Too hot or too cold? - The Economist

Summary:
The outlook for the economy in 2008 and beyond has changed dramatically in the last 6 months. At the start of 2008, investors assumed that interest rates would fall or at least be kept on hold, due to the lingering effects of the credit crunch. Analysts forecast 15% profits growth for European countries in 2008. Now interest rates are expected to rise, and growth forecast has been revised to 4%, and dropping. The problem is inflation and inflation expectations. The essence of the current crisis is that the global economy has received two shocks in the past 12 months: the credit crunch and higher commodity prices. Those shocks have made the outlook more uncertain. Investors fear that central banks, in their zeal to prove their anti-inflationary credentials, may inflict some severe damage on economic growth. Combination of higher interest rates and lower profit margins makes it difficult to see how stockmarkets could advance much during the rest of the year. As one analyst put it: "Recent years have seen the world get all the benefits of globalisation without the costs. Emerging markets got growth, developed countries kept the lid on inflation." (Published: 12/06/08)

Notes:

• start of 2008: most investors assumed lingering effects of credit crunch would allow interest rates to fall, or at worst be kept on hold
• but: over past week markets have priced in a number of rate rises later in the year from the Fed, ECB and BoE
• has caused turmoil in short-term government-bond markets, as yields have been forced sharply higher
• problem is inflation
• central bankers know that higher inflation expectations, once entrenched, are difficult to eliminate
• sounding as tough as they can
• lack of co-ordination between central banks
  
• 3 Jun: Bernanke tried to talk up the dollar
• a falling currency adds to inflationary pressures
• 5 Jun: Trichet gave strong hint euro-zone rates were soon to rise
• sent euro sharply higher
• 6 Jun: unexpected rise in American unemployment + $11 gain in price of oil
• combination pointing to higher inflation and slower growth
• DJ Industrial Average tumbled nearly 400 points on the day in response
  
• investors fear that central banks, in their zeal to prove their anti-inflationary credentials, may inflict some severe damage on economic growth
• house prices falling in Britain and America
• consumers struggling to cope with the impact of that on their wealth and with the effect of higher fuel and food prices on their wallets
• a rise in interest rates may push them over the edge
• balancing of inflation and growth not confined to the developed world
• China: central bank raised amount of reserves banks must hold against their loans in an effort to restrain inflation
• India: central bank raised interest rates for the first time in over a year to stem inflation
• essence of the crisis
• global economy has received two shocks in the past 12 months:
• credit crunch and higher commodity prices
• those shocks have made the outlook more uncertain
• not just for the economy but for monetary policy
• uncertainty makes investors nervous
• not least because it comes after a long period when markets seem to have underpriced risk
• Peter Oppenheimer, Goldman Sachs:
• "Recent years have seen the world get all the benefits of globalisation without the costs. Emerging markets got growth, developed countries kept the lid on inflation."
• higher commodity prices are a zero-sum game: for every winner there is a loser
• many of those losers are likely to be companies
• profit margins have been at historic highs in some big countries
• in large part because businesses have been succesful in controlling labour costs
• but: higher raw-material prices present firms with a problem:
• pass those costs on, and not only will consumer demand falter, but central banks may raise rates
• so they may have to accept lower margins instead
• start 2008: analysts were forecasting 15% profits growth for European companies in 2008
• revisions have brought that number down to 4%
• largely because of problems in the finance industry
• Goldman Sachs thinks still too optimistic
• predicting an earnings decline of 12% this year
• combination of higher interest rates and lower profit margins makes it difficult to see how stockmarkets could advance much during the rest of the year

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We can reduce risk in the financial system - FT.com

Summary:
Timothy Geithner, president and chief executive, Federal Reserve Bank of New York, proposing measures to make the financial more resilient. Measures are: higher expectations on capital, liquidity and risk management, commensurate with the benefits that come from access to central bank liquidity; improving the capacity of the financial infrastructure to withstand default by a big institution; changes in the regulatory framework (more authority for the Fed); and a stronger capacity to respond to crises. Argues the Fed's responsibility for financial stability is not matched by direct authority. This gap needs to be closed. (Published: 08/06/08)


Notes:

• Why was the financial system so fragile? What can be done to make the system more resilient in the future?
• world experienced a financial boom
• boom fed demand for risk
• products were created to meet that demand, including risky, complicated mortgages
• many assets were financed with significant leverage and liquidity risk
• many of the world's largest financial institutions got themselves too exposed to the risk of a global downturn
• amount of long-term illiquid assets financed with short-term liabilities made the system vulnerable to a classic type of run
• as concern about risk increased, investors pulled back
• triggering a self-reinforcing cycle of forced liquidation of assets
• higher margin requirements
• increased volatility
• to strengthen the system in the future
1. have to increase the shock absorbers held in normal times against bad macroeconomic and financial outcomes
• will require more exacting expectations on
  
• capital,
• liquidity and
  
• risk management
  
• for the largest institutions that play a central role in intermediation and market functioning
• should be set high enough to offset the benefits that come from access to central bank liquidity
• but not so high that they succeed only in pushing more capital to the unregulated part of the financial system
2. have to improve the capacity of the financial infrastructure to withstand default by a big institution
• will require:
• taking some of the risk out of secured funding markets
• increasing resources held against default in the centralised clearing house
• encouraging more standardisation, automation and central clearing in the derivatives markets.
3. regulatory framework cannot be indifferent to the scale of leverage and risk outside the supervised institutions
• does not believe it would be desirable or feasible to extend capital requirements to leveraged institutions such as hedge funds
• But: supervision has to ensure that counter-party credit risk management in the supervised institutions limits the risk of a rise in overall leverage outside the regulated institutions that could threaten the stability of the financial system.
  
• regulatory policy has to induce higher levels of margin and collateral in normal times against derivatives and secured borrowing to cover better the risk of market illiquidity
4. need to streamline and simplify the US regulatory framework
• system has evolved into a confusing mix of diffused accountability, regulatory competition and a complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion
• institutions that play a central role in money and funding markets need to operate under a unified framework that provides:
• a stronger form of consolidated supervision
• with appropriate requirements for capital and liquidity
• to complement this, we need to put in place a stronger framework of oversight authority over the critical parts of the payments system
• not just the established payments, clearing and settlements systems, but the infrastructure that underpins the decentralised over-the-counter markets.
• Federal Reserve should play a central role in such a framework
• because of its primary responsibility for the stability of the overall financial system
• needs to work closely with supervisors in the US and in other countries
• At present the Fed has broad responsibility for financial stability not matched by direct authority and the consequences of the actions we have taken in this crisis make it more important that we close that gap.
5. need a stronger capacity to respond to crises
• Fed examining what framework of facilities will be appropriate in the future
• conditions for access and oversight requirements required to mitigate moral hazard risk
• some of these could become a permanent part of our instruments
• some might be best reserved for the type of acute market illiquidity experienced in this crisis
  
• Authority to pay interest on reserves
  
• would give the Fed the ability to respond to acute liquidity pressure in markets without undermining its capacity to manage the federal funds rates in line with the federal open market committee's target
• big central banks should put in place a standing network of currency swaps, collateral policies and account arrangements
  
• in order to make it easier to mobilise liquidity across borders quickly in a crisis
• have to recognise that regulation has the potential to make things worse
• Regulation can distort incentives in ways that may make the system less safe
• but: It is important that we move quickly to adapt the regulatory system to address the vulnerabilities exposed by this financial crisis

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Quote of the Day

"It's such a fine line between stupid and clever." - David St. Hubbins (Spinal Tap)

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Oil prices: risks and opportunities - VOX EU

Summary:
Francesco Lippi argues that the current rise in price of oil is due to a demand shock, not a supply shock. Effects of a demand shock on the US economy are very different from a supply shock. A demand shocks tend to lead to an increase in industrial production, due to the booming of emerging economies. America’s specialisation in the production of goods not supplied by emerging economies is key to this result. It is the ability – or lack thereof – to innovate and produce goods that are not easily substitutable that determines whether the new challengers represent a risk or an opportunity for industrialised countries. (Published: 11/06/08)


Notes:

• Most analysts attribute the increase in the price of crude oil to growing demand from Asian economies.
• Economic theory suggests that the real effect of an oil price increase depends on its underlying fundamentals. If it stems from
  
• a change in supply conditions: the resulting price increase depresses economic activity, as energy inputs are more expensive
• case with the Iranian revolution, the first Gulf war, or policy tightening by OPEC
  
• an increase in demand by emerging economies
• production in other economies like the US is subject to both a negative effect
• due to the higher price of energy and
  
• a greater demand for US goods and services by the growing emerging economies
• i.e. effect on the US is positive
• weak relationship between oil prices and the US business cycle in recent years reflects oil demand shocks
• while the episodes in the ‘70s and ‘80s can be ascribed to oil supply shocks
• study identifying the oil demand and supply shocks underlying fluctuations in oil prices (deflated by the US CPI)
• allows estimation of the effects of these shocks on the US business cycle
• identification strategy assumes that oil production and price move in opposite directions following a supply shock, while they move in the same direction following a demand shock
• analysis focuses on the real effects of the shocks, disregarding the inflation effect, which depends to a large extent on monetary policy

• A historical decomposition of the oil price time series shows that demand shocks emerge as a main cause underlying the current increase.
• oil supply shocks account for less than half of oil price fluctuations over the last 30 years.
  
• More than half are due to oil demand shocks.
  
• effects of oil demand and supply shocks on the US economy are markedly different
• after a negative oil supply shock (that reduces production and increases the oil price), US industrial production falls with an estimated probability of about 80% one year after the shock
• after an oil demand shock (causing a comparable increase in the price of oil), industrial production increases with an estimated probability of about 70% one year after the shock

• Despite the “negative” production effect stemming from the higher oil price, the booming emerging economies ultimately lead to an increase in US industrial production the majority of the time.
• emergence of new players in the global economy makes some resources scarcer, increasing their cost, but it also offers new trade opportunities
• positive correlation between the price of oil and US industrial production shows that the US economy enjoys a net output gain from these developments
• America’s specialisation in the production of goods not supplied by emerging economies is key to this result
• It is the ability – or lack thereof – to innovate and produce goods that are not easily substitutable that determines whether the new challengers represent a risk or an opportunity for industrialised countries.

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Sustaining growth is the century's big challenge - FT.com

Summary:
Martin Wolf on Jeffrey's Sachs new book. Sach's sets three goals for humanity: elimination of mass poverty, population control and environmental sustainability. First goal, according to Sachs, can only be achieved through a massive aid effort. Wolf is sceptical of effectiveness but believes there is no moral/credible alternative. Biggest question of all, however, is whether global prosperity and economic growth can be maintained. Sachs: requires latter two goals to be achieved. Sach's calls current era the "Anthracene:" world dominated by human activity. Environmental sustainability. Achievable, provided incentives are put in place (less than 2% of global GDP). (Published: 10/06/08)

Notes:

• Jeffrey Sach's new book
• Common Wealth: Economics for a Crowded Planet (Allen Lane, 2008)
  
• arguably, the biggest question confronting humanity in the 21st century:
• Is it possible for the vast mass of humanity to enjoy the living standards of today's high-income countries?
• challenge is stark:
• world real incomes per head could rise 4.5 times by 2050 and world population by 40 per cent
• would mean a sixfold increase in global output, concentrated in the developing world
  
• Is such an increase feasible?
• Jeffrey Sachs: yes and no
• yes and no
• yes, because changes in incentives, technology and social and political institutions would make a benign outcome feasible;
  
• no, because the path we are now on is unsustainable.
  
• Sachs's 3 goals:
1. "the end of extreme poverty by 2025 and improved economic security within the rich countries as well"
• i.e. prosperity for everybody or elimination of mass poverty
  
2. "stabilisation of the world's population at 8bn or below by 2050 through a voluntary reduction of fertility rates";
   
• i.e. population control
  
• related to prosperity because the world's poorest people are burdened by the costs of rearing its largest families
  
3. "sustainable systems of energy, land and resources use that avert the most dangerous trends of climate change, species extinction, and destruction of ecosystems".
   
• i.e. environmental sustainability
  
• only by managing the global commons will it be possible to sustain rising living standards
• to achieve these ends, he recommends
  
• "a new approach to global problem-solving based on co-operation among nations and the dynamism and creativity of the non-governmental sector".
  
• Sach's "anthropocene"
• the era in which human activities dominate the world
  
• ways in which humanity has appropriated the bounty of the earth for its own use (Peter Vitousek, Stanford University):
  
• human beings now exploit 50 per cent of the terrestrial photosynthetic potential;
  
• they have put up a quarter of the carbon dioxide now in the atmosphere;
  
• they use 60 per cent of the accessible river run-off;
  
• they are responsible for 60 per cent of the earth's nitrogen fixation;
  
• they are responsible for a fifth of all plant invasions;
  
• over the past two millennia they have made extinct a quarter of all bird species;
• they have exploited or over-exploited more than half of the world's fisheries.
• how can growth in developing countries catch-up?
• Sachs:
  
• recommendation of an aid-supported, big-push investment strategy, aimed at lifting the world's poorest people, predominantly Africans, out of the poverty traps into which, in his judgment, they have fallen
  
• Martin Wolf: more sceptical than Prof Sachs of the returns to the big-push strategy
  
• In many cases, it will fail.
  
• But: it has to be tried, because there is no morally tolerable or credible alternative.
  
• Agrees, too, that huge efforts must be made to accelerate the fertility decline in the world's poorest countries, albeit on a voluntary basis.
• can economic growth once spread across the planet be sustainable?
• Jeffrey Sachs:
  
• optimistic on direct resource inputs into growth
• his view is that fossil fuel resources, renewable energy and availability of fresh water should be sufficient to support continued growth over the next half century
• would almost certainly require a transition from oil-based energy technologies to ones based on coal and renewables
• energy would, almost certainly, be much more expensive than in the 1985-2000 period, but not prohibitively so
• challenge: to make growth compatible with sustaining the global commons:
• species survival and, above all, climate change
• believes climate change can be dealt with at modest cost
• provided suitable incentives are put in place
• less than 1 per cent of global income
• believes we can achieve all the goals he has set for less than 2 per cent of global incomes
• Martin Wolf:
• One might not be quite as optimistic about the cost of the solutions. But one must recognise the salience of the challenges.
  
• If economic growth halted, conflict among the world's people would risk becoming unmanageable.
  
• If the environmental consequences proved overwhelming, the costs of growth would become unbearable.
  
• We are the masters of our planet now. The great question for the 21st century is whether we can also become masters of ourselves.
  

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Quote of the Day

"Nothing is impossible. Some things are just less likely than others." - Jonathan Winters

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Let the markets solve the energy crisis - FT.com

Summary:
Tony Hayward (BP's Chief Executive) argues that three of myths about the current oil prices are standing in the way of finding the right solutions to energy security and climate change. These myths are: 1) prices are due to speculation; 2) the world is running out of hydrocarbons; 3) we can switch to alternative sources of energy quickly. The solution to the crisis is to let the markets do the work: consumer will temper their consumption in response to high prices, while it will encourage the oil companies to invest in means of increasing output. Governments can help by removing barriers to that investment, improving access to resources and modernising the tax structure businesses work in. (Published: 10/06/08)


Notes

• some myths that need to be put to rest if we are to find the right solutions to big global problems such as energy security and climate change
1. prices are caused by technical factors, e.g. speculation
• may have an impact on the margins
• but: the data clearly show that high prices are really caused by economic fundamentals: supply and demand
  
• demand:
• global energy demand growth in 2007 was above average for the fifth year in a row
• driven by the fastest period of economic growth since the early 1970s
• demand growth is concentrated in those emerging nations that also subsidise fuel prices, such as China, India and - increasingly - the oil-producing nations themselves
• supply:
• energy supply has struggled to respond
• production by the OPEC fell by 350,000 barrels of oil a day last year
• production situation is even more challenging in the market-oriented nations of the OECD (e.g. UK)
  
• many existing basins are maturing fast
• last time oil prices surged to this kind of level, 30 years ago, new production from the North Sea helped bring prices down
• this time, new OECD production will have to come from frontier provinces such as the Canadian oil sands, the Arctic and the deep waters of the Gulf of Mexico
• production in Russia has begun to decline
• fact: until now, the growing demand for oil from China and India in recent years has been met almost barrel for barrel by rising supply from Russia
• access to resources for international oil companies remains very restricted
• resource nationalism is on the rise
• important because it is the oil majors that have some of the best technology for bringing difficult resources on-stream
2. world is running out of hydrocarbons
• world has ample resources:
• more than 40 years of proven oil reserves
• 60 years of natural gas
• 130 years of coal
• problems in bringing on new production are not so much below ground as above it
• not geological but political
  
3. we can switch quickly to a low-carbon economy
• biofuels, wind and solar energy
• growing rapidly
  
• but: comprise a tiny share of global energy production
• <>
• humankind remains dependent on fossil fuels
• coal is the fastest-growing of all the main fuel types
• carbon emissions will continue to rise
• all need to work harder if we are to tackle the threat of climate change.
  
• how to secure the energy needs of the world in the 21st century?
  
• evidence is that where markets are allowed to operate, they do work
• that is the real source of hope for the future
• consumers in Europe and north America are already responding to high prices by moderating demand and beginning to embrace energy efficiency
• where investment is allowed to take place, energy production responds positively
• last year, US oil and natural gas production increased - in the case of oil, for the first time since 1991
• conclusion:
• producers and consumers should be encouraged to respond to the market's signal
• High prices are saying that we need more investment
  
• in energy efficiency, new production, new technology and new energy sources such as wind, solar and nuclear
• in order for that to happen, businesses and governments must act together
• companies know that they need to invest more
• governments must do their bit too
• removing the barriers to that investment
• improving access to resources
  
• modernising the tax structures we work in

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Editor's Take: Time to get paid like a retail banker? - eFinancialCareers

Summary:
Sarah Butcher on why extravagant salaries for investment bankers may stay down, even when trade picks up again. Reasons for this are new regulations that are almost certainly on their way (central bank support for brokers will come at a cost); shareholder pressure (from individual investors as well as sovereign wealth funds) and an increasing number of clients disputing the exorbitant fees charged by investment banks. (Published: 10/06/08)


Notes:

• Investment bankers are paid generously because they make big money for their employers
• in 2006 profits per head in investment banking were 26 times higher than in the average industry, according to McKinsey
• profits now on a downwards trajectory
• pay will fall in 2008
• question is when it will bounce back up
• CEBR: big bonuses will be back in 2011
• but: there are signs that a deeper structural shift is taking place
• 3 bad omens:
1. Regulation
• Fed support for brokerage houses will come at a cost
• Tim Geithner, president of the Federal Reserve Bank of New York
• quoted in the Financial Times complaining that the Fed’s responsibility for financial stability is unmatched by its authority
• "The gap needs to be closed."
• Regulation will almost certainly involve
  
• increased capital requirements
  
• lower leverage,
  
• possibly limits on overnight repo funding
  
• higher capital charges against assets held in trading books
• When good times return, banks will therefore be less able to exploit new opportunities.
  
• Trading profits will be lower as a result.
2. Shareholder power
• investment banks have long traded at low multiples due to uncertainty over the source of their success
• clear now that those multiples are justified (profits now ephemeral)
• extravagant pay in boom years is looking increasingly foolish
• Sovereign wealth funds (SWFs)
  
• could also help suppress frothy bonuses
• will exert an influence behind the scenes
• Brad Hintz: “Sovereign funds are going to go directly to management and ask what’s being done to clean balance sheets, cut expenses and lower headcount.”
3. Fee disputes
• Client mutterings about exorbitant advisory fees are turning into full-scale complaints
• e.g. Bradford & Bingley rights issue debacle
  
• has helped focus minds on whether underwriting fees are justified
• In Asia, where M&A activity is still expanding, a high proportion of companies use their in-house advisors to save cash
• "Investment bankers could soon join their retail banking colleagues in pocketing bonuses that are fractions rather than multiples of salary - and in driving Mondeos rather than Maseratis."

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Quote of the Day

"The beginning of knowledge is the discovery of something we do not understand." - Frank Herbert

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Who’s Afraid of Friedrich Hayek? - Dissent Magazine

Summary:
Jesse Larner reviewing Hayek's Road to Serfdom. Good critique of central planning. Not as extreme a position as that of some of his followers. Hayek's main concern is human freedom. Not dissimilar to some versions of socialism (even libertarian collectivism). Hayek's limitation is that he only considers one type of socialism (Stalin's). Hayek admits that there are economic circumstances in which market forces cannot deliver the optimum result, and when the state may legitimately intervene. (Published: Winter 2008)


Notes:

• Hayek revered at
  
• American Enterprise Institute
• Cato Institute
• National Review
• Weekly Standard
• book: The Road to Serfdom (1944)
  
• 350,000 sold in US
• Hayek nowhere near as extreme as his ideological descendants
• admits that there are a few rare economic circumstances in which market forces cannot deliver the optimum result, and that when these occur, the state may legitimately intervene
• recognizes such a thing as the social interest and will even endorse some limited redistributionalism
• goes so far as to suggest that the state ensure a minimum standard of living
• idea surely to embarrasses people at Cato
• Hayek concerned with human freedom
• in contrast to many modern conservative intellectuals
• writes with passion against class privilege
• not as rational and irrefutable as the right would have it; often eccentric
  
• makes a powerful and far-ranging critique of state control of economic life in Road to Serfdom
• Keynes on Road:
  
• “it is a grand book. . . . Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.”
  
• but followed up his seven famous lines of praise with eighty-four little-known lines in favor of expanded economic planning
• George Orwell on Road:
• “In the negative part of Professor Hayek’s thesis there is a great deal of truth . . . collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamt of.”
• core of Road is an exploration of why a planned, state-managed economy must tend toward totalitarianism
• Road: Economic planning assumes a social goal at which the plan aims.
  
• But whose goal?
  
• In a society of competing interests—a condition that would describe every human society—any goal, any plan, inevitably favors some interests against others.
  
• Who is to say whether the favored interests are “better” for society as a whole?
• There may be consensus in government, or on a delegated planning board, but this only reflects the consensus of immediately interested parties.
• A complex economy is something no person or institution can understand.
  
• But it can generate a sustainable order, with a rational allocation of resources, as individuals respond to their own circumstances and make choices as consumers and entrepreneurs, signaling the subjective value that they place on goods and capital stock through the price mechanism
• One of Hayek’s most original contributions to economic theory:
• insight that economic systems are based primarily on information rather than resources
• To plan an outcome and to direct economic inputs and outputs toward this outcome is to stifle the emergence of a spontaneous, democratic response to the needs of the individuals who make up the community
• a response that will necessarily have winners and losers
• but will not privilege the vision or depend on the limited information of a governing elite
• furthermore, will encourage further experimentation
• responsibility of a government that fosters individual freedom is
  
• to set up transparent and impartial rules so that the legal reaction to personal choices can be predicted for all, regardless of social station;
  
• to tolerate no privileged access to the law;
  
• to provide security; and
  
• to protect contracts and private property
• so long as doing so does not conflict with the very small set of social assumptions on which there truly is broad consensus
• ensure a minimum standard of living (?)
  
• Hayek disapproved of prebendal institutions that increase the wealth and power of an elite at the expense of other members of the class in whose interests the elite is supposedly working, and of society at large
• whether that elite be composed of
  
• union members,
• holders of exclusive concessions,
• hereditary lords
• recognized that institutions that interfere with the price mechanism encourage relations of patronage.
• Hayek understood at least one very big thing:
  
• that the vision of a perfectible society leads inevitably to the gulag
• human societies are jerry-built structures, rickety towers of ad hoc solutions to unforeseen problems.
  
• their development is evolutionary
• as in biological evolution, they do not have natural end-states
• Comprehensive models of how society should work reject the wisdom of solutions that work and deny the legitimacy of individuals who demonstrate anti-orthodox wisdom
• models from Lenin to Mussolini to Mao to Ho to Castro to Qutb deny the very right to exist of individuals who demonstrate anti-orthodox wisdom

• Hayek makes little distinction between socialism, communism, and collectivism
• the only kind of socialism he considers in Road is state-managed, perfect-society utopianism, in which the direction of the economy and all of its inputs and outputs are planned, with the accompanying political and moral degradation that Hayek demonstrates quite convincingly
• this focus on state-led socialism should not be particularly surprising in 1944
• but: other visions of socialism, and other socialistic traditions, were certainly available to Hayek when he wrote
• libertarian, less top-down approaches
• socialisms of Luxembourg, Kropotkin, Proudhon, many others
• the possibility of nontotalitarian models of social democracy, like those that emerged in Europe after the war
• therein lies limitation of Hayek
• Hayek’s ideological descendants often assume, either sincerely or disingenuously, that in a world very different from that of 1944, socialism by definition still means state control of the economy in the interest of perfecting social relations

• Because they understand very little of the thoughtful left, it is hard for many on the right to acknowledge that as a critique of socialism, Hayek’s ideas are limited rather than devastating
• Hayek doesn’t seem to grasp that human beings can exist both as individuals and as members of a society, without necessarily subordinating them to the needs of an imposed social plan
• although he acknowledges that the state can legitimately serve social needs, he contradictorily views collective benefits as incompatible with individual freedom
• Hayek rejects the very concept of social justice
• for much the same reasons that he rejects the arbitrary valuation of labor
• in Hayek’s view there is no way to put an objective value on a grievance or to weigh it against other claims
• because he locates all responsibility and agency only at the level of the individual, he sees no way in which any claim can be generalized to society
• Hayek’s political philosophy recognizes only negative rights.
  
• Positive fulfillment beyond the most basic needs is a matter of individual striving.

• brief survey will show that there are all kinds of imaginative ways in which libertarian collectivism can coexist with capitalism and markets
• e.g. fishing co-operatives
• investors and crew are paid in shares of the catch
• form of economic organization that is found wherever fishing is pursued as a way of life
• has ancient origins.
• corporate stock ownership plans or the limited employee ownership of companies like Avis or United Airlines
• This is a socialism that is not incompatible with democracy, markets, or liberty.
  
• It is not subject to the perfectionist fallacy
• public disbursements in the social interest don't necessarily start us down a slippery slope to the totalitarian state
• Hayek, in suggestively conflating government spending with government planning, pulls a bit of a sleight of hand in Road.
• Democracy turned out to be a lot stronger than Hayek expected.

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Measuring single cell RNA expression levels find considerable transcriptional differences among phenotypically identical cells - BMC Genomics

Summary:
Single cell gene expression profiling. Shift towards understanding similarities and differences between individual cells at the transcriptional and translational level. Gene expression levels may be distorted by sampling effects (copying and amplying mRNA pool). Particularly problematic for low copy number transcripts in single cell samples (random dropouts of low abundance transcripts from amplified single cell cDNA populations). Magnitude of distortion will also depend on transcript abundance distribution. High number of genes with transcript abundances lower then 10-20 and relatively few genes with high transcript. Study finds that the majority (44%) of genes are represented by limited number of mRNA copies (less 25), and this may account for the large cell-to-cell variations in mRNA copy number that we have observed. They also conclude that sampling effects do not impede our ability to extract reliable gene expression profiles from single cells and that significant differences in gene expression levels exist between phenotypically identical cells. (Published: 03/06/08)

Notes:

• Single-cell gene expression profiling provides a powerful tool to analyze the composition of complex cell populations
• many contexts in which the focus is shifting towards understanding the cellular networks of individual cells and the similarities and differences between individual cells at the transcriptional and translational level

• Limitations to the sensitivity and resolution of current technologies for studying gene expression mean that when using samples as small as those generated from single cells we are inevitably faced with amplifying cellular mRNA.
• amplification stage may introduce significant distortions in the measured gene expression levels
• especially for genes with small numbers of transcripts in the material under study
• this distortion is introduced by sampling effects that arise from inefficiencies in the processes of copying and amplifying the original mRNA pool.

• In a complex mRNA population with small absolute numbers of individual transcripts, such as that from a single eukaryotic cell, sampling effects can result in only a subset of the population of starting RNA molecules being represented in the final amplified population

• particularly problematic for low copy number transcripts in single cell samples:
• in the first step of the process, reverse transcription may fail for a small proportion of the original mRNA molecules
• eliminated from subsequent amplification and detection
• For genes with only a small number of transcripts in the starting material, this will create a variable (assuming the failures are random) distortion in the relative representation of transcript abundances in the final experimental sample
• potentially leading to the absence of such low abundance transcripts in the final amplified population.
• first round of PCR amplification will have a similar effect, and subsequent rounds will have effects of diminishing importance, in terms of complete dropout of lowabundance transcripts

• overall effect of random dropouts of low abundance transcripts from amplified single cell cDNA populations would be that random sets of transcripts would be called as absent in different cells

• one estimate is that there is a lower limit of 80 copies of a single mRNA per cell for detection of two-fold differences between samples

• magnitude of the overall sampling effect will, in theory, depend on two factors:
1. the transcript abundance distribution which is the variation of transcript number among genes being expressed in a cell (and in particular the relative numbers of genes with low transcript numbers);
2. and the copying and amplification efficiencies for conversion of the original population of mRNA molecules into DNA or RNA detectable by the expression profiling platform in use

• The copying and amplification efficiencies can be estimated from experimental data. However, the estimation of the transcript abundance distribution poses two distinct problems: knowing the form of the distribution; and evaluating the shape and scale parameters for the distribution.

• conflicting reports of the transcript abundance distribution in a typical eukaryotic cell
• ranging from a distribution with a median value for mRNA transcript copies per gene of less then one
  
• to a distribution with a median of approximately 100 copies

• difficulty is that, in general, the transcript abundance distributions of real single cells are not known but are inferred from population measurements

• Based on published data, a simple approximation is that the transcript abundance distribution is log-log-normal, as this distribution captures certain key features of our current understanding of the single cell transcript abundance distribution:
• there is a high number of genes with transcript abundances lower then 10-20 and relatively few genes with high transcript

Discussion

• The main findings of this study are that the contribution of sampling effects to observed single cell expression data is likely to be minor and that substantial transcriptional differences exist between phenotypically identical cells.
• indicates that one can generate reliable gene expression profiles from single cells using microarrays to interrogate globally amplified RNA populations
• However, the considerable variation in gene expression levels between similar cells is likely to dictate that relatively high numbers of cells would need to be analysed to robustly identify significant and consistent differences in gene expression between cell populations.
• Alternatively, these findings argue that single cell expression profiling will be particularly useful for identifying absolute differences in gene expression between cell types.

• A second implication of this study is that one important limit on the use of amplification techniques for single cell expression profiling is that if amplification efficiency drops significantly below 90% then the sampling effect may considerably distort the measured expression profile
• One promising technique for mRNA amplification from individual cells, which combines global exponential and linear amplification, has been shown to produce very low levels of noise and highly reproducible data and may limit the significance of sampling effects when profiling rare transcripts [22].

• Our results demonstrate that the actual transcript abundance distribution for the tested cell type has a peak at approximately 5-20 copies per gene.
• We recognize that our experiments are based on a particular type of mouse neural stem cell, but in the absence of any reason to suppose that the transcript distributions of most other cell types are radically different from this, we believe the result should generally apply to expression experiments performed on a wide range of cell types.
• Although our method did not allow us to discriminate between different models of overall gene and transcript numbers in the cell, we believe it strongly suggests that more then 85% of transcripts are present in relatively low copy numbers (less then 100 copies per cell).

• Insight into the variability of the gene expression profiles of single cells has been obtained using a number of technical approaches, incuding microarray analysis following linear T7-based amplification [16, 25], multiplexed FISH (fluorescence in situ hybridization) [26] and quantitative PCR [27].

• Transcriptional bursting has been observed in Escherichia coli, in which protein levels have very little correlation with mRNA levels, particularly for younger cells [28], as well as Dictyostelium [29] and mammalian cells [30].
  

• Overall, those findings are consistent with a model for cellular phenotypes that are underwritten by transcriptional programs that appear inherently noisy when total cellular transcript levels are measured at the single cell level.
• It has been suggested that because in the individual cell the transcriptional machinery is controlled by a relatively small number of transcription factors, it may result in stochastic behavior in gene activity.

Conclusions

• Our current results revealed that the majority (44%) of genes are represented by limited number of mRNA copies (less 25), and this may account for the large cell-to-cell variations in mRNA copy number that we have observed.
• also concluded that sampling effects do not impede our ability to extract reliable gene expression profiles from single cells and that significant differences in gene expression levels exist between phenotypically identical cells

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Globalisation is good - The Guardian

Summary:
Peter Mandelson defending globalisation in response to the protectionist rhetoric heard during the presidential primaries. Feeling is that globalisation is out of countrol, no longer something we do but something that is done to us. But open markets and economic integration are far the best tool we have for increasing global economic welfare. "Only stable, cooperating states can manage the coming squeeze on resources."Globalisation and active welfare states are not incompatible. "Protective states do not have to be protectionist ones." (Published: 09/06/08)


Notes:

• The Atlantic world is no longer the centre of the economic world, because the economic world no longer has a centre.
• many Americans see global economic change in zero-sum terms
• as suggested by the protectionist and anti-trade rhetoric evident in the presidential primaries
• Economic inequality is reduced between countries, but widens within our own societies.
• Globalisation is no longer something we do, it is something that others do to us.

• "Nobody would disagree that globalisation has its dark side. But the open markets and economic integration that drive it are still by far the best tool we have for increasing global economic welfare. That is an essential contribution to global stability. Only stable, cooperating states can manage the coming squeeze on resources."
  

• US and Europe should recognise that in an interdependent world, they have nothing to gain from a stalling of growth in the developing world
• rather than worry about a relative decline in their economic weight, or retreat from international engagement
• should focus on renewing the global institutions needed to hold this new mix of states together through difficult debates on climate change, energy security and trade
• have to adapt these institutions - the UN, the WTO, the IMF - to give the emerging economies a chance not just to exercise their rights, but to assume their responsibilities.
  

• at the moment when we most need the tools of internationalism, our own politics has begun pushing in the other direction
• economic nationalism is the symptom of a deeper problem.
• we can't shape globalisation without tackling the causes of protectionism.
• means tackling our own economic insecurity and inequality.
  

• entrenched political myth that globalisation and active welfare states are incompatible
• OECD data for the last 20 years: strong welfare states have equipped countries for globalisation much better than weak ones.
• states that have encouraged labour market flexibility, high levels of education and retraining, and helped women and older people stay in the workforce
• Progressives in the US and Europe need to revive the New Deal case for governments that help people engage with open economies, rather than leave them exposed
• Protective states do not have to be protectionist ones.
  

• Gordon Brown has never erred in rejecting the false comforts of populism and setting out a positive politics of globalisation
• sees globalisation as part of the solution rather than part of the problem
• world needs to hear the same message from President Obama or McCain
  

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Quote of the Day

"Only lend money to those who do not need it" - first rule of banking

Another way to put it is this: borrowing should only be undertaken to improve returns, not to cover basic needs. Optimally, then, borrowing should be a choice, not a necessity and bankers should act accordingly.

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Free the gene genie - FT.com

Summary:
OpEd in the FT arguing that politicians in industrialised countries and green groups can no longer indulge in anti-GM rethoric. World must employ all resources to raise crop yields without using more energy and chemicals. Benefits from GM food are great enough and the food crisis severe enough to make use of them. Friendlier attitude towards GM by the EU is essential for the technology's adoption in Africa. GM on its own cannot transform the world food outlook. Requires overcoming structural deficiencies of agriculture in developing countries. (Published: 07/06/08)

Notes:

• world population is growing faster than agricultural production
• this for the first time in two generations
• food shortages and rising prices the inevitable outcome
• world must employ all the resources of science and technology, including genetic modification, to raise crop yields without using more energy and chemicals
• politicians in industrialised countries with strong environmental lobbies (i.e. Europe)
• could indulge in anti-GM rhetoric as long as most crops were in surplus
• wasn't worth taking any risks by introducing GM crops
• would benefit companies such as Monsanto (and might help farmers) but would do nothing for consumers
• can no longer afford the luxury of dismissing GM
• global evidence of a dozen years growing commercial GM crops shows an overall net benefit, in higher yields and lower inputs
• isolated problems with crop management but no known effects on human health and little impact on biodiversity
• Other changes in agriculture have a far greater potential for environmental damage than genetic modification.
  
• e.g. new cropping and cultivation methods,
• but the world must continue to monitor for unintended consequences from GM crops
• plant metabolism is so complex that scientists cannot predict fully what foreign genes may do
• research is leading to a second generation of GM crops
• with added traits such as drought and salt tolerance, better nutritional content and improved flavour
• will deliver more direct consumer benefits than the first-generation crops
• just kill pests or resist herbicides
• friendlier attitude to GM by the European Union is essential for the technology's adoption in regions such as Africa
• African governments often take their lead on regulatory issues from Europe
• as long as the EU remains hostile, some countries will be reluctant to "contaminate" their farmland with GM crops
• even with government support, introducing appropriate biotech plants to the developing world will be a formidable problem
• scientists will have to listen to poor farmers and develop the crops they want
  
• essential that outsiders do not impose new varieties that turn out to be unsuited to local conditions or prevent farmers saving and planting their own seeds in the traditional way
• GM on its own cannot transform the world food outlook
• overcoming the structural deficiencies of agriculture in developing countries would do more to raise yields
• from poor soil management to inadequate storage facilities
• But: the additional benefits of biotech plants are great enough - and the threat of a global food crisis serious enough - to give them a warm welcome worldwide

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Biotechnology seen as a key to solving food crisis - Reuters

Summary:
Ed Schafer (US Agriculture Secretary) and others at UN Food Summit calling for biotechnology, including genetically-modified organisms (GMOs), to help produce more food by raising yields and producing crops in developing nations that are resistant to disease, pests and environmental damage due to climate change. (Published: 03/06/08)

Notes:

• summit on seeking ways to combat high food prices when climate change may aggravate shortages
  
• Schafer: "Biotechnology is one of the most promising tools for improving the productivity of agriculture and increasing the incomes of the rural poor. We are convinced of the benefits it offers to developing countries and small farmers"
• green groups and Frankenfoods
• green groups say genetically-engineered crops threaten biodiversity
  
• many European consumers are wary of eating products dubbed by critics as "Frankenfoods"
• Schafer: biotechnology, including genetically-modified organisms (GMOs), could help produce more food by raising yields and producing crops in developing nations that are resistant to disease and pests
• Philippine Agriculture Minister Arthur Yap:
  
• "Genetic engineering offers long-term solutions to some of our major crop production problems"
  
• But: not a panacea for all of his country's agricultural problems.
• Progress being made in the Philippines included research into rice and coconuts resistant to disease
• "We're also working on virus-resistant papaya, papaya hybrids with a longer shelf life that should be ready for market in 2009"
• U.N. Climate Panel:
• Climate change could aggravate production around the world with more droughts, floods, disruptions to monsoons and rising sea levels
• In Africa alone, 250 million people could face extra stress on water supplies by 2020.
• Burkina Faso Agriculture Minister Laurent Sedogo
• country has worked with U.S. agriculture group Monsanto to battle pests that blighted the cotton crop
• "We are about to plant 15,000 hectares" of a new crop that was resistant to pests
• would also cut down on the use of pesticides that could damage the health of farmers
• World Bank and aid agencies
  
• estimate that soaring food prices could push as many as 100 million more people into hunger.
  
• About 850 million are already hungry.
• C.S. Karim, an adviser to Bangladesh's agriculture ministry
• A cyclone last year "is a wake-up call for all of us. It shows the vulnerability of Bangladesh. "
• Bangladesh is going ahead with efforts to make crops able to survive floods and more salinity in the soil

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Quote of the Day

"Character is what you have left when you've lost everything you can lose." - Evan Esar

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Nassim Nicholas Taleb: the prophet of boom and doom - The Times

Summary:
Interview with Nassim Nicholas Taleb, author of "The Black Swan: The Impact of the Highly Improbable." Problem with probability theory: Fat Tony vs. Dr. John. On buying "out-of-the-money" options: when markets rise, they rise by small amounts, when they fall, they fall dramatically. Mediocristan vs. Extremistan. On banks and failing of Long Term Capital Management. Importance of religion and being ecologically conservative. Investment strategy: 90% in safest government securities, 10% high risk. (Published: 01/06/08)

Notes:

• most economists, and almost all bankers, are subhuman and very, very dangerous
• live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems
• in December lectured bankers at Société Générale
• told them they were sitting on a mountain of risks – a menagerie of black swans
• didn’t believe him
• six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.
• "Clothes matter; they send signals"
• risk management
• facing up to those aspects of randomness about which something can be done
• “Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”
• "Take away religion, and people start believing in nationalism, which has killed far more people."
  
• Religion as way of handling uncertainty
• lowers blood pressure
• thinks religious people take fewer financial risks
• obsessed with probability
• Brooklyn-born Fat Tony and academically inclined Dr John: two of Taleb’s creations
• You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time?
  
• Dr John gives the answer drummed into the heads of every statistic student: 50/50.
  
• Fat Tony says the chances are no more than 1%.
  
• “You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”
• chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe.
  
• It is far, far more likely that somebody is cheating.
  
• Fat Tony wins. Dr John is the sucker
• 1985: France, Germany, Japan, Britain and America signed an agreement to push down the value of the dollar
• held options that had cost him almost nothing and that bet on the dollar’s decline
• 1987 – Black Monday
• options were suddently worth a fortune
• became obsessed with buying “out of the money” options
• was sitting on a pile of out-of-the-money eurodollar options
• realised that when markets rise they tend to rise by small amounts, but when they fall – usually hit by a black swan – they fall a long way.
• on fall of Long-Term Capital Management
• hedge fund set up in 1994 by, among others, Myron Scholes and Robert C Merton
• joint winners of the 1997 Nobel prize in economics
• had grandest of all possible credentials and used the most sophisticated academic theories of portfolio management
• went bust in 1998 and, because it had positions worth $1.25 trillion outstanding, it almost took the financial system down with it
• modern portfolio theory had not accounted for the black swan, the Russian financial crisis of that year
• Mediocristan vs. Extremistan
• Mediocristan: where early humans lived
• Most events happened within a narrow range of probabilities – within the bell-curve distribution still taught to statistics students.
• we don’t live there any more.
• Extremistan: world we live in
• created world we don't understand
  
• black swans proliferate, winners tend to take all and the rest get nothing
• our systems are complex but over-efficient
• no redundancy, so a black swan strikes everybody at once
• banking system is the worst of all
• banks make money from two sources
• they take interest on current accounts and charges for services
• this is easy, safe money
• but they also take risks, big risks, with the whole panoply of loans, mortgages, derivatives and any other weird scam they can dream up.
  
• “Banks have never made a penny out of this, not a penny. They do well for a while and then lose it all in a big crash.”
• increased economic concentration has raised our vulnerability to natural disasters
• Kobe earthquake of 1995 cost a lot more than the Tokyo earthquake of 1923
• countless other ways in which we have built a world ruled by black swans – some good but mostly bad
• believes in tinkering
• Trial and error will save us from ourselves because they capture benign black swans
• three big inventions of our time: lasers, computers and the internet
• all produced by tinkering and none of them ended up doing what their inventors intended them to do
  all were black swans
• big hope for the world is that, as we tinker, we have a capacity for choosing the best outcomes
• good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures
• insulates you from bad black swans and exposes you to the possibility of good ones
• Your smallest investment could go “convex” – explode – and make you rich
• High-tech companies are the best
• The downside risk is low if you get in at the start and the upside very high
• Banks are the worst – all the risk is downside
• Don’t be tempted to play the stock market
• “If people knew the risks they’d never invest.”
• We should be mistrustful of knowledge. It is bad for us.
  
• Give a bookie 10 pieces of information about a race and he’ll pick his horses.
  
• Give him 50 and his picks will be no better, but he will, fatally, be more confident.
• We should be ecologically conservative:
• global warming may or may not be happening but why pollute the planet?
  
• "Taleb's top life tips"
1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
2. Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.
3. It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.
4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.
5. Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.
6. Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
   
7. Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).
   
8. Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.
   
9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.
   
10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.
    

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The euro: how happy a birthday? - FT.com

Summary:
Mike Wickens (York). Argues introduction of euro has not achieved its goals. Inflation rates have not diverged, but ouput and inflation are not converging. Problem with a one-size-fits-all policy. In part due to inflexibility in fiscal policy imposed on members, in part due lack of labour mobility. Single market legislation has produced single market in goods and capital, but little progress in single labour market. Main difference with US or regions within e.g. UK. Need single labour market. But movement of labour in Europe causes tensions. Completing single labour market controversial and may deter countries like UK from joining. (Published: 05/06/08)

Notes:

• ECB has maintained average eurozone inflation between 1.6 and 2.5 per cent since 2000
• growth of prices and output
• for EU as a whole: both about 15%
  
• but: wide discrepancy among member states
• Ireland: 31% and 44%
• Germany: 5% and 11%
• UK: 18% and 20%
• the higher a country's inflation on joining the euro, the greater has been the price level rise thereafter
• inflation convergence observed before the euro has not therefore continued since
• How much of this is due to the "one-size-fits-all" monetary policy?
• setting a single nominal interest rate for all eurozone countries implies that high inflation countries have a low - even a negative - real interest rate, while low inflation countries have a higher - and positive - real interest rate
• the lower the real interest rate, the higher is economic activity and hence inflation
• therefore, we would expect output levels and inflation rates to diverge
• But as inflation rates have not diverged either, this explanation cannot be the whole story.
• Having a more rapidly growing price level implies a loss of competitiveness.
  
• This, together with higher output, may be expected to raise exports from lower to higher inflation countries, thereby reducing economic activity in high-inflation countries and increasing it in low inflation countries.
  
• conventional view is that these effects will be strong enough to act as an automatic corrective to the divergence otherwise inherent in having a common monetary policy
• has not happened
• may have prevented inflation rates from diverging, but it has not resulted in inflation and output growth rates converging as required in a successful currency union
• not fault of ECB: remit is aggregate euro area inflation, not that in member countries
• what can be done?
  
• short-term and long-term solution
• short-term: countries need more flexibility in the conduct of their fiscal policy
• only macro-economic policy instrument left to stabilise their economies in the short term is fiscal policy
• control of their interest rate and their exchange rate given up
• need ability to adopt different rules from those in the stability and growth pact
• correct framework for fiscal policy is to tax-finance permanent expenditures and debt-finance temporary expenditures
• non-cyclical expenditures, such as those on health and education, should be financed through taxation, but additional cyclical expenditures, like unemployment benefits, should be debt-financed
• no matter the size of deficits in business cycle slowdowns, countries should be allowed to finance them through debt
  
• provided the additional debt is paid off during the good times
  
• long-term: raising productivity and completing the single market
• more difficult to achieve and more controversial
• Improving productivity requires using the eurozone's advantages in human capital to innovate in new products and processes.
  
• This must be coupled with moving out of economic activities in which competitiveness has been lost and into new activities that give a temporary monopoly that is exploitable in world markets which would result in benefits to all countries.
• single market legislation has helped produce a single market in goods and capital, but there is little or no progress in creating a single labour market
• problems brought about by a one-size-fits-all monetary policy also apply to the states of the US and the regions of the UK but, because of labour mobility, are manageable
• recent tensions brought about by recent movements of labour in Europe show that completing a single labour market would be highly controversial and might further deter the UK and other countries from joining
  

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Summary only...

Act now to prick the oil price bubble - FT.com

Summary:
Meghnad Desai (LSE) argues that high price of oil is due a speculative bubble, not related to supply and demand. No macro-economic factors to explain sharp rise in prices. Index and pension funds treating oil as an asset rather than commodity, with no intention of using it. Market not driven by supply and demand but simply by price expectations. Needs to be made less profitable in order to discourage this. Up to Group of Eight leading industrialised nations leaders to urge Nymex to implement this policy. (Published: 05/06/08)


Notes:

• latest price rise has baffled many: what has happened to supply and demand to cause such a steep and sudden price rise?
• Gordon Brown: "the cause is clear: growing demand and too little supply"
• China and India are buying more oil.
  
• Costs of exploration and extraction are going up.
  
• Nigeria and Venezuela are causing anxieties about supply.
• But: none of this is new
• Nothing has happened in the real oil economy to justify such a sharp and steep rise in its price.
• latest sharp upsurge in the price of oil most likely a speculative bubble rather than an outcome of market fundamentals
• Soros: commodity index funds treating oil as an asset rather than a commodity to be bought and sold for use, thus creating a bubble
• index funds and pension funds are investing in oil futures, not for direct use but as financial assets for profit
• index funds and pension funds are neither buying oil nor selling it: they are passive investors in commodities
• have invested $260bn (C169bn, GBP133bn) in commodity markets, compared with $13bn just five years ago. Much of this money is in oil.
• this paper market is not driven by the pressures on demand and supply but entirely by price expectations
  
• global economy is likely to be forced into a serious crisis if we do not explore the possibility that this is a bubble that needs to be burst quickly
• best way to counter speculation is to make it less profitable.
• protect the regular traders in the real oil economy
• ie. those who intend to close their positions by making or taking delivery of oil)
• charge them a lower margin than those who have no intention of plying the oil trade
• purely financial traders must be made to pay a proper price for their speculation
• can be done simply by increasing the margin that they have to put down to trade as open interest, from the current 7 per cent to about 50 per cent
• up to the Group of Eight leading industrialised nations leaders to urge Nymex to implement this policy
• no need for western governments to go down on their knees to Arab oil sheikhs, or to ration oil to the increasingly cash-strapped and angry consumers
  

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Summary only...

Venturing Into Startup Life - Genome Technology

Summary:
VCs talking about current investment climate in life sciences (IPOs vs M&A) and describing investment approach and requirements. Need for big ideas, IP and strong management team. Also includes some business plan tips. (Published: 06/08)

Notes:

• investing in life sciences has changed over last few years
• used to be enough to have IP on a gene or a new method to form a company
• no longer sufficient
• venture funds trying to lessen risk in a less certain market
• big movement away from funding academic innovation
• funds pursuing lower risk approaches
• eg. spin-out drugs from pharma companies
• yet despite these changes, VCs still looking for the next great idea
• VC capital attracted by life sciences has increased:
• 2006: $7.6b; 2007: $9.1b
• as long as there's an exit strategy, interest will continue
• life sciences IPO market has been pretty bad
  
• 2007(Q1): 7; 2008(Q1): 4
• M&A market more interesting
• pharmaceutical and medical device industries continue to acquire small companies and are paying pretty strong prices for them
  
• question about how long this will continue
• if it starts to drop of, then there's really rough times ahead for biotech industry
• VC requirements
  
• big ideas
• not incremental approaches
• got to really open a new way of thinking about a problem
• risky is OK, just has to be very bold
• intellectual property
• idea has to be able to be covered by IP rights
• want a technology that company can protect
  
• so investors can recoup or expand upon funds put into creating the product
• VCs can help out with protection
• strength of management team
• lot of energy, creativity and skill
  
• some early stage VCs will set a management team up
  
• VC approach
• start
  
• sources: looking at business plans, scouring literature, contacts
• some begin with an unmet need and subsequently hunt for a technology
• some start with thinking about the type of company they might want to invest in
  
• getting going
• from idea to point where more funding is needed: ~1.5 years
• first step: talking science
• learning about the science for months
• educating oneselves, with company's help, about:
  
• specifics of the technology in excruciating detail
• company's prospects as a business
• what company is going to require in order to be succesful
• building financial model
• tries to take needs and future plans of the potential customers into account (e.g. pharmaceutical or medical device companies)
• helps investors assess how much funding the company will need
• molding the mission of the company
• taking scope of the whole field, especially competitors
• company should ideally have a lot of different projects going on that are independent to spread the risk
• need to think big about the opporunity
• people
  
• VC will find CEO and others to run the company
• investors become members of the board
• match-making and recruiting people to run the company
• business plan best practices
• being bold
• need to think big; academics often think too small
• has to be a big thing
• cannot be incremental
• assembling the best minds
• big names in management section, if possible
• big impact on investors if the leading people in the world are somehow involved
• thinking broadly
• take in full scope when describing market and competitive environment
• many startup don't understand the full range of competitors
• place yourself in shoes of potential customers:
• what would they want and where else can they go to fulfill that need
• don't define competition too narrowly
• being realistic
• when comparing company with other succesful companies, don't focus solely on the exceptional successes
• people need to understand what is more likely the average outcome for a company
• build a model based on hitting the average outcome as opposed to hitting the exceptional outcome

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Quote of the Day

"Public speaking is the art of diluting a two-minute idea with a two-hour vocabulary." - Evan Esar

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A party pooper’s guide to financial stability - FT.com

Summary:
Charles Goodhart (LSE) and Avinash Persaud proposing two devices to help regulators and supervisors play a useful counter-cyclical role: 1) amending supervisors' pay (rather than bankers directly); and a "simple framework" building on Basel II by raising capital adequacy requirements by a ratio linked to the growth of the value of bank assets, bank by bank. Should moderate excessive lending and build up reserves during booms. (Published: 04/06/08)


Notes:

• Almost 12 months on from the start of the credit crunch and eight months since the run on the Northern Rock bank
• developing consensus on what is to be done to make the financial system less vulnerable to crisis:
• more disclosure, more regulation and reform of bankers’ compensation
• largely the same consensus we reach after every crisis, ultimately to little effect
• where there is a will there's a way?
• financial supervisors had the wherewithal to do something about the party in the financial sector that was played out in full view of everyone between 2003 and 2006
• they did not have the will to do it
• William McChesney Martin (former chairman of fed): authorities should “re­move the punch bowl before the party gets going”
• but: parties are fun
• difficult for underpaid supervisors to squeeze past and take away the bowl of punch when there are:
• powerful and rich lenders, borrowers with seemingly worthy projects and politicians taking credit for the good times
• some argue it is not regulators and supervisors but monetary policy committees that should perform the role of official party pooper
• but: interest rates changes alone cannot deliver both price and financial stability:
• asset bubbles often follow periods of price stability (US 1929; Japan 1990s; Asia 1997-98; subprime mortgages 2007-08).
  
• moreover, the level of interest rates required to prick a bubble might eviscerate the rest of the economy
• proposing two devices to strengthen the backbones of regulators and supervisors
1. amend supervisors’ pay
• easier than aligning bankers’ bonuses to longer-term outcomes
• large annual bonuses for supervisors that are withheld for five years and paid conditionally on successful supervision during this period
• will be more willing to remove the punch in time – thereby limiting bankers’ bonuses in the first place
• need independent assessment of supervisory success to avoid excessive regulatory zeal
  
2. raise Basel II capital adequacy requirements by a ratio linked to the growth of the value of bank assets
• focusing on value will help lessen the pro-cyclicality of fair value, mark-to-market accounting and value-at-risk models.
• each bank would have a basic allowance of asset growth
• would be linked to
  
• the inflation target
• the long-run economic growth rate, and
  
• some margin for structural changes in the bank lending/gross domestic product ratio
• this formulation enables regulators’ financial stability committees better to link micro to macro stability
• allowances would be different for small operations
• growth in the value of bank assets would be measured as a weighted average of annual growth
• to emphasise more recent activity, exponential weights can be used
• growth above the basic allowance over the past 12 months would have a 50 per cent weight, growth over the preceding year would have a 25 per cent weight and so forth until 100 per cent is approximated.
  
• regulatory capital adequacy requirements would be raised by 0.33 per cent for each 1 per cent excess growth in bank asset values.
  
• If a bank grew its assets at a rate of 21 per cent above its allowance, its minimum capital requirement would rise from, say, 8 per cent to 15 per cent.
• purpose is to moderate excessive lending and build up reserves during booms
• should help supervisors act as a countervailing force to powerful procyclical forces
• proposal is evolutionary, since it builds on Basel II and it provides a simple, transparent rule for supervisors to play a useful counter-cyclical role
• but: they must be given better incentives to do so
• have already seen the deleterious but powerful effects of banking bonuses
• Why not use financial incentives for more socially useful behaviour

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Government Sponsored Versus Private Venture Capital: Canadian Evidence - NBER Working Paper

Summary:
Paper investigating the relative performance of enterprises backed by government-sponsored venture capitalists and private venture capitalists. Results indicate that enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation and innovation. Arises in part from a selection effect and in part from a treatment effect. Results cast doubt on the desirability of certain government interventions in the venture capital market. (Published: 05/08)


Notes:

• Only abstract; paper requires purchasing.
• Study focuses on a broader set of public policy objectives:
  
• value-creation, innovation, and competition
• Enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria:
• value-creation: as measured by the likelihood and size of IPOs and M&As
• innovation: as measured by patents
• Cause 1: selection effect
• private venture capitalists have a higher quality threshold for investment than subsidized venture capitalists
• Cause 2: treatment effect
• subsidized venture capitalists crowd out private investment
• subsidized venture capitalists provide less effective mentoring and other value-added skills

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EU Backs US$1.5 Billion Research Program to Develop Hydrogen Cars - FuelCell Today

Summary:
European Union approved a 940 million-euro ($1.5 billion) research initiative to spur the development of hydrogen-powered cars, seeking to reduce air pollution and reliance on imported oil. The program aims to accelerate the commercialization of hydrogen and fuel-cell technologies, allowing "commercial takeoff" between 2010 and 2020. FuelCell Today Newsletter: "More than ever, funding for fuel cells is being made available by governments worldwide. The opportunity to bridge the gap between research into and commercialisation of fuel cell technology has perhaps never been greater." (Published: 02/06/08)


Notes:

• Joint Technology Initiative (JTI)
  
• 940 million-euro ($1.5 billion) research initiative to spur the development of hydrogen-powered cars
• 50 percent financed by companies including Royal Dutch Shell Plc and Bayerische Motoren Werke AG and 50 percent funded by the EU over six years
• aims to accelerate the commercialization of hydrogen and fuel-cell technologies, allowing "commercial takeoff" between 2010 and 2020
• Existing market barriers include
  
• the cost and durability of fuel cells,
  
• the sustainable production of hydrogen
  
• the safe distribution and storage of hydrogen.
  
• The JTI aims to reduce time to market for hydrogen and fuel cells technologies by between 2 and 5 years
• quicker impact on improving energy efficiency, security of supply, pollution, and on improving potential for reducing greenhouse gases
• EU is creating public-private partnerships in research and development to help raise R&D spending to 3 percent of gross domestic product from 1.8 percent and bridge the gap with the U.S. and Japan
• In the UK, the Technology Strategy Board has allocated an indicative amount of £4 million to fund highly innovative collaborative research proposals on components and materials for low impact buildings, something that fuel cells could be a good fit for
• FuelCell Today Newsletter: "More than ever, funding for fuel cells is being made available by governments worldwide. The opportunity to bridge the gap between research into and commercialisation of fuel cell technology has perhaps never been greater."
• See also: JTI website
  

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