Monday 29 September 2008

Bank on it!

Dark days indeed, especially if you have shares, own an overvalued house you need to sell or have lost your job and source of income.
It is little consolation that things will eventually improve and this, financial burst bubble, will become just an historic tide mark.
The ‘get-rich-quick’ syndrome is part of human nature and we are unlikely, genetic engineering notwithstanding, to eradicate it. More insight into the details of company accounts might have focussed attention years ago into banking practices which created the domino structure now causing havoc. Regulatory oversight was insufficient and/or powerless to intervene in the past and will not improve much in the future, 700Bn US$ or not, once the tide has receded. Detailed regulation is anathema to our culture, not just to our banking system.
Confidence will return, it always has, even if it requires some healing time.
The main trouble with banks is that I don’t own one.

Monday 15 September 2008

Banking chaos: Umbrellas needed?

Banks are well known for lending policies where the loan is recalled at precisely the moment the client requires it. Bank lending strategy is to offer an umbrella in fine financial weather and take it back when rain starts to fall.
Lehman Brothers has filed for bankruptcy protection, Merrill Lynch has been absorbed into the Bank of America and globally banks are under pressure. Should the consumer give the banking system support in these trying times?
Whether the individual likes it or not, through the central banks and finance ministries, taxpayers’ money will be used in vast quantities to ensure the banking edifice does not collapse completely. Unlike other commercial tragedies which occur daily and receive no establishment support, banks have a special role in the generation of capitalist wealth which makes their survival essential.
In ancient times banking was fairly straightforward. Money (or Gold) was deposited, kept safely at a small charge and repaid when required. Somewhere along the way came the bright idea of lending out some of the secured money (which the bank did not own but held on deposit) temporarily to third parties for an interest fee. Experience soon showed that the bank could lend out to third parties a certain percentage of their deposits (assets) without much risk of the owners asking for it all back at any one time. This safety net percentage still underpins modern banking and is about 8% to 9%, I think.
Obviously, the smaller the bank the greater the risk involved that any large withdrawal might cause it to run out of money to pay other customers.
Although all banks have to lodge a certain sum with the central bank as security based on the size of their assets and they are legally required (like other businesses) not to trade when their liabilities exceed their assets, keeping track of the size of the assets and the liabilities has become rather complex.
Take a simplified Lehman Brothers as an example. Over the 150 years of their existence, Lehman Brothers made a lot of profit and gradually increased the size of their assets which belonged to them (own capital). Customers deposited money for Lehman Brothers to invest on their behalf which formed both an asset through the investment portfolio and a liability as money owing to clients. Because the sub-prime mortgage business was so profitable (higher risk – higher profit margin) Lehman invested in it – bought bundles of mortgages from other banks or Freddy Mac etc.
Lets say on January 2nd Lehman had a balance sheet showing 10 Billion US$ of assets and 8 Billion US$ of liabilities – a positive balance of 2 Billion US$. Unfortunately, due to the fall in house prices by July 2nd the value of the sub-prime paper assets had to be revised downwards and the balance sheet was then 7 Billion US$ assets and 8 Billion US$ of liabilities – a negative balance of 1 Billion US$. Assets fluctuate on external influences but liabilities usually remain stable or increase.
Although Lehman Brothers had substantial reserves it still meant they were technically trading illegally so they had to file for bankruptcy. The irony is that when the housing market again rises (and it will because banks etc. will give mortgages again) the paper assets will also rise in value without Lehman Brothers doing anything. It is all a question of who has the large enough umbrella.

Friday 12 September 2008

Climate change and global warming: The real issues

Climate change is certain and perfectly normal. Every adult can remember cold and warm winters and wet and dry summers. Geology provides ‘rock’ solid, and ice-cores provide ‘chilling’, evidence of historical climate change. The Earth is in a state of perpetual climate change. What makes this moment in time interesting is the accumulation of evidence that mankind’s actions since the industrial revolution have probably exacerbated natural climatic trends.
With modern computers and a greater number of scientists available to do research, our knowledge about how the climate works has been greatly increased. We are still some way from knowing all the answers, but there is general scientific acceptance that our climate in the near future will be showing some very negative aspects, including rising sea level, global warming and regional weather extremes. There is also an allied possibility that this trend will have negative biological consequences for our food chain.
Even if the most benign prediction formulated by the Intergovernmental Panel on Climate Change (IPCC) becomes a reality our grandchildren will experience weather conditions quite unlike those we are used to. In addition to the problems created by flooding and migrating tropical boundaries, an additional 3 or 4 billion people will be using resources and demanding a reasonable standard of living by 2050. Most of this population increase will be in areas of religious intolerance, political instability, educational inadequacy, medical insufficiency and coincidently lie geographically in the most vulnerable places in the face of climate change. Although the present political and religious leadership of currently aggressive countries will die relatively soon, the likelihood in a deteriorating environmental and economic situation would be for ever more radical successors to take their place. Given historical precedent it is likely that territorial expansion and war will be the result. In this scenario global warming pales into insignificance and ‘developed’ nations with nuclear defence capabilities would be well advised to maintain, and be prepared to use, them.
The threat posed by climate change can be met if politicians make funding available in advance of catastrophes for the administrative and infrastructure measures necessary on a global scale. For rich countries this means making long-term cheap loans to poorer ones and even making substantial donations to develop coastal dykes etc. and facilitate evacuation preparedness. Although democratic processes usually have an election horizon, a medium term commitment of twenty to thirty years will be imperative if radical forces are to be neutralised and replaced by responsible and rational leaders in those countries, particularly those without a secular constitution, which may find themselves in a worsening environmental situation.
Global funding for regional investment to ameliorate climate change is perhaps the best and cheapest option to avoid a global Armageddon.

English housing is a European disgrace

There can’t be many people in England at the moment who have not seen the wealth disappear they had believed rested solidly in their house. Once again, the English housing market has collapsed, readjusting inflated equity valuations, squeezing household liquidity and creating unmanageable debt.
The English housing market has always been a source of amazement to foreigners. Our houses are the smallest in Europe, poorly built and designed, badly kept up and horrendously expensive. German and French houses have nearly 40% more living space than those in England and their prices have remained relatively stable for decades, comparing more than favourably. Only the English have no double-glazing, wall and roof insulation. Drainpipes, telephone and television cables festoon the unpainted and often crumbling outside walls. Front and rear gardens are often car parks littered with rubbish.
Despite these obvious detractions there has been a headlong rush for generations to continually pay more for housing property, bolstering consumer borrowing in the knowledge that next year prices will be higher and asset values will increase.
Not that the individual could do much about the situation, but banks and mortgage societies have been incompetent, to say the least, in their own self-interested management of the housing market. Whereas no-one would lend £10,000 for an £8,000 car, banks and building societies have been giving out 125% mortgages without compunction. Top-up financing for extensions and improvements were happily given on very optimistic valuations.
Alright, it would seem the Americans are no less stupid. The very size of that disaster has shaken the credibility and fundamental stability of much of global finance, including the viability of many pension funds, and has precipitated the English and Spanish housing declines. None of this was unforeseen and warning signs have been there for years.
A recovery will take time, but the US and English housing markets will stabilise. When that happens, will everything go back to the status quo pro ante? Will the banks and building societies have learned a lesson? It would be nice to think so, but history has a habit of repeating itself.

Tuesday 9 September 2008

Another Ugly Fact?

Review of:
Phylogenomic evidence for multiple losses of flight in ratite birds.
Harshman, J., Braun, E.L., Braun, M.J., et al. September 9th, 2008, Proceedings of the National Academy of Sciences Vol. 105, no. 36
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Conclusions
Exhaustive analyses of DNA sequence data from 20 unlinked nuclear genes provide strong evidence that ratites are polyphyletic. We have discovered a robust genome-wide signal that is not associated with any known phylogenetic artefact. We believe this phylogeny resolves a debate on ratite origins that began in the time of Huxley and Owen. Our phylogeny implies that the numerous striking similarities associated with flightlessness had independent origins in various ratite lineages. Thus, the flightless ratites are living evidence of parallel evolutionary trajectories from flighted ancestors. The possibility that multiple, unique developmental genetic pathways underlie the ratite form should be tested in light of this new phylogenetic hypothesis. Finally, our phylogeny removes the need to postulate vicariance by continental drift to explain ratite distribution.
Although that theory seemed to represent a consilience between evolutionary biology and geology, it was never completely consistent either with any published phylogeny or the existence of paleognath fossils in the Northern hemisphere.
Perhaps the impact of our phylogeny should be viewed as yet another example of the phenomenon that Huxley called “the great tragedy of science – the slaying of a beautiful theory by an ugly fact.”
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Another ugly fact?

The postulated phylogeny differs particularly from other ratite phylogenies in that it includes Tinamous as part of the clade rather than a sister group. This focus on Tinamous is noteworthy as the authors included four Tinamou and two Rhea genera in their analysis, but excluded all Moas and Elephant Birds. Since the six South American species constitute 30% of the genetic material studied some doubt due to the breadth underlying the conclusions will remain.
It is already fairly uncontroversial to suggest that ratites (extant and extinct, but minus Tinamous) lost the ability to fly sometime in the past and may have done so at different times. The conclusion that ratites are polyphyletic is rather more contentious if viewed as a basal fact, but not incompatible with monophyly when an ancestral taxon to them all (perhaps including Tinamous) existed.
It is naive of the authors to imply that a ratite ancestral family took to the air and flew in different directions to settle new habitats on various continents. The very phylogeny they suggest demands staggered departure times of many millions of years which can be adequately accommodated by plate tectonics and pre-Gondwana dispersal.
Tinamous may indeed be the best modern representatives of the ancient Paleognath ancestor, which would have been volant and small. This common ancestor would have existed about 90 MA and have dispersed into ecological niches before the break-up of Gondwana, perhaps long before. The hypothesis of vicariance biogeography concerning ratites is not refuted by the phylogenomic evidence presented.

Richard Perron