Bailout: Just the Beginning

Ah, should have known this was going to happen. According to the Financial Times, all sorts of people are pressuing the U.S. Treasury and the Federal Reserve to provide further help to the economy, possibly a mix of a rate cut, letting money markets borrow money to fund their holdings, and maybe even offering unsecured loans to regulated banks. In other words, the U.S. government is going to become like a parent who always bails out the troubled child until things get so bad that it's no longer possible. I'm sure some would liken the current situation to the intervention of a doctor, but unfortunately the illness was the result of the stupidity of the institutions in danger. How is curing the symptoms going to change the underlying behavior? It's not, and chances are that the cash is not going to travel much farther than the banks and their largest customers - the ones they want to keep happy. I'm already hearing stories from small business owners suddenly finding their credit lines pulled. Many will make it through, but when you remember that the majority of employment in the country comes from small businesses, it makes you wonder whether it's the economy that's getting a bailout, or the most elite piece.

Toxic Banks: Not Just US Problem

I've heard some people remark that the credit crunch has shown the weakness of US banks as compared to the rest of the world (which generally means Europe, when it comes to the financial industry). I found that hard to believe, because it seemed that some of the names hit hardest were European banks. So I was interested to read in the Financial Times Lex column (sorry, no free link) that sub prime credit write downs by banks have totaled $493 billion worldwide. Of that, $250 billion was in the US, but $221 billion was in Europe, with $22 billion elsewhere.

And yet, the European economy has not taken the same hit as that of the US. The housing bubble in the US has been one factor, but there's been a similar bubble in many parts of Europe - Spain, Denmark, the UK, and Ireland. I'm guessing that the relative strength of the euro has been the reason. But it seems that won't be lasting long:

The US and European economies are of similar size, as are their banking industries, which both have market capitalisations of about $1,000bn. Yet European banking stocks have outperformed since the credit crisis began. So far, US banks have suffered most. The worst is yet to come in Europe.

Those in the US looking for economic salvation by investing overseas are likely to find that the safety is only temporary. Ah, well, misery loves company.

London Bridge Is Falling Down...

For all the bad financial news coming out of the U.S., Europe is having its own share. A rogue trader costs Société Général $7 billion in France - and the person's superiors might have known what was going on, as management did throughout all the stupid choices of financial institutions here. The euro has dropped, London's FTSE index has dropped, and British bank Northern Rock, which was supposed to get a bailout from private equity group Olivant has just heard that its white night rode right past (because of inflexible conditions given by the government, so Olivant is claiming).

To hope that a financial mess in the U.S. could be contained, with other countries propping prospects for investors, is naive. When the economy becomes global, it by definition becomes interrelated. You can't see one part tumble and expect that everyone else will be left standing. You certainly can't expect that a financial system that decided to go for the high risk "easy" profits can avoid eventually paying for that free lunch.

US Gambling Stance Endangers Copyright

The New York Times has a great story about how US attempts to stop its citizens from using online gambling in Antigua could result in that country getting permission from the World Trade Organization to infringe on US copyright and sell copies of American products. Essentially, Antigua took the US to the WTO court, complaining that we were selectively allowing online gambling. So far, the US has lost the original case and an appeal, but has been ignoring the ruling.

But not complying with the decision presents big problems of its own for Washington. That’s because Mr. Mendel, who is claiming $3.4 billion in damages on behalf of Antigua, has asked the trade organization to grant a rare form of compensation if the American government refuses to accept the ruling: permission for Antiguans to violate intellectual property laws by allowing them to distribute copies of American music, movie and software products, among others.

Wow. The WTO is stuck because it must follow its own rules. The US doesn't want to allow offshore gambling, but by protesting and ignoring the ruling, it opens doors for other countries, like China, to do the same. And if Antigua gets permission to go ahead, what can the US actually do to stop sales and the losses that businesses would feel? This is the hidden problem of talking about completely open markets - eventually you get caught by the law of unintended consequences. Most countries that talk about open markets are all for them - for others.

US Looks to Scan All Cargo on Ships

I read yesterday in the Financial Times a story that must be scaring the beejeezus out of shippers:

All cargo going into the US on ships would have to undergo thorough screening at foreign ports under new legislation agreed by key congressional committees, in a move attacked yesterday by the shipping industry as a recipe for chaos.

Notice, this isn't scanning ships in US ports - it's scanning the cargo in foreign ports as it gets loaded on. And if Congress passes this legislation, just how do they expect to make it stick with the foreign governments running those ports? I suppose that they would have to if they wanted the products to leave the country, but has our government talked to any other about this? I highly doubt it. And that opening paragraph from the story doesn't mention that all air freight would also have to be scanned.

Someone from the National Retail Federation brought up what I thought was an excellent question: does the Department of Homeland Security have the wherewithal to go through the literally millions of images that would come flooding back? Think about it - they'd have to review the images in real time to stop a container from being loaded onto a ship or plane.

This sounds like another feel-good piece of legislation where people haven't considered what they're actually requesting. And it's another example of how people desperately want to think that they can have complete safety and security. Someone should point out to them that this has never existed and never will. No one can completely eliminate risk, and to think that you can is self-deceptive.