Thursday, February 26, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 12 ) - Enough is Enough !!!

CEO ! Oh , CEO ! Where is your conscience ?

After loads and loads of scandalous corporate practices having been unearthed in the USA, Australia has also come under the unwanted limelight of corporate scandalous practices. The Australian corporation, PACIFIC BRANDS has just been accused of excessively remunerating the CEO and other top management corporate officials. After announcing a plan to lay off 1,800 workers it has been revealed that the CEO has trebled her annual salary from some A$ 600,000 to over A$ 1.8 million. Human greed has no bounds or is unlimited, a concept condemned by the fundamental principle of market economics or capitalism. If resources were unlimited there would not have been any need for economics, a discipline cater for the efficient distribution and consumption of economic resources. Yet the leaders and vanguards of capitalism such as CEOs of huge corporations resort to a motto like " sky is the limit " when it comes to their own remuneration and self interest. They always say that let the best person win. Let the top dogs earn whatever amount possible if the corporate profit ( or even losses ) can sustain their greed to fill their piggy bank. The silly defense provided by PACIFIC BRANDS in this incident is that the previous CEO had drawn A$3.6 million in salary per annum so the existing " generous " CEO is giving the corporation and its shareholders a dirt cheap bargain by drawing A$1.8 million. Should the shareholders and employees not pass a motion of thanks to the CEO in the annual general meeting of shareholders, then ? It is as if the murderer who has killed one person is innocent because other murderers have killed plenty more. " C'MON " as the Australian star tennis player, Lleyton Hewitt very often shouts. What do you take us for - suckers ?

Of course, another strong argument put forward by CEOs and their likes is that only the best remunerative package can attract the best talents to head the corporation. Some talent ! I must admit they are the best lot to rip the shareholders and their workers off to their selfish personal advantage. Where is your conscience ? I ask again. I think I am qualified to say something about scandalous corporate practices as I used to make my living in auditing and management & tax consultancy for 30 odd years before my retirement in 2006.

There is yet another strong and seemingly unassailable argument put forward by CEOs and their likes in defense of their ridiculously excessive remuneration package. It is legal and they acted within their rights provided by the law. Ah, ha, a very clever, logical and most importantly LEGAL argument but sorry, no dice ! If the law is inadequate to protect the public interest against greedy little creatures society must change the law into a more just and effective set of corporation laws. I will venture to propose some legal improvements to allow more effective regulation of corporate malpractices in my next blog. Yours truly as a voter who cast my vote for Kevin Rudd in the last Australian Federal election I have the right to appeal to the Rudd Government to do something about this less than ideal situation especially in the wakes of the FT. To feed one's own personal vice of GREED by creating unemployment at such a critical time of financial turmoil is a heartless, despicable and treacherous crime against society !

The argument of getting the best talent by unlimited amount of pecuniary reward is flawed. It will only attract the most greedy of the wolf pack which we can do better without. We want our corporate leaders to be clean, honest and they should be people with a social conscience. Such candidates are seldom seen on the corporate scene anywhere precisely because our present " sky is the limit " principle in remunerating corporate custodians is dead wrong in principle. It will not be an unwise move to place a cap on top management remunerative package as a matter of law. I will put forward my own suggestion in upcoming blogs. Obama is doing it to US corporations receiving the rescue package. Why can't this be extended, may be, to a less stringent degree to corporations in general ? ( There is no need for an answer to a rhetorical question, is there ? .... yet another rhetorical question !!!)

The other important issue which is relevant to all legal matters including corporate law is the manipulations by black sheep corporate custodians in the grey areas of the law to fatten their own pockets. This can be remedied by better legislation and developing a more balanced sense of value by steering away from the purely materialistic outlook on life. Australia should be well placed to achieve this grand moral goal having regards to the community spirit so eminently demonstrated by the tremendous support from the public in the recent bushfire appeal to assist victims of the tragedy.

If the reader is interested in knowing more about the pitfalls in the working of corporations in general please access my article on the basic working principles of economics and finance entitled :- " 2008 Financial & Economic Tsunami - An Overview for the Lay Person " highlighted on the navigation bar in my website by clicking on the ( green coloured ) title of this blog or any other blog in this FORUM.

See you all in my next blog on my suggestions on exercising an effective control over corporations.

Yours truly,

JKHC.

Saturday, February 21, 2009

The Financial Tsunami ( FT) - The Way Forward ( 11 ) - Mastering the Mad Dog ? Madoff

After the uncovering of what I called the MAD DOG AFFAIR involving over US$ 80 billion in alleged financial fraud we are again confronted by the further bad news of the STANDFORD alleged financial irregularities involving his small banking chain. Notwithstanding the small size of Stanford's banks the psychological blow on consumer confidence is not at all minor. The scandal has severely affected banking operations in South American ( Venezuela, etc. ) and there are also rumours of instability in the EU banking system as well. The latter development is especially worrying because it may lead to the collapse of the whole EU monetary system which is up to now still holding up reasonably well. If the worst should be proven true a second gigantic wave of the FT is poised to strike with even more devastating power because the delicate financial systems in EU countries have already been weakened by the first wave from the FT.

Unless we can master the MAD DOG and the like no complete recovery for the tattered global financial system is possible. There appears to be a lot of possibilities for collusion and even corruption involved because many big banks and financial houses are victims despite their usual prudence. Why haven't professional auditing practices and verification procedures detect the alleged fraud much earlier ? This big question has a huge bearing on the effectiveness of our regulatory system regarding the financial institutions. Are there gross negligence and even collusion involved at different stages of the whole MAD DOG scenario ?

Apart from the stricter enforcement of more effective financial regulations there is also the concern about the best way to avoid grey areas in the financial laws & regulations from being manipulated to the advantage of the greed of MAD DOG operators and the like. The ultimate solution has to be, as I said in earlier blogs, the attainment of a generally accepted but less materialistic value system in which pure financial rewards on efforts are not the sole motivating factor. Perhaps the raising of over A$ 120 million by private charities alone within a matter of 10 days of the Victorian Black Saturday ( 7th February, 2009 ) Bushfire disaster despite the FT will bring a positive message on the value of and the need to have a less materialistic value system for the global village.

JKHC.

Wednesday, February 18, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 10 ) - Homing on Homes

One of Obama's wisest moves on his rescue package so far has just been unveiled. A home rescue fund of US$ 275 billion will be set aside to help refinance the home mortgages of up to 9 million " responsible homeowners " to allow them to stay in their house and avoid foreclosure by banks. Those who lost their speculative investments through greed and misjudgment at the peak of the property bubble in the USA will not be included in the rescue package and so will those who bought beyond their means. This is a fair condition in applying precious and limited taxpayers' funds.

Economically speaking, the logical thing to do is to let people bear the consequences of their own economic decisions. If they had bought at the wrong time let them lose their homes and stay in rented property. However, strict economic principles may be too harsh on the ordinary citizens who acted honestly and spent within their means. Speculators and greedy opportunists apart, most honest and hard working folks are mostly victims of an impersonal capitalistic system run wild. Sometimes, pure logic and dogmatic adherence to rigid economic principles are not user friendly. Take for example. We are in the desert with only a limited supply of precious water and there is a millionaire among the travellers. According to the strict operation of the sacred economic law of supply and demand the millionaire can bid the highest price and so is theorectically capable of getting all the water for himself to save his own life. However, common human decency and generally accepted moral standards will dictate a fair rationing of the precious and limited water supply. That is where the enlightened form of capitalism should come in. No single consideration or working principle relating to any public issue should dominate relevant decisions on the matter.

Economic considerations aside, the psychological effects on boosting the morale and confidence of the general population through such a home rescue package are bound to be far reaching to the point of arresting the rapid decline of consumer confidence. This will in turn produce its desired economic stimulus in terms of consumer spending especially from those who still have savings that are horded because of a gloomy economic outlook. So, it can be easily seen that everything is inter-related in all human affairs and, hence, my personal motto of " ONLY CONNECT " borrowed from the famous and beloved British novelist - E. M. Forster - in his revered novel Howards End.

Three cheers for Obama for landing an effective punch on the Financial Tsunami. This is just a start but hopefully it will be a good start for all global citizens' sake.

JKHC.

Saturday, February 14, 2009

A Long & Arduous Road to Recovery

It has been a week since that fateful Black Saturday Victoria Bushfire Storm of 7th February, 2009 which has tragically become the worst national disaster in Australian history. To date, 181 citizens are confirmed dead and many are still missing. It is feared that the death toll could climb to 300 or more. The only silver lining that lingers in the horizon which may provide some comfort to fire victims who have lost their loved ones and everything else is the overwhelming response from the public to the appeal for donation of much needed funds for the rescue of fire victims. So far, the donations have topped A$ 92 million from the private sector alone. To the victims, I express my deepest sympathy and send you all this message :- " You'll Never Walk Alone ! "

Very appropriately, a Royal Commission ( similar to a Congressional hearing in the USA ) will be conducted to examine all facts & circumstances relating to this national tragedy and to make useful recommendations accordingly. From my discussions with fire victims and their friends I have come to the following conclusions about some positive steps that, in my humble opinion, can be implemented to lessen the impact of any future bushfires.

Firstly, country residents must be educated to learn more about bushfire to get themselves prepared for all contingencies. In particular, when to evacuate despite their will to defend their homes. Many of the victims such as the 100 plus fatalities in Marysville were burnt to death in their cars when they were outrun by the raging fire. It was simply a tragic case of a late evacuation. Fanned by over 50 km per hour gale force winds the fire storm outrun their cars in which the victims were severely hindered by thick smoke or blocked by fallen & burning trees. Many victims had sadly misjudged the ferocity of the fire storm and their own ability to defend their home against the overwhelming fury of mother nature.

Secondly, there should be some statute law to allow the emergency services ( the police, CFA - Country Fire Authority ) to order a forced evacuation like the USA. Understandably, people are strongly attached to their homes but it is not logical to ask people to make up their own minds on emotional issues such as this. Despite the difficulty of implementation it is about time that the Australian people should re-think their present practices that have proven fatal to so many in the Black Saturday Bushfire Storm.

Thirdly, building laws must also be updated to provide for the compulsory construction of underground fire escape bunkers for those who are too late to escape the inferno. Based on first hand experience from surviving victims ( such as the those related to the video link attached at the end of this blog which was produced by me ) the fire storm will pass in a few minutes after burning out all its fuel such as trees, shrubs and houses in your location. In the case of my friend's neighbours, the couple were wise enough with their construction knowledge to have used fire retardant materials for the interior of their burnt down home. They were at one point trapped inside their slowly burning house ( slowly because of the fire retardant materials ) while their house was surrounded by the raging ring of fire which burnt out the environment within a matter of a few minutes. Had their own house burnt at the same rate as the exterior fire storm they would have perished for sure. These are useful and expensive lessons to be learnt from this tragedy of grand scale. Fire victims commented that compared to the Ash Wednesday Bushfire ( also in Victoria ) in 1983 that killed 75 people the one week old Black Saturday Bushfire Storm is like hell on earth as opposed to a BBQ in the backyard for the former.

Fourth, a Federal Member of Parliament who is an engineer rightly pointed out that the wooden cross bars of electricity transmission posts must be replaced by steel once to prevent country fires from occurring due to a short circuit. A substantial percentage of over 10 % of bushfires are caused by this problem. The Australian Government must act to rectify this problem and must do so quickly as soon as the findings of the Royal Commission are published.

Fifth, I as well as many others think the the decade long protracted drought is a major contributing factor to this national tragedy. Everything is so dry that trees and shrubs will ignite on the slightest spark be it from thunder & lightening or arsonists. The northern part of Australia falls in the tropics with torrential rain every year. It is high time the Commonwealth Government should seriously co-ordinate with the efforts of State Governments to consider constructing aqua ducts to transfer now wasted tropical rain water in the north of the country to the dry south and south west. There are, of course, numerous complicated issues involved but this will be part of the ultimate solution to our perennial drought due to global warming. The present piece meal and expensive measure of using desalination plants which are inefficient, not cost effective and create more green house gas is not a long term viable solution. Such huge infrastructure project would ideally form part of the Financial Tsunami rescue package that will also justify national borrowing because it will have endless enduring future benefits for the good of all future generations of citizens.

Let us pray and lend our support to the bushfire victims on their long & arduous road to full recovery if that is ever possible.

JKHC.

http://www.youtube.com/watch?v=eXtf983QyWg&feature=channel_page

http://www.youtube.com/watch?v=PGaXBZVMLZA&feature=channel_page

Monday, February 9, 2009

A Day of Mourning for Australia Especially the Residents of the State of Victoria

From the start of the fatal bush fire in country Victoria on 7th February the devastation bush fire storm has killed 131 of my fellow citizens most of whom were trying desperately to save their own home just 50 km. east of the State Capital - Melbourne where I live with my family.

Let us pause for a moment in silence to pay our respects to those brave souls who lost their life in defense of their sweet home and livelihood. Many of us may think that the victims could have escaped with their lives if they were not so attached to their material possessions. This is both an after the facts assessment and a purely logical view without taking human feelings and emotion into consideration. Many of the victims were husbands and fathers who first evacuated their loved ones to safety and then returned to their own house to defend their home and protect the interests of their family. To these brave and dedicated souls I offer my profound admiration and my deepest heartfelt condolences to their families.

I have been in Australia since 1997 ( though travelling a lot overseas on business ). I realize that the Australian way may sometimes baffle the foreigners. You may call the Aussie thinking simple or even naive but, in fact, there is very often a profound sense of heroism and unmaterialistic ( my own coined term ) touch about it. Similar in some ways to Canadians many Australians have fought in foreign conflicts and given up their lives for other nations when Aussies believe in the cause for which they are fighting. Aussies ( and Kiwis - New Zealanders ) fought courageously and showed a profound sense of mateship ( or simply fellowship and solidarity ) in Gallipoli in 1915 ( where the ANZAC tradition started ) and in famous WWII battles like the RATS of Tobruk in North Africa along side the Allied forces. Aussies though seen as simple and even unambitious by some are, in fact, good materials for doubling as the vanguards for the enlightened capitalism I so strongly advocate to save the global village form all future financial tsunami. It is a more balanced and much less materialistic value system that most Aussies hold dear to their hearts.

A simple example would illustrate my point. It was from my own personal experience. About 3 years ago I and my family were holidaying in a resort town called Lakes Entrance in North Eastern Victoria. We were in desperate need of a pencil to play the game of bingo held in the lounge of the restaurant where we stopped by for coffee in the early evening. I went to the bookshop next to the restaurant to buy some. All the pencils for sale there were packaged in boxes of a dozen but when the shop owner realized that my purpose was for a game of bingo she just opened up one sealed box of pencil and gave me one for free. I have never had that happen to me in any holiday resort any where in the world. I offered to pay for the whole box but the owner simply said that she will be giving away the rest to her neighbour's children for their classes. She insisted that I should get the pencil for free because I am a tourist supporting the local industry. The value of the pencil is negligible but the friendly attitude is impressive. Ultimately, the motive was to be nice to tourists which may be commercially oriented but she is not the one directly benefited by our visit at that particular moment in time.

Coming back to the bush fire tragedy, heroism is commendable but blind zeal should not be encouraged. Already, the State Premier has announced that a Royal Commission will be set up to investigate and make recommendations on the present tragic incident. The main consideration is to make it compulsory for residents to follow orders for evacuation from the police and the fire authority in times of a bush fire. At present they cannot force the residents to leave unless a state of emergency is declared in which case martial law would be in force. That is the reason why the State Government is not willing to resort to declaring a state of emergency. Anyway, it is a right step forward to appoint a Royal Commission.

Finally, the mateship and solidarity of other fellow citizens are also highly commendable. Already the call for a fundraiser has been answered by a total donation of some 6 million ( Australian currency ) from the private sector. One will realize that this is a tremendous response having regards to the financial tsunami and the generally cash strapped position of the general population. Second hand clothing and domestic appliance stores are common here. Although the basic welfare is quite satisfactory for all citizens extra cash is hard to come by because of the high tax system.

Last but not least, I must salute the emergency services here especially the CFA ( Country Fire Authority ) the majority members of which are volunteers. One will feel ashamed in Australia if he or she is not engaged in some form of voluntary service to society. That was the reason why the Sydney Olympics back in 2000 was the most profitable Game in terms of surplus revenue.

I sincerely hope that the heart warming assistance from fellow Aussies will help make the pains of the survivors who have lost some of their loved ones less unbearable.

JKHC.

( N.B. Donation from the private sector now stands at an amazing A$ 110 million as of Feb. 20 but sadly the death toll has also risen to 208 )

Friday, February 6, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 9 ) - Caps off to the Captain

The hero of last month's lucky escape for everyone on board US Airways Flight 1549 that forced landed in the Hudson River of NYC, Captain Chesley Sullenberger is exemplary among his peers. It was his professionalism and nerve of steel that were the main factors behind that miraculous escape for everyone. Of course, luck is always a dominant player as usual. I raise my hat to this real American hero who had made a critical difference at the hour of near disaster. Had every high ranking Wall Street executive possessed his qualities we would not be in our present predicament.

I haven't got the slightest doubt that all Wall Street gurus are tip top professionals but where had their professional skills been applied to ? The most important thing that would make the difference between a hero and a villain is not simply skill but a sense of duty and his sense of dedication to his fellow citizens. If one is to choose between skill and honour the latter has to be the better bet especially with regard to key financial institutions where integrity and a high moral standard are the only safeguard for public interest. No written law can effectively prevent the CEO of a giant corporation from benefiting from insider dealing based on sensitive information privy to the top management. Therefore, a basic change in the value system in a capitalistic society is badly needed.

Instead of measuring people's success solely in terms of dollars and cents thus creating a lob-sided sense of value we should look to other qualitative factors such as how the environment is protected by a particular measure or how large is the proportion of the population that has been benefited by that measure. More attention must be paid to our younger generation in fostering their healthy sense of value. For example, the reward for getting good grades at school need not be monetary or materialistic in nature. The promise of a family trip or other more cultural rewards such as attending concert together could in the long run change the value of the younger generation. Down under where yours truly have my adopted home. The financially disadvantaged kids here need not fear that they will be totally ignored by other attractive young teenagers. If they surf well or have a good sense of humour there are endless opportunities to find a partner for life. Of course, the American way may find them not ambitious enough or they may even be considered as losers. But who could have imagined before 2008 that those who have failed the world most badly would be the ambitious and high flying Wall Street achievers. Everything has its time and place. Some issues take time to resolve or evolve to full maturity. The " instant noodle " culture or instant result ( at the expense of fairness or morality ) attitude can never stand the test of time. Chasing economic efficiency at the expense of moral efficacy has proven to be costly for the whole global village. We must think twice about keeping to the outdated " sky is the limit " view for remunerating or motivating people in the enlightened form of capitalism that would be a fundamental solution to prevent any more future FT. A balanced value system is the best safeguard against such disasters with a healthy financial regulatory system acting as a second line of defense.

So, let us hope and pray that all future key custodians of key financial institutions on Wall Street are like the real American hero, Captain Sullenberger who is a person of high professionalism with a nerve of steel in time of crisis because he puts honour before everything else including his own life and limb not to say the pathetic vice of greed. If the black sheep of Wall street were honourable they would have surrendered all their loots to their government to be used as part of the FT rescue package. Isn't it the honourable and right thing to do to make up for your mistakes by doing reparation ?

JKHC.

Thursday, February 5, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 8 ) - COMFORTING CORPORATE CAP

The New York Times has just reported that the Obama administration is imposing a maximum limit of US$ 500,000 for all high ranking executives of corporations which receive government benefits under the FT rescue package. However, this policy does not apply to the 350 institutions already rescued prior to this announcement of new policies. It is the first piece of good news for the new administration after some embarrassing bungles. It is, indeed, a COMFORTING CORPORATE CAP.

It has been suggested that because of this new limitation on corporate executives' remuneration some corporations intending to apply for the government rescue package may think twice before submitting their applications. This is good news if proven to be true. In the worst scenarios these marginally functioning institutions may fail without government aid but it is an economically sensible thing to allow inefficient entities to pass on so that a new leaf can be turned to cut them loose from past blunders. Sometimes, the worry about the resultant unemployment created by failed enterprises is blown out of proportion. Please do not misunderstand my intention. I am not happy to see more people becoming unemployed. There are bound to be more efficient owners coming in to buy the existing corporate structure with the related market share in that particular line of trade. New owners must be required to make the best possible arrangement with the existing work force and reduce lay offs to the barest minimum. A new start may not be a bad thing for some industries like the US motor industry to rid them of cumbersome labour contracts and other investment decision bungles.

Obama seems to be a bit apologetic about this new policy by reassuring the business world that there is no intention on the part of the US Government to curb personal efforts or create disincentives for successful business persons within the US market framework. If the report on the reluctance of marginal corporations to apply for the rescue package on account of the new cap on corporate executive remuneration is true it will imply that the high ranking executives are still intoxicated by the corporate piggy bank tradition of excessive remuneration. Not to be allowed to rip off the corporation of which they are custodians will piss them off. It would also mean that the traditional capitalistic concept of " SKY IS THE LIMIT " is still very much alive and kicking. As I have advocated in The Way Forward ( 3 ) - And Justice for ALL ! - there is no such thing as without limits. Such a concept is against the very basic principle of economics. If there are no limits to our resources there would be no need to have the discipline of economics to carry out the most efficient allocation and utilization of our imaginary unlimited amount of resources. Since resources are scarce and have limits in terms of availability so must corporate executive remuneration which is a factor ( or cost ) of production.

More open discussions must be conducted by the public on how to set a cap on corporate executive remuneration beyond a certain maximum amount for all corporations. Not just for those benefited by the FT rescue package. Such a cap may vary from one industry to another depending on particular circumstances but the cap must meet at least two criteria. Firstly, it must not be too low to discourage capable hands from running key industries. On the other hand, a reasonable cap must be set to do away with the traditional capitalistic concept of encouraging endless greed. The ideal thing is to introduce such a cap sooner rather than later. Anyway, it is high time for the public discussion on such a cap to start to allow for adequate input and consultation. Using the right size for a COMFORTABLE CORPORATE CAP will make everyone look economically smart.

JKHC.

Tuesday, February 3, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 7 ) - Don't put your wrong foot forward.

Somethings you do not ever want them to come true. In the majorities of cases, the worst scenario will materialize out of all our fears. This is known as Murphy's Law in science. I was talking about the P word or Protectionism in The Way Forward ( 5 ) and the dark clouds have already gathered on the horizon of international trade fast. Apart from the currency manipulation accusation against China the US Government FT rescue package due to be put to the US Congress will specify that all government aided enterprises must buy from local US suppliers for the purposes of their trade. This is an undisguised act of protection. Already the EU has threatened to bring the US Government to the WTO for arbitration on the issue. A serious international trade dispute is in the making. Should a full blown international trade conflict occur the anticipated world economic recovery period could be stretched to a decade or even longer. This is unthinkable !

The US conditional FT rescue package will certainly win the hearts of US voters but is it really a good strategy in the long run ? It is an unqualified NO ! If every country falls back upon the P word to protect employment in their our country at the expense of free trade and economic efficiency the world economy will become a shrinking loaf of bread as a result of multilateral trade retaliations. This is the worst possible scenario that could come to pass. You see, being a world leader will come at a cost, sometimes a painful one. It means exactly what the term LEADER implies. There are obligations attached to the honour of being the world's leading nation. She must take the lead to do the right thing with the related sacrifices not just rhetoric. It can hardly be disputed that the origin of the FT can be traced back to the dubious behaviour of the black sheep on Wall Street. It is high time and a good chance to show the world that USA means what she has committed herself to do in Obama's inaugural speech :- " USA is a friend to everyone in the world." Taking a step towards the P word can hardly be seen as world friendly. So, think twice before you leap. Your tarnished image is already in dire need of a good polishing. Please do not start the FT rescue mission by putting your wrong foot forward. To push ahead in this wrong direction will be tantamount to creating another disaster on top of the already devastating FT. It will be the same as throwing petrol into an open furnace. Common sense must prevail !

JKHC.

Monday, February 2, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 6 ) - Beat FT at its own game, with FT Bonds

Extraordinary times call for extraordinary measures but not at the expense of fundamental human rights ( at the legal level ) and decency ( in the moral arena ). It is not at all an exaggeration to say that we are fighting another world war, albeit a financial one. In a war, not just the government but every responsible citizen must get involved. This is the sacred mission of any person with a sense of duty and basic human decency. I am not advocating a declaration of a state of emergency to allow government access to all economic resources which bureaucrats and dictators would jump with joy. I am simply proposing to beat FT at its own game by the issue of FT FIGHTING BONDS ( FTFB ) either by the government or through some public agency closely monitored by law and the government. All repayments on maturity must be guaranteed by government because it is a national debt for the benefit of all. Let us discuss the pros and cons of my crazy proposal.

Firstly, for the pros it has been done many times before but only this time the bonds are issued to fight a genuine and devastating financial war. All blueprints on the set up, administration and monitoring ( with publication of annual independent audit reports, etc. ) are readily available. Therefore, it will take a very short period of time to implement. The time element is vital in a fire fighting operation as in the present scenario. Secondly, it will provide much needed funds for the government's rescue efforts - far, far better than the undesirable and morally dubious emergency measure of printing more money. The last measure is a certain and fast track leading to degeneration into a fifth class nation. Thirdly, promoting the sale of FTFB will serve the ideal purpose of re-educating the public on their civic sense of duty and thus will hopefully lead to a new and enlightened sense of value - the enlightened capitalism I am strongly advocating. Fourth, the concept should be easily sold to the public because of its dependable and historical reputation. Fifth, it is a healthy way to channel saving ( or hoarding at this point ) back to investment in infrastructure that has enduring benefits for all future generations. This is the least our present generation can do to sweeten the bitter fruits produced by those black sheep among our own generation. They have messed it up badly for all of us and for all future generations. How can you black sheep sleep at night or face your own kids after what you have done ?

Let us not be carried away by the above pros of my humble suggestion on FTFB. The obvious cons or disadvantages are not few. Firstly, more bureaucratic ( which means more red tapes and waste in administrative costs ) structures will be put in place. Secondly, it is not equitable friendly because the interest paid on FTFB will mostly go to the well off sections of society who can spare the cash to buy the bonds. It is just the same in the case of the disadvantages of national debt ( please see the appropriate section in my FT paper by hitting the above blog title to reach my website ). Thirdly, a lot of promotion will be necessary at this gloomy time to persuade people to buy FTFB but an appeal to their patriotism might help. To fight the FT is as urgent as fighting terrorism at this point in world history because we have all been mortally hurt by financial terrorists. Fourth, it can give some totalitarian regimes another excuse to further exploit their citizens but that is a sad fact of life with such despicable regimes. The same criticism can be leveled at all public projects when such regimes are involved. Fifth, as always with rescue packages it will take a lot of arguments to settle the priority in spending the FTFB funds. This is just a general issue with all public spending.

The above humble contraption of mine is by no means perfect. That is the whole point of setting up my forum. This is also the beauty and importance of the basic human rights of expression. More heads are always better than one walnut head like mine. Please comment and criticize my reasoning so that we may learn from one another and hopefully do our insignificant part to fight this war against the FT. As a wise Chinese saying goes :- " When you add more stuff into boiling water it will eventually become something substantial and sustaining like porridge ! "

Sunday, February 1, 2009

The Financial Tsunami ( FT ) - The Way Forward ( 5 ) - Protection Points the way to Public Poverty

I have mentioned in my article on the FT ( in the conclusion section on page 57 - please hit on the blog title above to reach my website and article ) that should trade Protectionism again raises its ugly head our present crisis could be prolonged to an unacceptable length of time. The P word must be avoided at all costs.

Unfortunately, there appears to be ominous signs of its revival. The Obama economic team has directly accused China of manipulating her currency, the RMB, to gain trade advantages. This is a bad move in that it is both badly timed from the global perspective and it is souring the much needed co-operative atmosphere among all nations to combat the FT in good faith and in unison. Even verbal confrontation at the time of a coordinated fight against the FT is counter productive as well as a distraction from the issue at hand. As the usual case in all human affairs it is misleading and mostly invalid to point to a single cause in the occurrence of any unhappy event. The simple reason for this is the complicated interactions and feedback loops created in all multilateral dealings that make a one-to-one or cause effect analysis quite impossible. Therefore, it is to everyone's advantage to avoid engaging in such a dangerous move especially at the present critical moment. Most global citizens are placing a lot of hope on the historic Obama administration in changing for the better. So, please heed the right advice and ignore the bad ones. With such a high profile announcement it may even create the wrong impression at the start of the Obama administration. I sincerely hope that the accusation concerning currency manipulation is not the prelude to trade retaliation.

On a more positive note, countries with huge trade surpluses like China should utilize her reserves to buy capital or investment items such as passenger aircraft from USA ( as wisely suggested by one of my friends ). Already China is making the right moves in putting forward rebuilding plans for last year's earthquake devastation in the Sichuan Province. The suggestion to buy from USA is not just a move to prop up the US market. It will go much further to help revitalize US consumer confidence that will in turn increase demand for consumer items in which China specializes. It may sound silly to make your customers rich so that they can afford to buy more from you. This is exactly what is actually happening under the proper working of the market economy. The theoretically ideal international trade position between two countries is an exact balance in their mutual trade accounts. This is because the surplus country like China is actually under-utilizing her purchasing power. To buy more capital goods means to acquire a greater potential for future economic growth. On the other hand the deficit country like USA will be faced with a lot of problems related to deficit financing. Thus, it will be seen that the surplus country is always in a better position in terms of control and having more options.

While advocating a theoretical balance of payment position in international trade it is also important to realize that there must be some trade reserve in reality and save it for a rainy day. However, the appropriate amount of reserve is open to question. There is a school of thought that suggests an amount of reserve equal to 18 months of projected recurrent government spending is appropriate. There are no hard and fast rules. The right amount depends entirely on the needs and circumstances of individual countries. The amount of any reserve usually appears to be huge and idle in good times and very often looks inadequate when disasters strike. There are endless factors to consider because of the endless human needs. That is why an apt definition of the discipline of economics is said to be :- " The study of how people meet their unlimited needs by limited means."

On the international front, we should realize the ultimate goal of globalization for a complete free flow of economic resources, human resources and ideas. Only when this ideal position is achieved will the existing global resources be most efficiently utilized. This will help us in our fight against the FT. The only way to attain the above goal is to open up markets and trade on an equal footing for all countries. Politicians will always be under pressure from voters to protect the narrow national interest by imposing trade barriers to protect local employment. Therefore, it is a touch stone or litmus test for leaders of any country in assessing the scope of his or her vision and strength of leadership to see if he or she can do the right thing under heavy political pressure and severe criticism based solely on national interest. It is a defining line between becoming a great statesman and simply remaining as a petty politician.

The amount of appropriate trade reserve to be maintained as a prudent move is open to deliberation but the evils of trade Protectionism and political Isolationism are beyond dispute.
History has time and again taught us by painful lessons such as the Second World War that such undesirable policies will lead to tragic consequences on a global scale. The evils such policies generate must be done away with for good.

The leader of a country may win over voters through trade Protectionism but he or she will ultimately falter because it is a certainty that PROTECTION points the way TO PUBLIC POVERTY. So, we must prevent Protectionism from raising its ugly head again ever.


JKHC.