In the latest development in the ongoing train-wreck that is global financial markets, the Irish Government has stepped in to guarantee deposits and debt of all Irish Banks. This is an extraordinary step to take and reflects a banking system that is truly broken. Finance, particularly banking, is built on trust more than law (as described in Francis Fukuyama’s book “Trust”) and that trust has well and truly gone from the market.
Update: regular commenter Mark L has helpfully identified they reason behind the apparent anomaly in the statistics that motivated me to write this post. I had misinterpreted one of the statistics. While this takes the mystery out of the numbers, it does highlight how tricky it can be to get to grips with the statistics of medical tests. I have edited this post to correct that misinterpretation. I decided not to use a the strikethough editing approach popular among bloggers as the content can be confusing enough already!
Despite the fact that more banks have been failing (Bradford & Bingley, Wachovia, Hypo Real Estate, Fortis,…), in this post I will continue to stay away from the subject of the financial markets and will instead look at some mathematics, trying not to lose too many readers in the process.
Recently I was contemplating results from an “NT-plus” test, which combines ultrasound measurements of the nuchal translucency with maternal blood-tests to provide a screening test for various chromosomal abnormalities, particularly Down Syndrome. Tests of this type abound with statistics and the mathematician in me could not resist crunching the numbers a little to get a better understanding of the test.
It’s time for a break from watching the financial markets implode. Instead, this post will focus on the arts, Newtown-style. Every year, the shops of Newtown become an extended gallery exhibiting the works of young Australian artists. Or at least, that’s how I describe it. According to the City of Sydney website, the aim of the exercise is “to combat the exclusivity fostered by institutional gallery spaces”. In years gone by, the exhibition was called “Walking the Streets”, but this year it goes by the name “2042: Art on the Street”. For those who are not local, 2042 is the postcode of Newtown and the immediate surrounds.
Being locals, Henry, my five year-old son, and I took a walk up King Street today to look at some of the works on show. Inspired by the blog Nosey in Newtown, we decided we would document the event, so we set off both armed with cameras. The undoubted favourite was the sculpture of giant ants beginning to rip into a car.
Financial markets around the world remain extremely anxious as the US Congress ponders the Troubled Asset Relief Program (“TARP”) proposal, aka the Mother of All Bailouts (“MOAB”). Under this proposal, the US Government will spend up to US$700 billion to buy “troubled” mortgage-backed securities in the hope that this will lubricate the markets that have well and truly seized, encouraging banks to start lending once more to each other, corporates and individuals.
There has been criticism of the plan both from some Democrats who want to see curbs on executive salaries and from some Republicans who are decrying the plan as financial socialism. Nevertheless, most observers expect the plan to be passed by the end of the month particularly since Paulson seems to be conceding ground on the subject of executive compensation.
One interesting perspective on the chances of success comes from the prediction market intrade which allows bets to be placed as to whether or not the plan will be passed. At the time of writing, this market puts the chances at 77%. (The chart originally published here is no longer available).
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Earlier this week, Australia joined the US, the UK, France, Germany, Canada and other countries in clamping down on the practice of “short selling” shares. According to the regulator, the Australian Securities and Investments Commision (ASIC), the new restrictions were aimed at reducing “unwarranted price fluctuations”. For the moment, the restrictions are in place for a period of 30 days, at which point ASIC will decide whether to extend or lift the restrictions.
For many outside the financial markets, the practice of short selling is a mysterious one and, for some, rather worse than that. The following letter to the editor in the Sydney Morning Herald is a case in point:
Short selling can be carried out only if the buyer is misled into believing that the seller owns the stock (“ASIC in total ban on short selling“, September 22). Can short selling ever be morally justified? Surely the only beneficiaries of such activity are those with sufficient funds to manipulate the sharemarket. After all, we cannot legally “short sell” anything else we do not own, such as a neighbour’s house, business or car.
Laurie Mangan Tamworth (September 23)
So what is short selling? Contrary to Laurie’s view, there is no misleading involved but it does involve selling shares that, essentially, you do not own. There are two types of short selling: naked (which really sounds naughty) and covered (which sounds a bit better). To explain what each of these involves, I’ll first go into some of the mechanics of share trading.
The phrase “too big to fail” (TBTF) has been used a lot throughout the credit crunch of the last twelve months or so. Now it seems that American International Group (AIG) was too big to fail as it was bailed out by the US Federal Reserve (the “Fed”), while Lehman Brothers was not and was allowed to collapse in ignominy. For those outside the financial markets, it probably doesn’t make a lot of sense (not that it makes much more sense for those on the inside), so what is going on here?
There is an old saying that if you owe the bank $1,000 that’s your problem, but if you owe the bank $1 million that’s their problem. Something similar is at work at the moment in the financial markets.
In theory, companies in a capitalist economy are free to stand or fall on the results of their own business decisions. If they do fall, investors who chose to buy shares or bonds will lose out, but that risk is supposed to keep everyone focused on making better decisions. Banks have always been a little bit different, for two reasons. First because they take deposits from “mums and dads” (or, as the banks call them, retail depositors) and it is in the interests of the smooth-running of the whole system that this money is put into banks rather than under the mattress. Hard experience over the years of bank runs has led to various forms of depositor protection around the world, such as Government guarantees in the US through the Federal Deposit Insurance Corporation (FDIC). Of course, banks make a decent, albeit shrinking, profit from all these protected deposits.
A topic that the New York Times visits from time to time is that of income inequality. In the United States, the gap between the highest and lowest earners has been increasing over the last 80 years or so. A recent article returns to this theme and provides further insight into the trend. It cites research from the new book “Unequal Democracy” by Larry M. Bartels, which indicates that income inequality has increased far more under Republican presidents than under Democrats.
The 2008 Paralympic Games are now well underway in Beijing. Since my Olympic medal charts on Swivel proved popular, I have now created a data set for the Paralympics as well, which I will be updating regularly (source: Beijing 2008 Paralympics website). One of the topics I touched on during the Olympics was the influence of the size of a country’s population and economy on their performance at the Games. This topic did prove controversial with at least one reader and the links may be more tenuous for the Paralympics. Neverthless, I will risk revisiting the subject here.
The world’s financial markets have shifted their focus from oil supply problems to the demand side of the equation. They appear to have decided that the US and European economies look so dire that oil consumption will collapse. As a result, oil prices have been in free-fall, barely staying above US$100 per barrel. If the recent hostilities in Georgia had taken place a couple of months earlier, oil prices would almost certainly have shot up. But with the shift in focus, they scarcely reacted to the conflict.
Unfortunately for Australian motorists, a weak Australian dollar is preventing the full effect of lower oil prices coming though to the price of petrol at the pump. Oil is not the only commodity to see price declines, not good news for the currency of a commodity producing country. More significantly, the Reserve Bank has started cutting interest rates and the dollar is moving down alongside rates. Since the end of July, the dollar has fallen almost as much as oil. The result, evident in the graphs below, is that oil prices have not fallen nearly as much in Australian dollar terms as they have in US dollar terms.
In my recent post on the future of Microblogging, I expressed concerns about the viability of twitter given that they are yet to find a business model. But perhaps I just wasn’t thinking laterally enough: earlier this week I stumbled across a novel approach to monetising microblogging. The new site Blip.fm brings music to microblogging in a way that initially had me scratching my head, but it is gradually starting to make more sense. Based on a recent post on the Microblogger’s blog, 140char, others are responding in much the same way.