Damien Hirst touted his art auction held on Monday and Tuesday in London as a revolution. Many did find it impressive: new art could be sold 'directly' to the public, without penny-grabbing art dealing in between.
Others weren't so sure. Art critic Robert Hughes, always there to lob the odd grenade of criticism, called it 'persiflage' to suggest that Hirst had somehow expunged the art dealer from the art selling equation. Christie's and Sotheby's, he argued in the Guardian (13 September), had filled the role of private dealer in any case. What are we to take away from the event that earned this 'pirate' of an artist some 111 million pounds?
Let Hughes sum it up: 'If there is anything special about this event, it lies in the extreme disproportion between Hirst's expected prices and his actual talent. Hirst is basically a pirate, and his skill is shown by the way in which he managed to bluff so many art-related people.'
More on this at Crikey, in their 18 September 2008 issue:
Damien Hirst finds a bull market without dealers
18 September 2008
Binoy Kampmark, Commonwealth Scholar at Selwyn College, Cambridge and lecturer in modern history at the University of Queensland, writes:
Damien Hirst specializes in gnomic incantations about his work. He produces what art critic Robert Hughes has termed "absurd" and "tacky commodities." Take his The Physical Impossibility of Death in the Mind of Someone Living -- for Hughes, a tacky, even wacky marine organism, "the world’s most over-rated" shark.
Perhaps one of the most recognisable figures of the art world, Hirst has now taken his war against those commissioning wizards, the art dealers. On Monday, his broadsides were fired at Sotheby’s (the auction was titled "Beautiful Inside my Head Forever") in London, where the auction house, for the first time, sold new work. There were 223 Hirst lots to be gotten through over two days, and they sold direct to eager punters. The dealers had to look on from the sidelines.
Hirst’s process of exiling the art dealer was modern in another sense. As Jackie Wullschlager of the Financial Times pointed out, his method of "disintermediation" was much like the "way bands sell music, or companies sell stocks, online rather than through record companies and brokers."
It was always a risk, and the global art dealership were hoping Hirst’s gamble would reap ruinous returns. Some art critics were probably wishing the same. This was far from the case -- the art market, if nothing else, gave us Hirst and this collusion with commercial bling. The Sotheby’s auction fetched a handsome £111 million. The Golden Calf, a dead bull suspended in trademark formaldehyde, equipped with golden horns and hooves in gold placed frame, alone sold for £10.3 million.
This was Hirst’s secret: he may be world renowned, but he is not as renowned as Sotheby’s. Most passers-by wouldn’t be able to name a single work by the man, but they would be able to tell you the name of a known auction house. It’s all in the branding. Attributes, or the self-defining spiritual nature of the work in question, are secondary.
Hirst did two things: he struck a blow at the conventional relationship between artist (at least known ones) and dealers of their work; and reaffirmed the commercial force of his name. We might get into more trouble if we assess the artistic merit of what he sold, though the auctioneers had to do their own share of branding. Despite having little clue, one auctioneer on Monday intoned knowingly that, "The quality of the work has really shone through." The usual meaningless terms followed: "exquisite", "powerful". The list goes on. Hirst couldn’t care less. He likes formaldehyde. And cows and sharks.
Art works such as Hirst’s are not merely grand spectacles popularized by dumbfounded critics -- they are also assets. The global art market is a huge investment -- more so than a collector’s aesthetic pursuit. When the oil assets deplete, Hirst’s formaldehyde-drenched creatures will take the tab and cover the running expenses of the rich, should they ever need them. Russian and Ukrainian oligarchs know this and are rapidly accumulating works of ‘art’ like blue chip stocks.
Hirst has been labeled a clown, a joker rather than a deep-thinking tormented type who is likely to disintegrate in self-doubt and drive off a cliff. But he is the one calling everyone else’s bluff. Andy Warhol, prophet of artistic shallowness, may well have been right: "art is what you can get way with".
Saturday, September 20, 2008
Thursday, September 18, 2008
Dreaming of an Asian EU
An Asian version of the European Union? A strange proposition? When Kevin Rudd became Australian Prime Minister, he enthusiastically bandied about the idea with colleagues and members of state. He hasn't been alone in this, and there is much to suggest that his ideas have been gleaned from various other commentators on the subject.
A discussion about the prospects of this idea and more takes place in an article in the respected Diplomat, a special Web Feature for Aug 08 :
Dreaming of an Asian EU
Binoy Kampmark 01-Aug-2008
It is hard to envisage: a seamless political and economic area in the Asia-Pacific region, where mobility is assured and military and trade interests are bound by genuine agreement. In short, something akin to the European Union, an order established by the Maastricht Treaty. The features: a common market, shared principles and modified sovereignty; where freedom of movement in people, capital, goods and services is guaranteed.
Australia’s new Prime Minister, Kevin Rudd, is happy to consider a rough model along such lines. His target year for establishing it is 2020. On June 4, a keen Rudd sketched a few ideas for the Asia Society Australasia Centre in Sydney.
First, the necessary doffing of the hat to an old ally. “Our alliance with the United States is the first pillar of our foreign policy and the strategic bedrock of our foreign and security policy.”
Second, a need to bolster the United Nations, a body mauled and scorned by the governments of the Coalition of the Willing in their invasion of Iraq. Third, the importance of providing some directions on “the regional architecture of the wider region.”
So, what do we have on the cards? An Asia-Pacific union of sorts. Rudd’s speech on June 4 to the Asia Society Australasia Centre provides a few clues. “The European Union does not represent an identikit model of what we should seek to develop in the Asia-Pacific, but what we can learn from Europe is this – it is necessary to take the first step.” Rudd envisages a body that facilitates trade, responding rapidly to crises such as threats of terrorism, and natural disasters, a multilateral body designed to maintain regional security.
Whether this remains fluff, a massaging of moral imperatives in the face of climate change and economic obstacles, is an open question. The political visionaries are churning out material at speed from the planning rooms in Canberra, but the detail is threadbare. Nonetheless, Rudd and his advisors may be facing a reality pointed out by international relations theorist Barry Buzan in an issue of the Pacific Review in 2003. According to Buzan, there is “a distinct and longstanding regional structure in East Asia that is of at least equal importance to the global level shaping of the region’s security dynamics.”
There is little doubt that Rudd has identified a movement at work. A new regional architecture has been discussed for some time. The US considered various initiatives in the early post-Cold War period such as an Asian version of the Organisation for Security and Cooperation in Europe or an Asian NATO.
Dramatic shifts in regional relationships in the East Asian and Southeast Asian region have recently taken place. The economic leg is kicking with vigour: an East Asian Economic Community, an East Asian FTA and an Asia Pacific FTA are all on the cards. It is obvious that many Asian countries are seeking a community of sorts – the creation of the East Asian Summit in 2005 was an affirmation of this spirit.
There are other trends as well. The China-India relationship, as articulated in the Joint Declaration between the countries in November 2006, suggested exploring “a new architecture for closer regional cooperation in Asia”. And most recently, again with Washington’s keen interest in keeping itself in the picture of Asian security, a strategy called the “Big Four” initiative, involving the US, India, Australia and Japan was implemented. This arrangement, as pointed out in a sharp analysis by Siddharth Varadarajan (Hindu, 1 December 2006), was a “post-tsunami” naval agreement. The second is the “Five plus Five” formula, where existing military alliances with Japan, South Korea, Australia, Thailand and the Philippines are supplemented by hedging powers – India, Indonesia, Singapore, Vietnam and New Zealand.
What of membership issues? Rudd, for instance, is keen to keep Washington in the picture, but this is something that may not sit comfortably with other countries in the region. Planners would do well to appreciate the tensions behind the foundation of APEC, which initially excluded the United States.
Only at Seattle, the site of the first leaders’ meeting in 1992, did Washington get a look-in, an outcome which led to a spat between then Malaysian Prime Minister Mahathir Mohammad and Australian Prime Minister Paul Keating. Mahathir, having sought to keep it an all-Asian club, was labelled “recalcitrant” by a Keating bristling with frustration.
The problem within any new economic and security model is whether the US plays a balancing role (moderating the growing power of China) or exists as one on equal footing with its partners. In terms of dialogue and cooperation, APEC already enables member states to air problems on an equal footing without a deeper commitment. A community is quite a different proposition.
Rudd’s ideas have received a lukewarm, if not openly negative, reception. The Asia Times (11 June) called his plan a “hastily cobbled one” by a star-struck Sinophile, and unlikely to go far. “His proposal is at best premature and at worst presumptuous.” Nor was it entirely original – there was indeed very little to distinguish it from current processes.
Rudd had also managed to sour relations with a host of regional partners in pushing his schemes of union. The Japanese, initially perplexed by Australian preference to visit Beijing over Tokyo, retaliated by outlining a vision of the Asia-Pacific titled ‘Five Pledges to a Future Asia that “Acts Together”’. Australia none too mysteriously vanished from the consideration of Japanese Prime Minister Yasuo Fukuda. Regional commentators were also wondering why he hadn’t tended to the important relationship between Jakarta and Canberra.
Rudd has additional critics within his party. Two have been vocal – former Australian leaders Bob Hawke and Paul Keating. What was good for the Europeans, argued Hawke, was not necessarily good for the Asian region. Goals, both economic and political, could still be achieved in the region without the “full degree of integration that has occurred within the European Union” (SBS, 7 June).
Keating was even more concise, quick to pounce on the fetters of sovereignty implied in an Asian EU model. It took the Chinese “350 years of the modern age to truly recover their sovereignty; I do not see them sharing much of it with anybody else.”
Keating reminds those who might believe in the stirrings of an Asianist identity, or even a Nehru-like Pan-Asianism, that they are barking up the wrong tree. “Problem sharing and dialogue is one thing, the surrender or partial surrender of sovereignty is an altogether different thing.” APEC serves its purposes for the region, remarkable, claims Keating (The Sydney Morning Herald, 6 June), as having both a US president, the president of China and the Japanese prime minister, sit “in common cause”.
A mountain of work is needed on Rudd’s ideas before they have much meaning, but the Asia-Pacific community proposal, however unclear and amorphous, is unlikely to go away.
Binoy Kampmark was a Commonwealth Scholar at Selwyn College, University of Cambridge. He lectures at the University of Queensland.
A discussion about the prospects of this idea and more takes place in an article in the respected Diplomat, a special Web Feature for Aug 08 :
Dreaming of an Asian EU
Binoy Kampmark 01-Aug-2008
It is hard to envisage: a seamless political and economic area in the Asia-Pacific region, where mobility is assured and military and trade interests are bound by genuine agreement. In short, something akin to the European Union, an order established by the Maastricht Treaty. The features: a common market, shared principles and modified sovereignty; where freedom of movement in people, capital, goods and services is guaranteed.
Australia’s new Prime Minister, Kevin Rudd, is happy to consider a rough model along such lines. His target year for establishing it is 2020. On June 4, a keen Rudd sketched a few ideas for the Asia Society Australasia Centre in Sydney.
First, the necessary doffing of the hat to an old ally. “Our alliance with the United States is the first pillar of our foreign policy and the strategic bedrock of our foreign and security policy.”
Second, a need to bolster the United Nations, a body mauled and scorned by the governments of the Coalition of the Willing in their invasion of Iraq. Third, the importance of providing some directions on “the regional architecture of the wider region.”
So, what do we have on the cards? An Asia-Pacific union of sorts. Rudd’s speech on June 4 to the Asia Society Australasia Centre provides a few clues. “The European Union does not represent an identikit model of what we should seek to develop in the Asia-Pacific, but what we can learn from Europe is this – it is necessary to take the first step.” Rudd envisages a body that facilitates trade, responding rapidly to crises such as threats of terrorism, and natural disasters, a multilateral body designed to maintain regional security.
Whether this remains fluff, a massaging of moral imperatives in the face of climate change and economic obstacles, is an open question. The political visionaries are churning out material at speed from the planning rooms in Canberra, but the detail is threadbare. Nonetheless, Rudd and his advisors may be facing a reality pointed out by international relations theorist Barry Buzan in an issue of the Pacific Review in 2003. According to Buzan, there is “a distinct and longstanding regional structure in East Asia that is of at least equal importance to the global level shaping of the region’s security dynamics.”
There is little doubt that Rudd has identified a movement at work. A new regional architecture has been discussed for some time. The US considered various initiatives in the early post-Cold War period such as an Asian version of the Organisation for Security and Cooperation in Europe or an Asian NATO.
Dramatic shifts in regional relationships in the East Asian and Southeast Asian region have recently taken place. The economic leg is kicking with vigour: an East Asian Economic Community, an East Asian FTA and an Asia Pacific FTA are all on the cards. It is obvious that many Asian countries are seeking a community of sorts – the creation of the East Asian Summit in 2005 was an affirmation of this spirit.
There are other trends as well. The China-India relationship, as articulated in the Joint Declaration between the countries in November 2006, suggested exploring “a new architecture for closer regional cooperation in Asia”. And most recently, again with Washington’s keen interest in keeping itself in the picture of Asian security, a strategy called the “Big Four” initiative, involving the US, India, Australia and Japan was implemented. This arrangement, as pointed out in a sharp analysis by Siddharth Varadarajan (Hindu, 1 December 2006), was a “post-tsunami” naval agreement. The second is the “Five plus Five” formula, where existing military alliances with Japan, South Korea, Australia, Thailand and the Philippines are supplemented by hedging powers – India, Indonesia, Singapore, Vietnam and New Zealand.
What of membership issues? Rudd, for instance, is keen to keep Washington in the picture, but this is something that may not sit comfortably with other countries in the region. Planners would do well to appreciate the tensions behind the foundation of APEC, which initially excluded the United States.
Only at Seattle, the site of the first leaders’ meeting in 1992, did Washington get a look-in, an outcome which led to a spat between then Malaysian Prime Minister Mahathir Mohammad and Australian Prime Minister Paul Keating. Mahathir, having sought to keep it an all-Asian club, was labelled “recalcitrant” by a Keating bristling with frustration.
The problem within any new economic and security model is whether the US plays a balancing role (moderating the growing power of China) or exists as one on equal footing with its partners. In terms of dialogue and cooperation, APEC already enables member states to air problems on an equal footing without a deeper commitment. A community is quite a different proposition.
Rudd’s ideas have received a lukewarm, if not openly negative, reception. The Asia Times (11 June) called his plan a “hastily cobbled one” by a star-struck Sinophile, and unlikely to go far. “His proposal is at best premature and at worst presumptuous.” Nor was it entirely original – there was indeed very little to distinguish it from current processes.
Rudd had also managed to sour relations with a host of regional partners in pushing his schemes of union. The Japanese, initially perplexed by Australian preference to visit Beijing over Tokyo, retaliated by outlining a vision of the Asia-Pacific titled ‘Five Pledges to a Future Asia that “Acts Together”’. Australia none too mysteriously vanished from the consideration of Japanese Prime Minister Yasuo Fukuda. Regional commentators were also wondering why he hadn’t tended to the important relationship between Jakarta and Canberra.
Rudd has additional critics within his party. Two have been vocal – former Australian leaders Bob Hawke and Paul Keating. What was good for the Europeans, argued Hawke, was not necessarily good for the Asian region. Goals, both economic and political, could still be achieved in the region without the “full degree of integration that has occurred within the European Union” (SBS, 7 June).
Keating was even more concise, quick to pounce on the fetters of sovereignty implied in an Asian EU model. It took the Chinese “350 years of the modern age to truly recover their sovereignty; I do not see them sharing much of it with anybody else.”
Keating reminds those who might believe in the stirrings of an Asianist identity, or even a Nehru-like Pan-Asianism, that they are barking up the wrong tree. “Problem sharing and dialogue is one thing, the surrender or partial surrender of sovereignty is an altogether different thing.” APEC serves its purposes for the region, remarkable, claims Keating (The Sydney Morning Herald, 6 June), as having both a US president, the president of China and the Japanese prime minister, sit “in common cause”.
A mountain of work is needed on Rudd’s ideas before they have much meaning, but the Asia-Pacific community proposal, however unclear and amorphous, is unlikely to go away.
Binoy Kampmark was a Commonwealth Scholar at Selwyn College, University of Cambridge. He lectures at the University of Queensland.
Levitt, Diamond and Kashyap on Economic Crisis
A useful overview about the financial crisis engulfing the globe this week is provided by Doug Diamond and Anil Kashyap in Steven D. Levitt's Freakonomics column in the New York Times. Like scientists who have stumbled over an ailing specimen, they dissect the problems with refreshing clarity. A.I.G., Lehman Brothers, Freddie Mac and Fannie Mae are all covered.
Lessons to be gained from the recent government intervention to halt the rot? 'A reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained. '
The full extract is available below. The original is from the 18 September 2008 issue of the New York Times:
September 18, 2008
Diamond and Kashyap on the Recent Financial Upheavals
By Steven D. Levitt
As an economist, I am supposed to have something intelligent to say about the current financial crisis. To be honest, however, I haven’t got the foggiest idea what this all means. So I did what I always do when something related to banking arises: I knocked on the doors of my colleagues Doug Diamond and Anil Kashyap, and asked them for the answers. What they told me was so interesting and insightful that I begged them to write their explanations down for a broader audience. They were kind enough to take the time to do so. In what follows, they discuss what has happened in the financial sector in the last few days, why it happened, and what it means for everyday people.
The F.A.Q.’s of Lehman and A.I.G.
By Douglas W. Diamond and Anil K. Kashyap: A Guest Post
For most of the last 20 years we have been studying banks, monetary policy, and financial crises. So for us the events of the last year have been especially fascinating.
The last 10 days have been the most remarkable period of government intervention into the financial system since the Great Depression. In talking with reporters and our noneconomist friends, we have been besieged with questions about several aspects of these events. Here are a few of the most frequently asked questions with our best answers.
1) What has happened that is so remarkable?
This episode started when the Treasury nationalized Fannie Mae and Freddie Mac on September 8. Their combined assets are over $5 trillion. These firms help guarantee most of the mortgages in the United States. The Treasury only got authority from Congress to take this action in July, and in seeking the authority had insisted that no intervention would be needed.
The Treasury has replaced the management of both companies and will presumably oversee their operation. This decision marked an acknowledgment by the government that the mortgage market and the institutions to make it operate in the U.S. are broken.
On Monday, the largest bankruptcy filing in U.S. history was made by Lehman Brothers. Lehman had over $600 billion in assets and 25,000 employees. (The largest previous filing was WorldCom, whose assets just prior to bankruptcy were just over $100 billion.)
On Tuesday, the Federal Reserve made a bridge loan to A.I.G., the largest insurance company in the world; perhaps best known to most of the world as the shirt sponsor of Manchester United soccer club, A.I.G. has assets of over $1 trillion and over 100,000 employees worldwide. The Fed has the option to purchase up to 80 percent of the shares of A.I.G., is replacing A.I.G.’s management, and is nearly wiping out A.I.G.’s existing shareholders. A.I.G. is to be wound down by selling its assets over the next two years. (Don’t worry, Man U will be fine.) The Fed has never asserted its authority to intervene on this scale, in this form, or in a firm so far removed from its own supervisory authority.
2) Why did these things happen?
The common denominator in all three cases was the ability of the firms to secure financing. The reasons, though, differed in each case.
The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.
Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.
But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.
Lehman’s demise came when it could not even keep borrowing. Lehman was rolling over at least $100 billion a month to finance its investments in real estate, bonds, stocks, and financial assets.
When it is hard for lenders to monitor their investments and borrowers can rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.
This was especially relevant for Lehman, because as an investment bank, it could transform its risk characteristics very easily by using derivatives and by churning its trading portfolio. So for Lehman (and all investment banks), the short-term financing is not an accident; it is inevitable.
Why did the financing dry up? For months, short-sellers were convinced that Lehman’s real-estate losses were bigger than it had acknowledged. As more bad news about the real estate market emerged, including the losses at Freddie Mac and Fannie Mae, this view spread.
Lehman’s costs of borrowing rose and its share price fell. With an impending downgrade to its credit rating looming, legal restrictions were going to prevent certain firms from continuing to lend to Lehman. Other counterparties that might have been able to lend, even if Lehman’s credit rating was impaired, simply decided that the chance of default in the near future was too high, partly because they feared that future credit conditions would get even tighter and force Lehman and others to default at that time.
A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments. While its core insurance businesses and other subsidiaries (such as its large aircraft-leasing operation) were doing fine, these contracts, called credit default swaps (C.D.S.’s), were hemorrhaging.
Furthermore, the possibility of further losses loomed if the housing market continued to deteriorate. The credit-rating agencies looking at the potential losses downgraded A.I.G.’s debt on Monday. With its lower credit ratings, A.I.G.’s insurance contracts required A.I.G. to demonstrate that it had collateral to service the contracts; estimates suggested that it needed roughly $15 billion in immediate collateral.
A second problem A.I.G. faced is that if it failed to post the collateral, it would be considered to have defaulted on the C.D.S.’s. Were A.I.G. to default on C.D.S.’s, some other A.I.G. contracts (tied to losses on other financial securities) contain clauses saying that its other contractual partners could insist on prepayment of their claims. These cross-default clauses are present so that resources from one part of the business do not get diverted to plug a hole in another part. A.I.G. had another $380 billion of these other insurance contracts outstanding. No private investors were willing to step into this situation and loan A.I.G. the money it needed to post the collateral.
In the scramble to make good on the C.D.S.’s, A.I.G.’s ability to service its own debt would come into question. A.I.G. had $160 billion in bonds that were held all over the world: nowhere near as widely as the Fannie and Freddie bonds, but still dispersed widely.
In addition, other large financial firms — including Pacific Investment Management Company (Pimco), the largest bond-investment fund in the world — had guaranteed A.I.G.’s bonds by writing C.D.S. contracts.
Given the huge size of the contracts and the number of parties intertwined, the Federal Reserve decided that a default by A.I.G. would wreak havoc on the financial system and cause contagious failures. There was an immediate need to get A.I.G. the collateral to honor its contracts, so the Fed loaned A.I.G. $85 billion.
3) Why did the Treasury and Fed let Lehman fail but rescue Bear Stearns, Fannie Mae, Freddie Mac, and A.I.G.?
We have already explained why Fannie, Freddie, and A.I.G. were supported. In March, Bear Stearns lost its access to credit in almost the same fashion as Lehman; yet Bear was rescued and Lehman was not.
Bear Stearns was bailed out for two reasons. One was that the Fed had very imperfect information about what was going on at Bear. The Fed was not Bear’s regulator, the amount of publicly available information was limited, and its staff was not versed in all of the ways in which Bear might have been connected to other parts of the financial system.
The second problem was that Bear’s counterparties in many transactions were not prepared for the sudden demise of Bear. A Bear bankruptcy might have triggered a wave of forced selling of collateral that Bear would have given its counterparties. Given the potential chaos that would have resulted from Bear Stearns filing for bankruptcy, the Fed had little choice but to engineer a rescue. In doing so, the Fed argued that the rescue was a rare, perhaps once-in-a-generation, event.
When Bear was rescued, the Fed created a new lending facility to help provide bridge financing to other investment banks. The new lending arrangement was proposed precisely because there were concerns that Lehman and other banks were at risk for a Bear-like run. Since March, the Fed had also studied what to do if this were to happen again; it concluded that if it modified its lending facility slightly, it could withstand a bankruptcy; it made these changes to the lending facility on Sunday night.
Once the Fed had made these changes and determined that it and the others in the market had an understanding of the indirect or “collateral damage” effects of a bankruptcy, it could rely on the protections of the bankruptcy code to stop the run on Lehman, and to sell its operating assets separately from its toxic mortgage-backed assets.
Against this backdrop, if the government had rescued Lehman, it would have repudiated the claim that the Bear rescue was extraordinary; it would have also conceded that in the six months since Bear failed, neither the new facility that it set up nor the other steps to make markets more robust were reliable. Essentially, the Fed and the Treasury would have been admitting that they had lied or were incompetent in stabilizing the financial system — or both.
It was not surprising that they drew the line at helping Lehman. Based on all the publicly available information, this was clearly the right thing to do.
4) I do not work at Lehman or A.I.G. and do not own much stock; why should I care?
The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding.
As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
This is going to slow growth. We have not seen this much stress in the financial system since the Great Depression, so we do not have any recent history to rely upon in quantifying the magnitude of the slowdown. A recent educated guess by Jan Hatzius of Goldman Sachs suggests that G.D.P. growth will be just about 2 percentage points lower in 2008 and 2009. But as he explains, extrapolations of this sort are highly uncertain.
5) What does it mean for the Fed and Treasury going ahead?
A reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained.
Assuming the level of chaos is sufficiently high, this dichotomy is probably consistent with the mandate of the Federal Reserve. The rescue of A.I.G., however, raises some major challenges.
One is where to draw the line. A.I.G. was an insurance company, not a bank or a broker dealer, so the Fed had no special relationship with A.I.G. Presumably, if a very large airline or automaker had been involved in the C.D.S. market, the same reasoning that led to the rescue would apply.
A second challenge comes with defining the acceptable level of chaos. We will never be able to find out what would have happened if A.I.G. had been allowed to fail. Furthermore, there are some reasons to believe that even if A.I.G. continues to operate, the fundamental stress in the financial system will remain. If the rescue does not mark a turning point, the bailout may not be viewed quite differently down the road.
Should the government intervene if it merely postpones an inevitable adjustment? Creditor runs can make adjustment too fast; blanket bailouts can make adjustment too slow. Has the Fed found the speed that is just right?
Third, now that A.I.G. has been lent to, how will regulation have to be adjusted? Surely the Fed cannot be called upon to provide backstop financing whenever a large member of the financial system runs into trouble. How does it prevent a replay of this scenario, and can it be done without stifling innovation?
6) What does this mean for the markets going ahead?
Letting Lehman go means that the remaining large financial services firms now must understand that they need to manage their own risks more carefully. This includes both securing adequate funding and being prudent about which counterparties to rely upon. Both of these developments are welcome.
If the remaining investment banks, Goldman Sachs and Morgan Stanley, do not get more secure funding in place, they may be acquired or subject to a run too. In the current environment, relying almost exclusively on short-term debt is hazardous, even if a firm or bank has nothing wrong with it.
7) When will the turmoil end?
The inability to secure short-term funding fundamentally comes from having insufficient capital. There are many indicators that the largest financial institutions are collectively short of capital.
One signal is that there were apparently only two bidders for Lehman, when the ongoing value from operating most of the bank was surely far above the $3.60 share price from Friday.
Another is the elevated cost of borrowing that banks are charging each other. A third indicator is the reluctance to take on certain types of risk, such as jumbo mortgages, so that the cost of this type of borrowing is unusually high.
The fear of being the next Lehman ought to convince many of the large institutions that, despite however much they already raised, more is needed. It may be expensive to attract more equity financing, but the choice may be bankruptcy or sale. The decision by the Federal Reserve to not cut interest rates suggests the Fed also recognizes that the short-term interest rate is a very inefficient way to address this problem.
Lessons to be gained from the recent government intervention to halt the rot? 'A reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained. '
The full extract is available below. The original is from the 18 September 2008 issue of the New York Times:
September 18, 2008
Diamond and Kashyap on the Recent Financial Upheavals
By Steven D. Levitt
As an economist, I am supposed to have something intelligent to say about the current financial crisis. To be honest, however, I haven’t got the foggiest idea what this all means. So I did what I always do when something related to banking arises: I knocked on the doors of my colleagues Doug Diamond and Anil Kashyap, and asked them for the answers. What they told me was so interesting and insightful that I begged them to write their explanations down for a broader audience. They were kind enough to take the time to do so. In what follows, they discuss what has happened in the financial sector in the last few days, why it happened, and what it means for everyday people.
The F.A.Q.’s of Lehman and A.I.G.
By Douglas W. Diamond and Anil K. Kashyap: A Guest Post
For most of the last 20 years we have been studying banks, monetary policy, and financial crises. So for us the events of the last year have been especially fascinating.
The last 10 days have been the most remarkable period of government intervention into the financial system since the Great Depression. In talking with reporters and our noneconomist friends, we have been besieged with questions about several aspects of these events. Here are a few of the most frequently asked questions with our best answers.
1) What has happened that is so remarkable?
This episode started when the Treasury nationalized Fannie Mae and Freddie Mac on September 8. Their combined assets are over $5 trillion. These firms help guarantee most of the mortgages in the United States. The Treasury only got authority from Congress to take this action in July, and in seeking the authority had insisted that no intervention would be needed.
The Treasury has replaced the management of both companies and will presumably oversee their operation. This decision marked an acknowledgment by the government that the mortgage market and the institutions to make it operate in the U.S. are broken.
On Monday, the largest bankruptcy filing in U.S. history was made by Lehman Brothers. Lehman had over $600 billion in assets and 25,000 employees. (The largest previous filing was WorldCom, whose assets just prior to bankruptcy were just over $100 billion.)
On Tuesday, the Federal Reserve made a bridge loan to A.I.G., the largest insurance company in the world; perhaps best known to most of the world as the shirt sponsor of Manchester United soccer club, A.I.G. has assets of over $1 trillion and over 100,000 employees worldwide. The Fed has the option to purchase up to 80 percent of the shares of A.I.G., is replacing A.I.G.’s management, and is nearly wiping out A.I.G.’s existing shareholders. A.I.G. is to be wound down by selling its assets over the next two years. (Don’t worry, Man U will be fine.) The Fed has never asserted its authority to intervene on this scale, in this form, or in a firm so far removed from its own supervisory authority.
2) Why did these things happen?
The common denominator in all three cases was the ability of the firms to secure financing. The reasons, though, differed in each case.
The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.
Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.
But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.
Lehman’s demise came when it could not even keep borrowing. Lehman was rolling over at least $100 billion a month to finance its investments in real estate, bonds, stocks, and financial assets.
When it is hard for lenders to monitor their investments and borrowers can rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.
This was especially relevant for Lehman, because as an investment bank, it could transform its risk characteristics very easily by using derivatives and by churning its trading portfolio. So for Lehman (and all investment banks), the short-term financing is not an accident; it is inevitable.
Why did the financing dry up? For months, short-sellers were convinced that Lehman’s real-estate losses were bigger than it had acknowledged. As more bad news about the real estate market emerged, including the losses at Freddie Mac and Fannie Mae, this view spread.
Lehman’s costs of borrowing rose and its share price fell. With an impending downgrade to its credit rating looming, legal restrictions were going to prevent certain firms from continuing to lend to Lehman. Other counterparties that might have been able to lend, even if Lehman’s credit rating was impaired, simply decided that the chance of default in the near future was too high, partly because they feared that future credit conditions would get even tighter and force Lehman and others to default at that time.
A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments. While its core insurance businesses and other subsidiaries (such as its large aircraft-leasing operation) were doing fine, these contracts, called credit default swaps (C.D.S.’s), were hemorrhaging.
Furthermore, the possibility of further losses loomed if the housing market continued to deteriorate. The credit-rating agencies looking at the potential losses downgraded A.I.G.’s debt on Monday. With its lower credit ratings, A.I.G.’s insurance contracts required A.I.G. to demonstrate that it had collateral to service the contracts; estimates suggested that it needed roughly $15 billion in immediate collateral.
A second problem A.I.G. faced is that if it failed to post the collateral, it would be considered to have defaulted on the C.D.S.’s. Were A.I.G. to default on C.D.S.’s, some other A.I.G. contracts (tied to losses on other financial securities) contain clauses saying that its other contractual partners could insist on prepayment of their claims. These cross-default clauses are present so that resources from one part of the business do not get diverted to plug a hole in another part. A.I.G. had another $380 billion of these other insurance contracts outstanding. No private investors were willing to step into this situation and loan A.I.G. the money it needed to post the collateral.
In the scramble to make good on the C.D.S.’s, A.I.G.’s ability to service its own debt would come into question. A.I.G. had $160 billion in bonds that were held all over the world: nowhere near as widely as the Fannie and Freddie bonds, but still dispersed widely.
In addition, other large financial firms — including Pacific Investment Management Company (Pimco), the largest bond-investment fund in the world — had guaranteed A.I.G.’s bonds by writing C.D.S. contracts.
Given the huge size of the contracts and the number of parties intertwined, the Federal Reserve decided that a default by A.I.G. would wreak havoc on the financial system and cause contagious failures. There was an immediate need to get A.I.G. the collateral to honor its contracts, so the Fed loaned A.I.G. $85 billion.
3) Why did the Treasury and Fed let Lehman fail but rescue Bear Stearns, Fannie Mae, Freddie Mac, and A.I.G.?
We have already explained why Fannie, Freddie, and A.I.G. were supported. In March, Bear Stearns lost its access to credit in almost the same fashion as Lehman; yet Bear was rescued and Lehman was not.
Bear Stearns was bailed out for two reasons. One was that the Fed had very imperfect information about what was going on at Bear. The Fed was not Bear’s regulator, the amount of publicly available information was limited, and its staff was not versed in all of the ways in which Bear might have been connected to other parts of the financial system.
The second problem was that Bear’s counterparties in many transactions were not prepared for the sudden demise of Bear. A Bear bankruptcy might have triggered a wave of forced selling of collateral that Bear would have given its counterparties. Given the potential chaos that would have resulted from Bear Stearns filing for bankruptcy, the Fed had little choice but to engineer a rescue. In doing so, the Fed argued that the rescue was a rare, perhaps once-in-a-generation, event.
When Bear was rescued, the Fed created a new lending facility to help provide bridge financing to other investment banks. The new lending arrangement was proposed precisely because there were concerns that Lehman and other banks were at risk for a Bear-like run. Since March, the Fed had also studied what to do if this were to happen again; it concluded that if it modified its lending facility slightly, it could withstand a bankruptcy; it made these changes to the lending facility on Sunday night.
Once the Fed had made these changes and determined that it and the others in the market had an understanding of the indirect or “collateral damage” effects of a bankruptcy, it could rely on the protections of the bankruptcy code to stop the run on Lehman, and to sell its operating assets separately from its toxic mortgage-backed assets.
Against this backdrop, if the government had rescued Lehman, it would have repudiated the claim that the Bear rescue was extraordinary; it would have also conceded that in the six months since Bear failed, neither the new facility that it set up nor the other steps to make markets more robust were reliable. Essentially, the Fed and the Treasury would have been admitting that they had lied or were incompetent in stabilizing the financial system — or both.
It was not surprising that they drew the line at helping Lehman. Based on all the publicly available information, this was clearly the right thing to do.
4) I do not work at Lehman or A.I.G. and do not own much stock; why should I care?
The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding.
As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
This is going to slow growth. We have not seen this much stress in the financial system since the Great Depression, so we do not have any recent history to rely upon in quantifying the magnitude of the slowdown. A recent educated guess by Jan Hatzius of Goldman Sachs suggests that G.D.P. growth will be just about 2 percentage points lower in 2008 and 2009. But as he explains, extrapolations of this sort are highly uncertain.
5) What does it mean for the Fed and Treasury going ahead?
A reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained.
Assuming the level of chaos is sufficiently high, this dichotomy is probably consistent with the mandate of the Federal Reserve. The rescue of A.I.G., however, raises some major challenges.
One is where to draw the line. A.I.G. was an insurance company, not a bank or a broker dealer, so the Fed had no special relationship with A.I.G. Presumably, if a very large airline or automaker had been involved in the C.D.S. market, the same reasoning that led to the rescue would apply.
A second challenge comes with defining the acceptable level of chaos. We will never be able to find out what would have happened if A.I.G. had been allowed to fail. Furthermore, there are some reasons to believe that even if A.I.G. continues to operate, the fundamental stress in the financial system will remain. If the rescue does not mark a turning point, the bailout may not be viewed quite differently down the road.
Should the government intervene if it merely postpones an inevitable adjustment? Creditor runs can make adjustment too fast; blanket bailouts can make adjustment too slow. Has the Fed found the speed that is just right?
Third, now that A.I.G. has been lent to, how will regulation have to be adjusted? Surely the Fed cannot be called upon to provide backstop financing whenever a large member of the financial system runs into trouble. How does it prevent a replay of this scenario, and can it be done without stifling innovation?
6) What does this mean for the markets going ahead?
Letting Lehman go means that the remaining large financial services firms now must understand that they need to manage their own risks more carefully. This includes both securing adequate funding and being prudent about which counterparties to rely upon. Both of these developments are welcome.
If the remaining investment banks, Goldman Sachs and Morgan Stanley, do not get more secure funding in place, they may be acquired or subject to a run too. In the current environment, relying almost exclusively on short-term debt is hazardous, even if a firm or bank has nothing wrong with it.
7) When will the turmoil end?
The inability to secure short-term funding fundamentally comes from having insufficient capital. There are many indicators that the largest financial institutions are collectively short of capital.
One signal is that there were apparently only two bidders for Lehman, when the ongoing value from operating most of the bank was surely far above the $3.60 share price from Friday.
Another is the elevated cost of borrowing that banks are charging each other. A third indicator is the reluctance to take on certain types of risk, such as jumbo mortgages, so that the cost of this type of borrowing is unusually high.
The fear of being the next Lehman ought to convince many of the large institutions that, despite however much they already raised, more is needed. It may be expensive to attract more equity financing, but the choice may be bankruptcy or sale. The decision by the Federal Reserve to not cut interest rates suggests the Fed also recognizes that the short-term interest rate is a very inefficient way to address this problem.
Friday, September 12, 2008
A note on Anti-Americanism
Where to with anti-American sentiments? What defines them? What motivates them? Such questions have become academic bricks and mortar, the subject, for instance, of a four-volume collection of essays edited by Brendon O'Connor from Greenwood Press (Anti-Americanism: History, Causes, and Themes). In Britain, a group has been formed to protect America's good name. But its guidelines of America in the World are far from clear. Online Opinion gives a sense about where they went wrong:
How not to understand anti-Americanism
By Binoy Kampmark
On the popular networking system Facebook, a particular group exists calling itself the “Petition to Revoke the Independence of the United States”. It is a playful thing, though some of its participants tend to become too serious. It’s such sentiments that have prompted the web antics of one unabashedly pro-American Englishman and conservative pundit Tim Montgomerie.
Montgomerie is on edge. He dislikes what he considers to be a vicious tide of anti-Americanism in Britain, indeed, the world. Nor does he believe an Obama administration will necessarily put to rest that unruly beast. Hence his newly established group "America in the World" (AIW). The organisation opposes two things: anti-Americanism and American isolationism. It is also quick to point out to critics that they are not in the pocket of American finance.
Montgomerie has taken the bright colored end of the American dream and run with it - America is good, and questioning its handling of power, bad. As he says in a statement that was actually culled by the Guardian editor, “World opinion, rightly called the second superpower, should not stop America from taking the toughest decisions.” Even, evidently, when they involve the hokum of unstable regimes intent on annihilating the West with weapons they do not have.
A collection of publicity videos are available on the site. One, A World Without The American Soldier, is particularly liberal with history and, to borrow a term from Donald Rumsfeld, unknown unknowns. The absent American soldier becomes the metaphor of global instability - without him, the world will devour itself in sanguinary fury. What would have happened if the US had not sent its soldiers to fight Hitler, for instance? None of us know, but AIW is happy to throw out various scenarios.
Montgomerie reflects that sentiment described by Geir Lundestad, Director of the Norwegian Nobel Institute as that of the inviter: the US did not create an empire on its own accord - it was invited to do so by its European auxiliaries.
Some states create them in fits of "absentmindedness" (that’s the British variety); others are asked to create imperiums like well-moneyed guests at a fundraising event. The assertion is of cause naïve: Europeans were happy to take the money, but not always happy with what came with it: American personnel and bases were less welcome.
A few points of the AIW are worth challenging, and they apply broadly to those concerned that an Obama administration will somehow retreat, mollusk-like, into an isolationist shell. If the new administration winds back the global imperium by closing some of its 737 bases (according to Chalmers Johnson), then a bit more of that might be better than a bit less.
In more than one sense, the AIW and those who believe in rampant anti-Americanism in Britain, have missed the point. It falls down to poor definitions - what is anti-Americanism in the first place? Its taxonomy risks being unnecessarily complicated and cluttered by academic jargon. But no pointers are given by Montgomerie or his group as to what that might be: is anti-Americanism a prejudice, a structured hatred, perhaps an ideology? Some thought might have been given to consulting the recent four-volume compilation of essays Anti-Americanism: History, Causes and Themes edited by Brendon O’Connor.
There is, for instance, a poor understanding about how countries and their citizens can feel compelled to embrace parts of Americana (the jeans for instance) and still take up arms against the Great Satan. Again, that’s the dilemma that AIW does little to resolve, when it would be best served doing so.
Most of all, the AIW is aggrieved at the failure of Britain and fellow Europeans to love. They must feel a fondness for America. The truth is that many do, and had Washington allowed its cultural representatives to do the colonising rather than its military personnel, it might not have been quite in this mess. Few should forget the famous headline in the French paper, Le Monde immediately following the attacks of September 2001, which stated, in no uncertain terms, the bonds of transatlantic friendship: “We are all Americans Now.” Such invaluable currency was rapidly devalued with Middle East adventurism. Many European citizens, and that goes for many around the globe, just don’t like the vicissitudes of American power.
Besides, the British, or to be more exact, the English, are renown in a historical sense not so much for being just anti-American, but hostile to everyone, including themselves. A brief consultation of any reference book on insults will find an assortment of English nasties for every race and nation on this planet. Don’t privilege one dislike - acknowledge them all. To paraphrase a comment once made by director Billy Wilder, one can’t have any prejudices if one hates everyone equally.
How not to understand anti-Americanism
By Binoy Kampmark
On the popular networking system Facebook, a particular group exists calling itself the “Petition to Revoke the Independence of the United States”. It is a playful thing, though some of its participants tend to become too serious. It’s such sentiments that have prompted the web antics of one unabashedly pro-American Englishman and conservative pundit Tim Montgomerie.
Montgomerie is on edge. He dislikes what he considers to be a vicious tide of anti-Americanism in Britain, indeed, the world. Nor does he believe an Obama administration will necessarily put to rest that unruly beast. Hence his newly established group "America in the World" (AIW). The organisation opposes two things: anti-Americanism and American isolationism. It is also quick to point out to critics that they are not in the pocket of American finance.
Montgomerie has taken the bright colored end of the American dream and run with it - America is good, and questioning its handling of power, bad. As he says in a statement that was actually culled by the Guardian editor, “World opinion, rightly called the second superpower, should not stop America from taking the toughest decisions.” Even, evidently, when they involve the hokum of unstable regimes intent on annihilating the West with weapons they do not have.
A collection of publicity videos are available on the site. One, A World Without The American Soldier, is particularly liberal with history and, to borrow a term from Donald Rumsfeld, unknown unknowns. The absent American soldier becomes the metaphor of global instability - without him, the world will devour itself in sanguinary fury. What would have happened if the US had not sent its soldiers to fight Hitler, for instance? None of us know, but AIW is happy to throw out various scenarios.
Montgomerie reflects that sentiment described by Geir Lundestad, Director of the Norwegian Nobel Institute as that of the inviter: the US did not create an empire on its own accord - it was invited to do so by its European auxiliaries.
Some states create them in fits of "absentmindedness" (that’s the British variety); others are asked to create imperiums like well-moneyed guests at a fundraising event. The assertion is of cause naïve: Europeans were happy to take the money, but not always happy with what came with it: American personnel and bases were less welcome.
A few points of the AIW are worth challenging, and they apply broadly to those concerned that an Obama administration will somehow retreat, mollusk-like, into an isolationist shell. If the new administration winds back the global imperium by closing some of its 737 bases (according to Chalmers Johnson), then a bit more of that might be better than a bit less.
In more than one sense, the AIW and those who believe in rampant anti-Americanism in Britain, have missed the point. It falls down to poor definitions - what is anti-Americanism in the first place? Its taxonomy risks being unnecessarily complicated and cluttered by academic jargon. But no pointers are given by Montgomerie or his group as to what that might be: is anti-Americanism a prejudice, a structured hatred, perhaps an ideology? Some thought might have been given to consulting the recent four-volume compilation of essays Anti-Americanism: History, Causes and Themes edited by Brendon O’Connor.
There is, for instance, a poor understanding about how countries and their citizens can feel compelled to embrace parts of Americana (the jeans for instance) and still take up arms against the Great Satan. Again, that’s the dilemma that AIW does little to resolve, when it would be best served doing so.
Most of all, the AIW is aggrieved at the failure of Britain and fellow Europeans to love. They must feel a fondness for America. The truth is that many do, and had Washington allowed its cultural representatives to do the colonising rather than its military personnel, it might not have been quite in this mess. Few should forget the famous headline in the French paper, Le Monde immediately following the attacks of September 2001, which stated, in no uncertain terms, the bonds of transatlantic friendship: “We are all Americans Now.” Such invaluable currency was rapidly devalued with Middle East adventurism. Many European citizens, and that goes for many around the globe, just don’t like the vicissitudes of American power.
Besides, the British, or to be more exact, the English, are renown in a historical sense not so much for being just anti-American, but hostile to everyone, including themselves. A brief consultation of any reference book on insults will find an assortment of English nasties for every race and nation on this planet. Don’t privilege one dislike - acknowledge them all. To paraphrase a comment once made by director Billy Wilder, one can’t have any prejudices if one hates everyone equally.
The death of the Murray-Darling
The Murray-Darling river system in Australia, disproportionately responsible for much of that country's agriculture, is doomed. We have known that for some time, yet state and federal governments continue to dither. Despite trumpeting the merits of cooperation between the states and Canberra on the subject, no immediate action is being taken. The politics of water may well kill the river.
More on this at Facts & Arts, 11 September 2008:
How to kill a river: the Murray-Darling System
By Binoy Kampmark
It's looking more than just grim. A vast river system in Australia, the Murray-Darling Basin, seems terminally affected by drought and decades of environmental abuse. Cosmetic measures have been suggested by the Australian authorities dealing with water conservation and extraction. The Federal government has trumpeted the rescue of the system with the cooperation of state governments. But it may well be too late.
The politics of water has helped exacerbate an ecological disaster. State governments bicker about water allocations. Canberra has attempted a take-over of the entire basin, a measure that was vehemently opposed by Victoria in 2007. That opposition only ceased in March this year, when Victoria's Premier John Brumby was happy to accept a federal bribe of a billion dollars to upgrade irrigation facilities.
There is an inordinate amount of chatter as to what to do, but the only thing most of the officials can agree on is the fate of the river: it seems doomed. In 2007, water expert Peter Cullen issued an assessment. 'This crisis in the Murray-Darling Basin has been brought on by the climate change shift and the serious drought we are now seeing, but the fact that we allowed the system to run to empty is another symptom of our failure to manage the waters of the basin in a sustainable way'.
The Murray Darling Basin Commission reported in 2007 that inflows of water to date had been '68 percent of the pervious recorded minimum… observed in 1902'. The federal government, then under Prime Minister John Howard, offered a solution: prayer. In the face of lower water levels, an appeal to the Lord or an assortment of busy rain deities might help some, though it is unlikely to reverse the toxicity that results from the exposure of acid sulfate soils at low water levels.
Other governments have been less pious. Amidst the tangle of state and Federal governments, each is taking action on its own accord. The South Australian government has attempted to preserve river flows by closing off 33 wetlands. The environmental impact of this move has been minimized by winter rains, though relief to such areas as the renown Banrock Station wetlands will be in short supply. The time has come, argue some of the water mandarins, to abandon various 'icon' sites.
Such abandonment is probably inevitable, spurred on by government incompetence. The current Rudd government did not see fit to ask the main scientific agency in Australia, CSIRO, as how best to ease the crisis of South Australia's lower lakes. Water experts Bill Young and Tom Hatton, both well versed with the dynamics of the Basin, were not contacted. An Australian Senate inquiry instead heard that the water data used by Canberra's apparatchiks on the Basin was inaccurate, relying on long-term average conditions rather than current figures.
Solutions are gathering on the shelves in reports and committee minutes. Another water expert has suggested (earlier this month) shrinking the ailing river system, a sort of shock treatment that looks much like bleeding a patient. Mike Young of Adelaide University has suggested sealing off areas of pooled water to preserve main river channels. Evaporative losses, he cites, have become too great. 'We are running the Murray-Darling with half the amount of water we used to have.' But there is nothing in sight about an immediate rescue.
A sustainable Murray-Darling system would need, for instance, a moratorium on extractions of water to assess sustainability levels. The truth is that water, like any scarce yet vital resource, is political. And the politics of water has doomed a river system. Cullen calls this the work of 'interest groups'.
The Murray-Darling's demise will be that of rural Australia. That lifestyle's days are, like the National Party that represents it, already numbered. The failure of this system will put pay to upwards of 50,000 farmers who account for 41 percent of the country's agriculture. Drinking water supplies will be reduced. Electricity shortages are inevitable. The states of Queensland, New South Wales, Victoria and South Australia all stand to be affected. In the meantime, Canberra will happily form another Senate commission to deliberate over the impending disaster.
More on this at Facts & Arts, 11 September 2008:
How to kill a river: the Murray-Darling System
By Binoy Kampmark
It's looking more than just grim. A vast river system in Australia, the Murray-Darling Basin, seems terminally affected by drought and decades of environmental abuse. Cosmetic measures have been suggested by the Australian authorities dealing with water conservation and extraction. The Federal government has trumpeted the rescue of the system with the cooperation of state governments. But it may well be too late.
The politics of water has helped exacerbate an ecological disaster. State governments bicker about water allocations. Canberra has attempted a take-over of the entire basin, a measure that was vehemently opposed by Victoria in 2007. That opposition only ceased in March this year, when Victoria's Premier John Brumby was happy to accept a federal bribe of a billion dollars to upgrade irrigation facilities.
There is an inordinate amount of chatter as to what to do, but the only thing most of the officials can agree on is the fate of the river: it seems doomed. In 2007, water expert Peter Cullen issued an assessment. 'This crisis in the Murray-Darling Basin has been brought on by the climate change shift and the serious drought we are now seeing, but the fact that we allowed the system to run to empty is another symptom of our failure to manage the waters of the basin in a sustainable way'.
The Murray Darling Basin Commission reported in 2007 that inflows of water to date had been '68 percent of the pervious recorded minimum… observed in 1902'. The federal government, then under Prime Minister John Howard, offered a solution: prayer. In the face of lower water levels, an appeal to the Lord or an assortment of busy rain deities might help some, though it is unlikely to reverse the toxicity that results from the exposure of acid sulfate soils at low water levels.
Other governments have been less pious. Amidst the tangle of state and Federal governments, each is taking action on its own accord. The South Australian government has attempted to preserve river flows by closing off 33 wetlands. The environmental impact of this move has been minimized by winter rains, though relief to such areas as the renown Banrock Station wetlands will be in short supply. The time has come, argue some of the water mandarins, to abandon various 'icon' sites.
Such abandonment is probably inevitable, spurred on by government incompetence. The current Rudd government did not see fit to ask the main scientific agency in Australia, CSIRO, as how best to ease the crisis of South Australia's lower lakes. Water experts Bill Young and Tom Hatton, both well versed with the dynamics of the Basin, were not contacted. An Australian Senate inquiry instead heard that the water data used by Canberra's apparatchiks on the Basin was inaccurate, relying on long-term average conditions rather than current figures.
Solutions are gathering on the shelves in reports and committee minutes. Another water expert has suggested (earlier this month) shrinking the ailing river system, a sort of shock treatment that looks much like bleeding a patient. Mike Young of Adelaide University has suggested sealing off areas of pooled water to preserve main river channels. Evaporative losses, he cites, have become too great. 'We are running the Murray-Darling with half the amount of water we used to have.' But there is nothing in sight about an immediate rescue.
A sustainable Murray-Darling system would need, for instance, a moratorium on extractions of water to assess sustainability levels. The truth is that water, like any scarce yet vital resource, is political. And the politics of water has doomed a river system. Cullen calls this the work of 'interest groups'.
The Murray-Darling's demise will be that of rural Australia. That lifestyle's days are, like the National Party that represents it, already numbered. The failure of this system will put pay to upwards of 50,000 farmers who account for 41 percent of the country's agriculture. Drinking water supplies will be reduced. Electricity shortages are inevitable. The states of Queensland, New South Wales, Victoria and South Australia all stand to be affected. In the meantime, Canberra will happily form another Senate commission to deliberate over the impending disaster.
Thursday, September 11, 2008
Making your own Black Hole
Humans may be able to create their own in-lab black holes. These black holes might even consume the earth in a cosmic fit of destruction and human vanity. Or the exercise might simply be inordinately expensive. Much speculation exists over whether the Large Hadron Collider, a design of the European Organisation for Nuclear Research (CERN), achieve all of this. The first to find out, apart from the scientists, will be those near Geneva.
The issues are discussed in an article in the New Matilda, 11 September 2008:
Black Holes Really Suck
By Binoy Kampmark
The world's largest particle collider, now going through its first tests, may not trigger the end of the world, but it's got people worried, shown how much scientists don't know, and sucked in an awful lot of cash.
"I am very angry that so much emphasis has been made on the possible 'end of the world scenario'. I had an extremely upset 10-year-old son to comfort last night." So writes "Kim", of Hayes in the United Kingdom, to the BBC World Service. With characteristic nonchalance, the Beeb had been suggesting that humanity might annihilate itself in pursuing the origins of the universe — a case of lethal curiosity.
But what exactly happened in Switzerland yesterday? Much in the way of cryptic, abstract science, most of it indulgently speculative and all of it highly expensive. A 27-kilometre-long Large Hadron Collider (LHC), a colossal ring buried 300 feet beneath the Swiss-French border and the handiwork of the European Organisation for Nuclear Research (CERN), "went live" on Wednesday morning 0730 GMT (yesterday evening, Australian time). The test was the first of a series of exercises scheduled before the facility becomes fully operational on 21 October, when high energy proton collisions can begin.
With these proton collisions, CERN hopes to find some of the missing matter in the universe, and maybe also see if it can find any observable basis for "string theory". The side-effects of such high-energy collisions are at the centre of "the end of the world" scenarios doing the rounds at the moment.
The LHC was designed to fire two beams of specific particles, known as hadrons, in opposing directions. Collisions between them would result, thereby releasing astonishing amounts of energy replicating the universe at the time of its birth. What sort of conditions are these? Possibly a mini blackhole, according to some, and temperatures approaching a trillion degrees centigrade. Preferably a sighting of the Higgs-Boson, or "God particle", the only standard model particle yet to be observed and responsible for giving other particles their mass and weight.
At a time of such excitement in the scientific world, it may seem mean spirited to count the cost of this facility. But the cost is so very high that it can't really be avoided. While no one's really sure quite what the collider will end up costing, it's probably somewhere between $5.6-11.2 billion.
After so much money and 30 years of planning have gone into this extravaganza, scientists might, just might, get a bit closer to accurately theorising how the universe was created.
Much more was at stake here than the collision of hadrons and the manufacture of Earth's very own, domesticated black hole. Those behind the "atom smasher", as the British paper, the Daily Telegraph, named it, had to face something far more earthly and human: legal challenges. The European Court of Human Rights has been in receipt of a lawsuit claiming that the replication of such conditions was suicidal. In more legal terms, it purportedly violated the right to life and right to private family life under the European Convention of Human Rights. An injunction was sought thereby depriving CERN from turning on the machine. Obviously that strategy didn't work.
The concerns of the litigating parties are not those of pious fanatics who fear the onset of an apocalypse wrought upon us by an angry god. Otto Rössler, a German chemist at the Eberhard Karls University of Tübingen, was one of the key complainants. "CERN itself has admitted that mini black holes could be created when the particles collide, but they don't consider this a risk."
Having made a few calculations of his own, Rössler argues that such holes will prove predatory and insatiable, growing exponentially like bacteria and "[eating] the planet from the inside". And how long does the chemist give us in his worst-case scenario? The earth could be literally sucked inside-out within four years of the mini black hole's creation.
Not content with keeping this an all-European affair, environmentalists in Hawaii have decided to initiate their own suit (filed 21 March) in a US federal district court to compel their government to intervene. Walter L Wagner and Luis Sancho claim that the risks have been downplayed by CERN, who have failed to provide an environmental impact statement as required by the National Environmental Policy Act. The experiments might result in a ravenous black hole or a "strangelet" that might reduce the planet to a dense lump called "strange matter".
Why US laws should even interest a scientific body operating in Europe suggest a misguided sense of American legal reach. But the activists argue that that the focus must be necessarily universal. "[CERN] have got a lot of propaganda saying it's safe," says Wagner, "but basically it's propaganda".
It's hard to see this action coming to anything. Getting CERN to appear in a dock in Hawaii would be quite another matter.
It will be several weeks before the first particles collide. Perhaps Earth will get its own resident, all-consuming black hole, or merely disintegrate into "strange matter". In that case, the first to know will include not only the enthusiastic scientists of CERN but the residents of Geneva.
Or perhaps the LHC will have just been an astonishingly expensive exercise in history gazing.
At this moment, before any results have started to emerge, we can even imagine another possibility — a "best case scenario", in which the research being carried out deep beneath Switzerland yields information that will somehow greatly improve the lives of people in the world, in this era. We can hope that in some way these experiments have a positive effect, equal to or greater than that which would have been achieved by otherwise redirecting the billions of dollars spent on this project.
That would really be something to celebrate.
The issues are discussed in an article in the New Matilda, 11 September 2008:
Black Holes Really Suck
By Binoy Kampmark
The world's largest particle collider, now going through its first tests, may not trigger the end of the world, but it's got people worried, shown how much scientists don't know, and sucked in an awful lot of cash.
"I am very angry that so much emphasis has been made on the possible 'end of the world scenario'. I had an extremely upset 10-year-old son to comfort last night." So writes "Kim", of Hayes in the United Kingdom, to the BBC World Service. With characteristic nonchalance, the Beeb had been suggesting that humanity might annihilate itself in pursuing the origins of the universe — a case of lethal curiosity.
But what exactly happened in Switzerland yesterday? Much in the way of cryptic, abstract science, most of it indulgently speculative and all of it highly expensive. A 27-kilometre-long Large Hadron Collider (LHC), a colossal ring buried 300 feet beneath the Swiss-French border and the handiwork of the European Organisation for Nuclear Research (CERN), "went live" on Wednesday morning 0730 GMT (yesterday evening, Australian time). The test was the first of a series of exercises scheduled before the facility becomes fully operational on 21 October, when high energy proton collisions can begin.
With these proton collisions, CERN hopes to find some of the missing matter in the universe, and maybe also see if it can find any observable basis for "string theory". The side-effects of such high-energy collisions are at the centre of "the end of the world" scenarios doing the rounds at the moment.
The LHC was designed to fire two beams of specific particles, known as hadrons, in opposing directions. Collisions between them would result, thereby releasing astonishing amounts of energy replicating the universe at the time of its birth. What sort of conditions are these? Possibly a mini blackhole, according to some, and temperatures approaching a trillion degrees centigrade. Preferably a sighting of the Higgs-Boson, or "God particle", the only standard model particle yet to be observed and responsible for giving other particles their mass and weight.
At a time of such excitement in the scientific world, it may seem mean spirited to count the cost of this facility. But the cost is so very high that it can't really be avoided. While no one's really sure quite what the collider will end up costing, it's probably somewhere between $5.6-11.2 billion.
After so much money and 30 years of planning have gone into this extravaganza, scientists might, just might, get a bit closer to accurately theorising how the universe was created.
Much more was at stake here than the collision of hadrons and the manufacture of Earth's very own, domesticated black hole. Those behind the "atom smasher", as the British paper, the Daily Telegraph, named it, had to face something far more earthly and human: legal challenges. The European Court of Human Rights has been in receipt of a lawsuit claiming that the replication of such conditions was suicidal. In more legal terms, it purportedly violated the right to life and right to private family life under the European Convention of Human Rights. An injunction was sought thereby depriving CERN from turning on the machine. Obviously that strategy didn't work.
The concerns of the litigating parties are not those of pious fanatics who fear the onset of an apocalypse wrought upon us by an angry god. Otto Rössler, a German chemist at the Eberhard Karls University of Tübingen, was one of the key complainants. "CERN itself has admitted that mini black holes could be created when the particles collide, but they don't consider this a risk."
Having made a few calculations of his own, Rössler argues that such holes will prove predatory and insatiable, growing exponentially like bacteria and "[eating] the planet from the inside". And how long does the chemist give us in his worst-case scenario? The earth could be literally sucked inside-out within four years of the mini black hole's creation.
Not content with keeping this an all-European affair, environmentalists in Hawaii have decided to initiate their own suit (filed 21 March) in a US federal district court to compel their government to intervene. Walter L Wagner and Luis Sancho claim that the risks have been downplayed by CERN, who have failed to provide an environmental impact statement as required by the National Environmental Policy Act. The experiments might result in a ravenous black hole or a "strangelet" that might reduce the planet to a dense lump called "strange matter".
Why US laws should even interest a scientific body operating in Europe suggest a misguided sense of American legal reach. But the activists argue that that the focus must be necessarily universal. "[CERN] have got a lot of propaganda saying it's safe," says Wagner, "but basically it's propaganda".
It's hard to see this action coming to anything. Getting CERN to appear in a dock in Hawaii would be quite another matter.
It will be several weeks before the first particles collide. Perhaps Earth will get its own resident, all-consuming black hole, or merely disintegrate into "strange matter". In that case, the first to know will include not only the enthusiastic scientists of CERN but the residents of Geneva.
Or perhaps the LHC will have just been an astonishingly expensive exercise in history gazing.
At this moment, before any results have started to emerge, we can even imagine another possibility — a "best case scenario", in which the research being carried out deep beneath Switzerland yields information that will somehow greatly improve the lives of people in the world, in this era. We can hope that in some way these experiments have a positive effect, equal to or greater than that which would have been achieved by otherwise redirecting the billions of dollars spent on this project.
That would really be something to celebrate.
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