Climate change, the final word

Beyond this there is nothing to say about climate change. This is how it is: either climate change is completely untrue or it is true in part or totally. There are no other possibilities.

If climate change is totally untrue, we don't have to do a thing. There is no problem; at least not a climate change one.

If climate change is true, in part or in full, whatever we may may do to alleviate its consequences may not be effective at all, or it may be effective to any degree, from marginally to totally alleviating the consequences of climate change. I'm talking of consequences still in the future.

If nothing we can do will have any effect, the worst is going to happen, whatever the worst will be.

This leaves us with the final scenario; climate change is true, either in part or in total, and we can do someting about it.

From the standpoint of taking action on climate change there are really only two scenarios:

• we might as well do nothing beacuse there is no climate change or whatever we do won't help


• we'd better do something because climate change is real and we can do something about it

What will the costs of doing nothing or going all out be?

If we do nothing and there is no climate change the cost will be nothing.

If we do nothing in the case that whatever we do won't help, doing nothing will cost nothing - whatever is going to happen will happen with us watching helplessly on.

If we do nothing in the case that we could have alleviated the consequencs of climate change the cost will be those consequences, whatever they may be: an ice age for north western Europe, vastly expanded deserts, we don't know in detail.

The cost of doing something will be the same in all cases: economic upheavel, work moving from some industries like coal to other industries like nuclear, wind, solar and other forms of power generation. Some countries and areas in countries will become less wealthy while others will become more wealthy. Coal and oil exporters will be hardest hit. Everything that uses energy will become more energy efficient.

Apart from the obvious benefit of alleviating the effects of climate change in the case that we can do it, there will be other benefits. These other benefits will be the same in all scenarios: decreased air pollution, a decreased reliance on oil and a saving on the balance of payments for oil importing countries, new industries in some cases with in others existing industries becoming much stronger and less oil money in the hands of Islamic terrorist sympathisers - there are a great many of them.

The problem most politicians face is how they can be perceived as doing something about climate change while in reality they are doing nothing about it. They will no doubt use their old allies - empty words, promises and obfuscation. Political campaigns cost money. To stay in politics they need financial backing. People are making money from polluting industries. And these people have much influence on who gets elected and who doesn't. Politicians can't upset these people. Expect very little from countries in which polluting industries are big, like the USA and Australia. Most of the bosses and workers in these industries care only about their money and jobs. And they have a lot of clout.

Just look around you on the road, what do you see? Every driver of a big, fuel hungry vehicle couldn't care less about global warming. And there are many of them. Some of the big four wheel drives have three or four small kids in them. Do their fathers or mothers driving these vehicles care what type of world these kids will inherit? Obviously not. And all the big vehicle manufacturers still make these thirsty vehicles. According the the Australian Government's Green Vehicle Guide the Nissan Y61 Patrol 4.8L 6cyl, Auto 5 speed drinks 16.4 litres of petrol per 100Km mixed driving (it goes up to 23.2L/100Km of city driving) and coughs up 393g CO2 per Km. I'm sure Nissan is very proud of themselves.

As we don't know which scenario is true, the clever thing is to prepare for the worst and do everything we can that may possibly help. The possible costs of doing nothing are just too great. But this is not going to happen. There are too many who just couldn't care less.

Till next time.

How to prevent another Enron

Why do publicly traded companies lie about their financial positions? In most cases, to boost their stock price. Why would they want to do that? Because key employees hold many shares, that's why.

Most big, publicly traded companies have share schemes whereby employees are rewarded with shares for performance or can buy shares at discount rates. The rationale is that employees with a stake in the company will be more diligent than those just working for a pay check. This is most likely true. But the other side of the coin is that it will provide an incentive to manipulate share prices by lying about the company's financial position or prospects. Enron was the classical case. When the truth eventually comes out, like in the case of Enron, the consequences may be devastating, like in the case of Enron. It depends on how much money is involved and on the stakeholders affected.

So how can we prevent another Enron? Simple. Make it illegal for anybody working for a company to own shares in that company. What about incentives then? Financial performance bonuses have been around for a long time. Reward staff with extra holidays, a toaster, a new car, an expensive watch. The list is endless. But don't dangle the temptation to inflate the share price by lies in front of them.

Till next time.

All the rice in China

You may have heard the story about the man who it is said invented the game of chequers. According to the story he was from China. It may also have happened in India and the game may have been chess. In that case the story is known as The King's Chess Board. The emperor or king liked the game so much he decided to reward the inventor.

"What would you like," the emperor asked the man, beaming benignly.
"Your highness," the man humbly said, "let's take a chequer board, put one grain of rice on the first square, two on the second square, four on the next square and so on. We double the grains for every subsequent square. Then your grace can give me all the rice on the board."
"Is that all?" asked the amazed emperor. "No man, choose something of value."
"Your highness," the man said, politely looking at the emperor and measuring his words. "That is not a little bit of rice."

The emperor summoned his accountants and they worked on the problem for two full days. When all the calculations were done they found that there was not enough rice in all of China to give to the man.

When I first heard this story I wondered if this was true. Well, let's see.

Here is a very small Groovy script which does all the heavy lifting for us:

BigInteger rice = 0
0.upto(63){x ->
  rice += 2**x
 }
rice

We start with the first square with one grain of rice on it, that is two to the power of zero. We increment the power with one for every square, in effect doubling the grains of rice on each subsequent square. We sum the grains as we go.  Yes, hard to believe, but those few lines above do all that.

Next we apply what we got. I used values from the Internet. The low specific gravity is for rough rice. Most likely the rice in China so long ago was not husked.

This is what we did, again in Groovy:

 println "There are ${rice} grains of rice on the board"
 println "At 200 grains of rice to a teaspoon that would give ${rice/200} teaspoonfuls of rice"
 println "To get to liters we multiply by 5 and divide by 1000 : ${rice/200*5/1000}"
 println "To get to kilograms we multiply by the specific gravity of rice, about 0.58 : ${rice/200*5/1000*0.58}Kg"
 println "Metric tons of rice on the board: ${rice/200*5/1000*0.58/1000} Metric Tons"
 println "Total global annual rice production, about 12 million tons"
 println "Ratio of rice on the board to global annual rice production: ${rice/200*5/1000*0.58/1000/12000000}"

And here is the print out:

There are 18446744073709551614 grains of rice on the board
At 200 grains of rice to a teaspoon that would give 92233720368547758.07 teaspoonfuls of rice
To get to liters we multiply by 5 and divide by 1000 : 461168601842738.79035
To get to kilograms we multiply by the specific gravity of rice, about 0.58 : 267477789068788.4984030Kg
Metric tons of rice on the board: 267477789068.788498403 Metric Tons
Total global annual rice production, about 12 million tons
Ratio of rice on the board to global annual rice production: 22289.8157557324

Absolutely amazing, isn't it? There was 22,290 times as much rice on the board as the global annual rice production!

The story doesn't say if the man got his rice, but I doubt it.

Till next time.

How to prevent a financial crisis and much more

A financial crisis can have more than one cause. We are mainly concerned with the current financial crisis which has fraud as its main cause - near worthless assets were created and sold off as as assets of value. As fraud is a crime, it should be prevented by the powers that be.

The first thing that should be done is that whoever sells assets should clearly and unambiguously state what underlies the asset and gives it value. In the case of these mortgages it means they should not only have stated that real estate underlies the mortgage, but that the mortgage is in the name of an unemployed, semi-literate drunk.

The next thing is that the chain of accountability should be clearly spelled out. The same goes for the consequences of contravening the law. That means the exact person in a company should know he will go to jail for so long if so much worth of dodgy assets are sold. It should be like a decision made by computer logic once the relevant facts have been fed in. No lawyer should be able to have any influence on the eventual outcome. If any company structures itself in such a way as to obfuscate the chain of accountability, it should be a crime and the CEO should go to jail.

Any company should be legally required to immediately make public knowledge any financial adversity. Again, the consequences for not doing so and the chain of accountability should be clearly spelled out. These derivatives were heading south long before anyone spoke out.

No income should be acknowledged before the money is in the bank. This requirement alone would have prevented the whole Enron saga. They claimed income which at best was years in the future and in the end did not eventuate.

Any projected income should have a solid basis and a high probability of eventuating. Enron made wild income projections that didn't have a hope in hell of coming true. Whoever issues these projections should know, as he is talking or tapping away at his keyboard, that it's either the projected income coming in right on time, or jail.

The powers that be should not make laws or issue proclamations compelling anyone to enter into unwise business transactions, like the Community Reinvestment Act in the USA. This is a prime example of an act which shouldn't exist. It is based on political correctness. Political correctness has no business in business or anywhere where reason is required.

Of course, a financial crisis can be fueled by other causes. When the share market is going up many people make money on shares. This is seen and everybody jumps in. Shares become grossly overvalued and everybody wants to convert paper gains to real gains. They sell. Needless to say, shares plummet. Ditech Networks which once (about 2000) briefly sold for $101 now (18 Nov 2009) sells for $1.40 a share. Again, needless to say, many lose out big time.

It should not be possible to make money out of creative accounting or clever manipulations of numbers. Sadly, in todays financial system it is. Many are going to make big money out of trading carbon offsets, or whatever they are called in different countries, without these carbon offsets making any difference to greenhouse gas production at all.

Yes, these things can be prevented or at least often prevented. Unfortunately Kris Kristofferson was right: "The things that they complain about are thing they could be changing, but no-one seems to care."

Next time won't have anything to do with finance.

Till next time.

How did it happen? Who did it? Why are they free?

Let's get to the foundation stone of the "how" of the current economic crisis. At the core the problem was caused by creating near worthless assets and reselling them as assets of high worth. Truth sometimes has a way of getting out. In this case it did. When the truth that these assets were basically worthless saw the light, everyone, individuals and institutions alike, who had loaded up on these assets were worse off financially. The degree depended on how many of these near worthless assets they had. As these assets had been created in very large quantities the effects for some were devastating, as we all know.

What were these assets? Mortgages to people who could not possibly service these mortgages. Why lend to such people? First of all institutions were encouraged to do so. The Community Reinvestment Act in the USA encouraged institutions to lend to the poor. In fact, if they didn't make enough loans to the poor the institution couldn't expand by opening new branches or through mergers and acquisitions. The act had a nice catch 22; on one hand the loans had to be based on sound financial principles but on the other they should be to people which sound financial principles would have disqualified from receiving loans. The second reason is that people made money extending these loans. From the commission to the agent who writes the loan to the payment to the institution reselling the loans as derivatives to commissions to agents selling these derivatives. Down the track there were those raking in the windfall, the estate agents, the builders, tradesmen and many more. Note however that this last group just benefitted from this highly irregular situation. They had no say in extending these loans.

How can a mortgage be an asset? First of all, a mortgage has real estate behind it. So its backing seems rock solid. Now imagine buying a mortgage for $220,000 from an institution who extended a $200,000 mortgage. Over the years you are going to rake in, let's say $350,000. Not bad for an investment backed by real estate. If the person whose mortgage you hold doesn't pay, you sell his house. Neat. However, if thousands upon thousands of these people default on their mortgages thousands of thousands properties come on the market. Of course, by this time institutions are wary of extending mortgage loans. The properties which sell, sell for much less than the mortgages on them, if they sell at all. This happens all over the place. At this time things go off the rails in a major way.

So, who should be held responsible? Beyond any question of a doubt those who packaged these worthless assets and resold them as high value assets. They knew what they were doing. This is not rocket science. The mortgage defaults were guaranteed to happen. As sure as night follows day the next thing would be an avalanche of properties coming on the market. These financiers knew that right from the beginning. They are criminals and should be behind bars.

The next group of people are those who created the circumstances that made this possible. Many of them are just your usual inept public servants, from two USA presidents on downwards. Many of these have admitted that they have made mistakes. To which degree should they be held accountable? At present it seems that nothing is going to happen to any of them. If criminal negligence can be shown maybe some of them should be held accountable. It's not my call.

Below is a list of 25 people more or less responsible for the crisis. This list comes from Time. Clicking on any of the names will open a new window to the Time website to that person's page. Below the list I will discuss why so few have ended up, or face ending up, in jail.

Time list of the Blameworthy

1. Angelo Mozilo


2. Phil Gramm


3. Alan Greenspan


4. Chris Cox


5. American Consumers


6. Hank Paulson


7. Joe Cassano


8. Ian McCarthy


9. Frank Raines


10. Kathleen Corbet


11. Dick Fuld


12. Marion and Herb Sandler


13. Bill Clinton


14. George W. Bush


15. Stan O'Neal


16. Wen Jiabao


17. David Lereah


18. John Devaney


19. Bernie Madoff


20. Lew Ranieri


21. Burton Jablin


22. Fred Goodwin


23. Sandy Weill


24. David Oddsson


25. Jimmy Cayne

Why are so few of these people in jail or face going to jail? First of all, much of what they did is not illegal. Extending a bad loan is not illegal. It is only when this bad loan is sold as a safe, good investment that it becomes fraud. The people who sold these derivatives will say they were open and honest. The people who bought them will say something different. Ideally, the exact nature of the investment, including its risks, should be on paper. It is extremely doubtful the buyers were fully informed of the nature of the investment. Of course, they should have exercised due diligence. I wonder how many people were offered these investments but turned them down. On the count of misrepresentation and downright fraud many more should get their comeuppance.

The second reason is that many of these well heeled people are also well connected. Make no mistake, they will use their connections. But that should be able to get them only that far. You may know that the Saudi royals got Tony Blair to stop a BAE bribery investigation. So, connections and leverage can get one pretty far.

The, most likely, most important reason is expensive lawyers. The legal profession has always been willing to follow big money, be it big money from the mob or from crooked company bosses. Connie Francis once sang that she could be found "where the boys are." Lawyers can be found where the money is. And these fat cats made millions selling or buying worthless investments, often driving old, established businesses into the ground. Dick Fuld made nearly $500,000,000 as CEO driving the 158 year old Lehman Bros into bankruptcy. He sold a $13,000,000 home in Florida to his wife for $100. Now why would he do that? All these people will have expensive legal representation. And in many developed countries the verdict is not based on one's guilt, but on the quality of one's legal representation. Expect many true criminals to walk away scott free.

That's enough for now. Next time I'll tell you how all this can be prevented.

Till next time.

2009 Financial Crisis

This financial crisis, why did it start, how did it start, how come it was possible in the first place, will it happen again?

We all know it started by people being able to make money by extending loans to people not having a snowball's chance in hell to service those loans. Making money by extending bad loans? That's downright stupid. Aren't there organisations, like governments and government organisations, who are supposed to see that such a stupidity can't happen? Where have they been? What have they been doing? Were they asleep or part of the whole scam?

To understand it all we have to go back to the beginning. Well not quite. We stay this side of the Big Bang and don't even approach moment zero. We start with one unenlightened cave man who put much effort into hunting down an antelope, killing it, skinning it, barbecuing a choice piece of meat to get the aroma to reach the nostrils of his intended partner in commerce. This cave man may have been unenlightened, but he was not stupid. He wanted to trade the antelope for something big. Well, not so big, really. She was kind of petite with disheveled hair and a build to die for. She was the teen-age daughter of his neighbour. This neighbour had the daughter, put effort into raising her at times and at other times convinced his wife to put the effort into raising their tomboy daughter. She was his property, like his wife was. He could trade her, and trade her he would. It was always on the cards. Life just was like that. He was getting on in years and his surviving four sons had families of their own and had no time to hunt for their old man and old lady. Now this young neighbour whose barbecuing meat smelled so heavenly was sure to be a good provider.

So, the trade was made. No money changed hands, but goods with intrinsic value did. The world of commerce operated like this for some time. The big problem with bartering was that one had to find someone who had what one wanted and wanted what one had. This was a problem even in primitive societies. There had to be something anyone could exchange for any goods. Some primitive societies used shells. Coinage and precious metals soon followed. Barter and buying co-existed for a long time. Even today barter is still used.

The problem was that in most cases the exchange medium had no or very little intrinsic value. How was one to insure that the system didn't get out of kilter? Who was to issue the exchange medium and how were they to decide how much of it to issue? The more people came on the scene, the more difficult these problems became.

Ideally, the exchange medium derived its value from the amount of goods and services a unit of it could buy. That means goods and services should increase and decrease in parallel to the exchange medium, or vice versa. It boils down to the same thing. As people increased and the industrial revolution came on the scene these problems became very difficult to manage. How was one to know the total amount of goods and services one should issue currency for? People started to back their currency with things like gold, which was a stupid idea. How can a currency derive its value from something dug out of the ground and put in vaults? Something of which there is much more available than is needed for all its uses? Gold may have been rare in antiquity, but not anymore. New gold fields and production methods have seen to that.

International trade has been around for thousands of years, but with the electronic age it accelerated out of all proportion. Now figures on paper, and even figures stored and moved between electronic mediums, count as currency. The balance between goods and services and whatever is used as an exchange medium has become very difficult to maintain.

Enter the sharks. They've always been around. But they never had it so good. Opportunities to make money out of manipulating money have never been so plentiful.

And there you have it: it is too easy to make money out of manipulating money. Very little thought has been given to how this can be prevented. The greed of some seems to be unlimited while the risk associated with scheming us suckers - yes, in the end someone always has to pay - is negligible. And, of course, people are too easily fooled. Will it happen again? You can bet your bottom dollar. Nothing has changed. These people got to keep their millions, they are not in jail, no effective safeguards have been put in place, such actions have not been criminalised. Yes, it will happen again.

Next time I will ask why the perpetrators are not in jail. What hold do they have over the powers that be that keeps them out of jail? Why did the powers that be not criminalise these actions? Why did they not take decisive action to prevent this happening again? Why reward these people and instances by paying them tax payer money?

Yes, Johnny Nash was right; there are more questions than answers.

Till next time.