Wednesday Night #1415

Markets, the economy and banks
Hypotheses abound explaining the cause, effect and future of stock market indices, hence the economy. The precipitous drop in the market during February was generally viewed as foreshadowing an even more chaotic economy, but its sudden impressive rise in March which, in fact, was merely a cyclical effect correcting the February drop, was greeted with euphoria and hope. Unfortunately, one tends to equate the rise and fall of the stock market with that of the economy, a relationship that is tenuous even when valid. However, whatever the explanation, it is a far easier task to explain the past than to accurately predict the future. There appears to be some confidence in the future subsequent to the deals said to have been made by the United States at the G-20 summit, with China, Russia the U.K. and the Middle East. If so, the effect on the economy of wealthy countries, more particularly those of North America, will be positive. In the world of finance, there exists an oligarchy that will ensure that the financial system will remain intact indefinitely.
Knowledgeable economists believe that older securities are overvalued. If true, either their value will have to rise or the price has to fall. There is a continuing lack of transparency in the banking sector which is probably a good thing in that it preserves the anticipation that the problems of the recent past are behind us – a confidence that is not necessarily justified. Although banks are certainly aware of the acquisition cost of their assets, there probably is not an accurate picture of their current value and risks. In a sense, this is fortunate because confidence in the positive effect of the government bailout’s ability to have solved the problem has prevented the chaos that would have resulted from the loss of consumer confidence. The expectation is that in the end, the problems will work themselves out. One problem arises from the unreliability of asset ratings by the rating agencies, but more important is the current value of assets acquired prior to the sudden decline in the economy during the latter part of 2008 and the early part of this year. In the instance of mortgage payments, the assumption is made that value of the asset on which the mortgage was issued remains intact as long as mortgage payments are being made, an assumption that in many instances, especially in the U.S., is not valid. In effect, assets had been rated on the basis of not foreseeing or taking into account the precursor of the current crisis. The banks had apparently falsely assumed that the securities with the biggest returns would be the most secure.

It would be naïve to assume that a lesson has been learned and new legislation will eliminate these lacunae as the economy rises and finally recovers. As long as humanity exists, it is certain that the creativity of humans will continue to find new ways of legally circumventing any legislation designed to prevent a repetition of the current and similar past situations.

The differences between the U.S. and Canadian banking system continue. Canadian banks accept deposits and make loans whereas a large portion of the activities of U.S. banks involve the far riskier bundling and selling of loans, making access to bank loans by businesses more difficult.

The question that inevitably arises in view of the enormous sums of money spent by the U.S. government following the tremendous debt inherited from the Bush administration is whether President Obama will be able to afford to raise tax money for health care, a prominent and popular plank in his election platform. It has been pointed out that some form of government-funded health care is extremely important in the rebuilding of industry and getting the United States on its feet once more. There is a consensus on the need for vastly increased public funding in health care and education, the latter, being a local issue, attracting less attention.

Considering all the elements of inherited deficits, cost of bailouts, cost of fulfilling election promises and the inevitability of increasing taxes, there is some division among Wednesday Nighters as to the outcome of the 2012 national elections in the U.S. To some, Barack Obama is certain to be elected for a second term thanks to his broad support base. Others point to a decreasing popularity following the current chaotic financial situation inherited from the previous administration. Others maintain that he has lost control of his own Democratic Party colleagues making the prospect of a reelection less certain.

Taxation
Are we overtaxed? Most taxpayers believe that they are and people, especially those sufficiently wealthy as to believe that they are grossly overtaxed, may migrate either in person or only their assets to countries with lower tax rates. G-20 members are said to have resolved to eliminate offshore tax havens, a resolution unlikely to be effective as there are inevitably loopholes that are quite readily identified by people sufficiently clever and creative to have sufficient money to find and make use of them. By and large, taxes are a function of the quality of services we receive. Québec taxes are higher than those in Ontario but the services offered to Quebecois are superior.

The dearth of family physicians
One area of concern is difficulty in Québec in obtaining the services of family physicians as well as delays in treatment by specialists. Despite the fear that the recent reciprocity agreement would lead to an exodus of Québec physicians, this is not likely to happen, mostly because of the reluctance of university hospitals to recruit foreign physicians. There is little likelihood of foreign physicians coming to Québec because conditions here are not that attractive. The greatest causes of the shortage in this province lie in the lower remuneration paid by the government, government limitation of permits to practice in the province and a system that discourages physicians from practicing in the cities rather than encouraging them with financial bonuses to choose to practice in rural areas. Although the number of medical students graduating is increasing, these restrictions as well as inadequate remuneration, ensure a continuing shortage and with an aging population including aging medical practitioners, greater demand. Some claim that the lack of family physicians is a direct cause of higher mortality rates. If this is indeed the case, in their own interest, the electorate would do well to use the power of the vote to influence the legislators to deal more effectively with a potentially correctible situation.

Susan Boyle
The clip of Susan Boyle, 47, who was apparently a surprise success on the television contest “Britain’s Got Talent”, brought a number of responses. Without questioning her talent and sincerity, Wednesday Nighters strongly suggest that the judging process on these shows is less than transparent. Contestants have to be interviewed, auditioned and accepted. The judges are certainly aware of what contestants will perform and likely have already heard/seen video tapes. Thus the astonished expressions of the three judges are probably faked and the impact of the ‘unsuspected talent’ is highly suspect. There was also suspicion about her story and origins, – too perfect?
By Tuesday, a video clip of Boyle’s performance on YouTube has been watched more than 2.7 million times.

Jeffrey Sachs’ lecture at McGill was attended by several Wednesday Nighters.
La critique mordante de Jeffrey Sachs – La bourse ou la vie?
Sauver des centaines de millions d’humains coûterait une fraction de ce qui a été offert aux banques. Et pourtant…
Aide humanitaire: Le Canada doit en faire plus
Rich lord over poor (link N/A)
Millennium summit: Influential economist Jeffrey Sachs pulls no punches exposing U.S. greed
(Montreal Gazette) Jeffrey Sachs, head of the multidiscipinary Earth Institute at Columbia University and identified by Time magazine as one of the world’s 100 most influential people, spoke at McGill University before giving another no-punches-pulled speech at the 2009 Montreal Millennium Summit, where he received a standing ovation.
Live up to Africa vow: Sachs (Link N/A)
(Montreal Gazette) As host of the G8 summit in 2010, Canada has a responsibility to ensure that the world’s wealthiest countries live up to past summit promises to provide increased aid to Africa, a leading international economist said yesterday.
During two speeches in Montreal and in rounds of media interviews, Jeffrey Sachs said if the aid promise first made at the Group of Eight summit in 2005 won’t be kept, the G8 should call it quits.

THE INVITATION

Forget for the moment the upcoming Summit of the Americas and the new Cuba policy announced in advance of the meeting; the crisis in Thailand and cancellation of the ASEAN meeting by Protests in that country. Pay no attention to the the Conservatives’ battle over whether Mr. Mulroney is a member of the Party,  or anything else, except, maybe, the rescue of  Richard Phillips and what can be done about Somali piracy, which is hardly a new threat . Next week, perhaps Kimon Valaskakis will shed some light on how to deal with the pirates. Another good article is The Pirate Economy.

The news of the week – or at least the holiday weekend is Bo, the new White House puppy. As the National Post put it: “What’s the buzz of the day from Washington, D.C. as President Barack Obama sanctions snipers to take down Somali pirates, and works out a strategy to fight cyberterrorism, solve the war in Iraq, bail out the big auto companies and boost the sagging economy? None of the above. No, not today. Washington is all ears over the Obama family’s new pet, Bo, a six-month-old Portuguese Water Dog.” And why not, he’s much cuter than most of the people we have to look at! The media have been having fun with all that President Obama has been juggling, while getting ready to welcome Bo; none has done a better job than Gail Collins in her delightful column The Obama Holiday Tour – Thank you, Tony Deutsch.

Now that we have unleashed that topic, there are many others to consider – and not all as gloomy as the possibility of GM in bakruptcy.

We are intrigued by Diane Francis’ column on a CN proposal to ship oil from the tar sands by train rather than pipeline. Leaving aside the environmental considerations (which she brushes aside with the statement that “the oil sands is [sic] absolutely essential to maintaining the future living standards of Canadians. They should not be stopped, but perhaps the environmental challenges could become another opportunity.”), the idea is cost effective, rapidly implemented, and gives Canadian oil producers the ability to shift quickly from one market to another. This is not to say that we agree with her assertion that the age of oil is decades away from ending, but we are happy to see rail transport back on the public agenda.

David Kilgour (who unfortunately will not be with us) has forwarded a Toronto Star article, Fears grow over Chinese lawyer’s disappearance, reminding us of the connection – if not contradiction – between Stockwell Day’s trade mission to China this week and the plight of Gao Zhisheng, pioneering Chinese human-rights lawyer, who has been missing for nearly two months (and whose family successfully escaped to New York) . For those unfamiliar with the story,  The New Yorker gives an excellent summary

On the economy: oh, yes, we have to go there, Ofer Avital has sent along Barron’s interview with William Black, who was a deputy director at the former Federal Savings and Loan Insurance Corp. during the 1980s S&L crisis. Mr. Black, incidentally, would be James K. Galbraith’s choice for Secretary of the Treasury – we would have to go along with that on the basis of the title of his book “The Best Way to Rob a Bank is to Own One.” [Tony Philbin notes that: William Black was also on Bill Moyers a couple of weeks back. The full interview (30 minutes or so) and transcript.

Turning to Canada and one of WN’s favorite topics, we are pleased to learn that our MP, Marc Garneau, is off on a cross-country tour to consult Canadians (industry, academics, researchers) on how to revitalize Canada’s scientific industries, and to discuss the importance of research and innovation in creating the jobs of tomorrow. This,we hope, may produce concrete answers to the issues raised by Heather Munroe -Blum in her recent address to the Canadian Club of Toronto [thank you, Gerald Ratzer] “The issue we need to confront is our stubbornly poor performance in building the economy of the future: the Innovation Economy — the creation and marketing of ground-breaking knowledge, and value-added goods and services … our old ‘I think I can’ optimism is no longer enough. It can be done. But only through strategic, concerted and coordinated action. We need a coherent plan, a coherent vision — and we lack one currently.” – If you only read one link of this invitation, please read this one, of which Guy Stanley says “HMB’s energizing and thoughtful overview of Canada’s innovation issues. So gratifying to see that someone in her position actually has the clues on this file.”

A final offering: Judith Warner’s This I Believe, reflections on “celebrating Passover with our motley Jewish-Catholic-Episcopalian crew, commemorating events we don’t believe in, confirming an identity that doesn’t quite fit, united in the love of one another.” We would suggest that a healthy dose of this philosophy would go a long way to curing the world’s ills. Our irrepressible Tony replies:”It is a wonderful self-description of my image of the typical NYT reader.” [or possibly a Wednesday Nighter?] He continues in a more serious vein to suggest a thoughtful topic for WN – and one which Kimon might care to address: … “we could speculate about the role of religion in societies where it does not function as a social control mechanism. Perhaps one of the outstanding attractions of Jeffersonian democracy is its specific designation of denomination-based religion as a personal matter, and the numerous attempts in American history to negate the idea ever since in practice, particularly on the level of the small community. Monarchies of all kinds require an active God to endow the king with the authority flowing from above, and while the US got by without all this for more than two centuries, neither Cromwell nor the French revolution managed to last long without it. Contemporary Russia is well on its way back to 1916 in this respect: watch Putin trying to get close to the Orthodox Church.”
On that pensive note, we encourage you to join us this week.