Technology Investment Dot Info

I apologize to regular readers (if any) but I’ve been on the road for more than a week. Meetings and keeping up with the game of musical markets combined with some too-good-to-miss leisure activities to keep me from putting finger to keypad.

I’m currently in Manila for an ASEAN workshop/conference which was meant to be about globalisation, global warming, expensive oil, challenges to democracy, politics of Islam and such; but I have a feeling the conversations in the corridors will be mostly about the banks, central and otherwise, and those pesky bi-modal markets and nasty hedge funds.

From my conversations with all manner of investors in Sydney I came away with a couple of new thoughts on the crisis. For one thing, I thought back to a year or so ago, when Citibank and some others started purchasing equity stakes in the Chinese banks. I’ll bet most observers at the time were like me in expecting these banks to look a lot more like Western banks by now. Instead, we have many Western banks government owned, with balance sheets full of non-performing loans and increasingly permissive “cosmetic” accounting. This world is funny, isn’t it?

On that question of what (if anything) governments should do, I’ve been trying to come up with a framework for thinking about why banking should be treated any differently than any other industry (autos?) that is close to failure. Because banking is ubiquitous it does deserve some special status, like telecoms or electrical utilities. The closest analogy I can come up is a scenario in which all of the power companies world-wide have leveraged up and blown their all of their equity and most of their borrowings on a speculative technology (cold fusion?), and are now no longer able to operate the grid connecting generators (savers) to consumers (borrowers). My conclusion is that the government should nationalise the grid. The grid cannot be allowed to fail or the economy will grind to a halt. But the government should NOT be buying up the dud cold-fusion investments, or shoring up the balance sheets of the leveraged entities. The government should be buying the operating assets - people, buildings, infrastructure - and leaving the balance sheets with those who created them.

In contrast, the Treasury efforts still seem primarily directed at preserving the banking management, both financially and leaving them in control. Incredibly, the only authority that Paulson even has to begin to do the right thing and recapitalise banks is a question and answer in the House before the vote clarifying that this power was included in one of the catchall “and whatever is necessary” phrases. But he is still resisting triage and attempting to cover up the actual damage. Hopefully the rest of the world will move on.

I couldn’t help picking up some great snippets through the week, and will add more to the comments on this post as I do some catching up. I’ve been getting my daily news feed on the iPod - RSS is the best newspaper in the world - and am posting on a 14″ iBook rather than my usual 2×24″ gear…

From 2008 Nobel Prize laureate Paul Krugman:

The only thing we have to fear is fear itself. Fear and negative equity… The two things we have to fear are fear itself and negative equity. And the depleted capital of financial institutions… Amongst the things we have to fear are fear itself, negative equity, and the depleted capital of financial institutions…

From Jeremy Grantham:

We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.

The New York Review of Books has an extensive review of Soros’ new book. Apparently the chaos has coaxed him back into the markets to make another billion or two. The stupidity must be irresistible.

The Milken Institute has a collected overview of the train wreck in slides. It is comprehensive, and devastating to expectations of a miracle recovery. download the original (pdf)

Stiglitz, with a modest plan:

A unique combination of ideology, special-interest pressure, populist politics, bad economics, and sheer incompetence has brought us to our present condition.

I almost missed this Warren Buffet interview, but it is amazing. He is ancient, absolutely without reservations in speaking the truth as he sees it, and seriously worried. His key points: TARP must use market pricing, and we must stick to reporting market values. I only wish he hadn’t likened the crisis to a “financial Pearl Harbour” quite so many times… In a world where the US may be relying on Japanese savers (and many others) for support of a coordinated bailout this struck a jarring note. Why not a “financial Three Mile Island”? It was self-inflicted, after all.