Preservation: The Baby, The Green Back or the Yellow Belly?

In today's climate we are all looking for one thing; preservation. That's right, forget making money, most of us are just looking for a way to make sure that our money doesn't slide out from beneath us in this economically destabilizing world.

Earlier this year, I had most of my funds tied up in dollar markets, and I worked hard to liquidize my funds and on on September 1st, moved the bulk of them from dollars to pound sterling at a rate of 1.845. I figured at that stage that I had done pretty well; I had transferred these funds across at rates of 0.5ish, and I figured that the dollar would decline against the pound and I would be able to repatriate (so to speak) my assets in the near future. As far as I was concerned, I was in a win-win situation.

But for some reason the dollar or the pound would just not follow my plan. The dollar remained strong (for different reasons that I've yet to blog on) while the pound slumped to record lows through Q2. Today the tradeable rate sits at 1.465 which would mean that a reconversion would cost me a considerable 1400GBP per $10,000. Ouch; the harsh reality of a 20% drop. The only good news here is that it's only slightly below my initial trading rate for the mostpart.

So perhaps chasing the dollar shouldn't be high on my priority list. With many forecasting sterling's parity with the euro in 2009 and gold's current recovery... is it time to explore one of those options? Also the possibility of "sitting tight" and just riding this out even seems viable at the moment. Comments, as always, are welcome!

Don't Be* There

On December 7th, this article was posted on Slashdot. It seems that various UK ISPs who were subscribed to the IWF (Internet Watch Foundation) had blocked access to a certain page on Wikipedia. The page, the entry for the Scorpions' "Virgin Killer" album contained an image of a pre-pubescent girl and the IWF contacted the UK member ISPs and asked for the content to be censored.

There are so many issues with this that I find it hard to start in a coherent place. My ISP, Be*, is apparently a member of the IWF. I say apparently because it was not advertised or even disclosed by Be* in the small print. You would have thought that being a member of such an influencing government funded body would have been of relevance to members. Apparently not.

My next issue is the censorship itself. Obviously this is a much larger issue than one supposedly indecent image, but when did we as a country or as the Internet start to decide what was acceptable, and what was not? This is an incredibly slippery slope which has huge global ramifications.

Next seems to be the way in which the content was censored. Turns out that all customers were routed through something called a transparent proxy. To cut through the techno babble on this one, it simply meant that as far as Wikipedia was concerned, everyone was accessing the Internet from the same Internet address. Because of this, Wikipedia had to stop anonamous posting (because it could no longer be tracked) and new registrations for the same reason.

Then came the issue of the resulting message to customers which has been termed security through obscurity. The message was delivered in the form of a 404 message to customers. This would normally indicate that the page did not exist... which of course it did. Instead of at very least including information on the block and the reasons behind it, it was actually a completely fraudulent message... in effect a lie.

Onwards to the final insult, the fact that Be* did not communicate this issue to members in any official way. Random posts and ticket responses were included in the forums, but their response to this large-scale invasion of Internet user's rights went unmentioned.

Then yesterday afternoon, Slashdot reported on the IWF backing down on the issue. Apparently the IWF credited the Streisand effect for "opening their eyes". (The Steisand effect in a nutshell is when censored information is made super public, backfiring completely on the original censor.)

Their release stated that:

"...in light of the length of time the image has existed and its wide availability, the decision has been taken to remove this webpage from our list. Any further reported instances of this image which are hosted abroad, will not be added to the list. ... IWF's overriding objective is to minimize the availability of indecent images of children on the internet, however, on this occasion our efforts have had the opposite effect."

This of course does not negate the situation in any way. Indeed both the IWF and member ISPs will be left with very damaged reputations. This is extremely damaging for Be* becauase as many members point out, Be* is a ISP widely used by technical professionals, and it has failed to act in a communicative, fairhanded, neutral and frankly professional manner.

Be* users can review the pertenant discussion thread on the Be* member forums here.

Krugman's New Depression

I've just been reading an interesting article by Paul Krugman regarding the New Depression and thought I would share a condensed version.

He starts by looking at the deflation of the housing market in autumn 2005, and the late realisation of this in the spring of 2006. It seems that although house values were deteriorating and sales were falling, actual prices were not.

Of course this is fairly damaging, because as soon as home owners find themselves in a negative equity situation, creditors feel the pressure. Foreclosures are a poor conduit of debt recovery.

He then talks on why the creditors don't help out the home owners by relaxing payment plans or "restructuring" their debt. It becomes apparent that this debt is actually sold on and divided up between investors and other parties of something known as a shadow banking system. These mangled debts are branded collateralised debt obligations or CDOs, the management of which falls down to loan servicers who have little interest or resources to enable debt restructuring.

In essense by this stage, securities backed by sub-prime mortgages became a bad investment. By Febuary 2007, it was realised that shares in CDOs were going to take a serious hit... in fact by the end of 2007, it was generally decided that anything to do with the housing marked was pretty dangerous.

It turns out that the dessolation of the housing market saw $8 trillion in losses, $7 trill of which were felt by home owners, $1 trill of which by investors. You would have naturally thought the knock on effect to home owners would be the worst felt, however that $1 trill loss to investors actually triggered the colapse of the shadow banking system.

In a nutshell, the shadow banking system has become very popular due to high interest rates and low borrowing rates... but at a cost of deregulation and lack of Federal assurance. The SBS could do this because it did not require the level of liquidity that the banking system mandated.

So what happened? Well simply put, people panicked and started to try and repay debts by selling assets. In essence, it became a run on the banks similar to those of the 30s, with the exception that this was a run of mouse clicks... but just as damaging.

US investment banks started falling and the Fed tried to help by lowering interest rates, but this was only felt by business and individuals with top credit ratings... those with poor ratings were still being charged higher rates, so the cuts were not felt as widely as the Fed had hoped.

Of course the other danger of the SBS was that the Fed seemed powerless to help; pouring money into the banking system generally did nothing to quell the pain perpretrated by the SBS. It was decided then, that the way to help the shadow banking system was to invest in investment banks, money market funds and even non-financials.

See, helping the banking system encompassing just $800bn was a pretty easy task... but of course the SBS was playing with around $50 trill of credit, so any rescue package would just be a drop in the ocean.


Now we talk about decoupling. Krugman talks about the way our global ecomomy is, on paper, able to decouple itself from the US and Europe when needed, therefore warding against a global recession. The problem with decoupling seems to be twofold. Firstly, emerging markets were heavily investing in the US as a means of stability; secondly US and global investment banks were taking part in a mechanism know as the carry trade. Simply put, an entity borrows from an economy with low interest rates, and lends to economies with high rates. When it works... it works well. The only backlash being of course, that global economies are therefore very much intertwined as a result.

The core issue along with the aforementioned is the lack of demand as the result of financial insecurity coupled with bloated production capacity. A bad combination indeed. Simply put, private spending is drying up.

So what is the solution? Recapitalisation, some of which is already taking place in the form of the Fed's $700bn bailout package, but Krugman believes that this is too little, and that a broader recapitalisation is required, and maybe even deeper nationalisation of key financial entities and processes.

He concludes by talking about the apparent need for deeper and deeper regulation to these entities, processes and systems once recovered to prevent reoccurance. These safeguards were already put in place in the aftermath of the Great Depression, but it seems that as the Great Depression became that of fairy tales... people became more comfortable with the idea of an indestructable, infallable financial system and became lax, dangerously opportunistic and more demanding of what is in reality, a very fragile system.

Krugman's article made for some interesting reading not only because it explored the past, present and future of the current crisis, but because it went some way into understanding why the "infection" so to speak was able to masasticise so quickly throughout the financial systems of the world both developing and developed.

He concludes that the real danger here is not lack of resources or even virtue, but of understanding.