sort of estimated sum of how effective greed is for helping you meet each of your goals, weighted by priority.  Let’s call this the “all-in-all” meaning.

So, is greed “good” in the all-in-all sense?  Will greed help you live a happier life?

From a wide-scope approach, it might be said that an economy of greedy people is an economy of motivated, productive workers.  This might be true, to a certain extent.  However, a society of extremely greedy people would mean a society of very stingy people; I doubt a country of greedy financiers, sitting on their money would lead to a robust, healthy economy.

But this is all about your average person.  Aberrations exist.  What if you’re not like most people?  What if poverty starvation is a serious possibility in your life?  Well then yes, greed would be a good thing to have.  What if material wealth is the big thing that makes you happy?  The only thing that makes you happy?  What if greed is your only motivator, the only thing that gets you out of bed and drives you to accomplish?  Then yes, having greed would be good in relation to your goals.  You might get better results though from examining your priorities and possibly changing your goals.

So in general, I would say that a little greed is good; it’s nature’s way of getting you to take care of your self-interests.  It’s also one of the major forces that keep societies progressing past the survival point.  Too much greed though poisons you.  There are countless examples of callous damage done to the world by the business community, and the only cause we can point to is human greed.

Bottom Line: I believe greed is ‘good’ only to the extent that it can be channeled productively.  Most of modern greed leads to people skimming money off of the productive and creative members of society; it results in many people with enormous intelligence and capability dedicating their lives to essentially worthless endeavors (such as predicting minor movements in stocks, bonds, currencies, etc.).  It also leads to frivolous lawsuits, ‘gaming the system’, overcharging and overbilling, etc.  It also leads individuals to steal and engage in other criminal activities.  Greed – when it leads one to invent, create, increase productivity, work harder, etc. can be good.  But it doesn’t always or even rarely has that effect.

I have no problem with people that amass large amounts of wealth — but if it pools up, it leads to problems. Wealth, like water, needs to move. Ideally that motion through society will be generated by the heavenly virtue that is classically contrasted with the deadly sin of greed.

Share your thoughts…

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