Unintended consequences of market Tsunami
Paul Kennedy

RUNNING through Heathrow Airport this spring, late for a flight connection, my eye briefly caught a tabloid newspaper with the glaring headline: “End of 105-per cent Mortgages!!!” Recovering my breath and sanity on the plane a half-hour later, I began to ponder on what that meant. And it wasn’t a pleasant discovery. What 105-per cent mortgages meant was that foolish banks had lent to foolish people (at very low “come-on” interest rates) not only the entire capital for buying a house or apartment without the purchaser putting up funds, but an extra 5 per cent to, say, improve the kitchen.
This foolishness was not confined to the United Kingdom, although its habits of excess may have gone beyond all others. And, truth is told, if only the British home-lending system had been badly hurt — a Northern Rock collapse here, a Halifax Bank of Scotland fold-up there — that would not have raised many eyebrows in Singapore or Dubai.
The problem was that the same sort of fiscal recklessness was rampant in the world’s largest economy and, more importantly, that this “buy now, think about paying later” cancer of home-loans-without-responsibility had sucked in banks and investors across most of the globalised world. Sub-prime mortgages (the very term always made me cling to my wallet) in the United States had been eagerly funded by hitherto austere Swiss banks and normally Dickensian North-Yorkshire building societies. They had also been funded indirectly (but what is “indirectly” these days?) by Norwegian and Chinese investment corporations.
And the physical result was as plain as a pikestaff; it can now be seen in all those photographs of hundreds of half-built McMansions running straight into the cactus fields of Arizona. Here was the equivalent of the early-18th-century Dutch tulip bulb frenzy. And now it has collapsed, and rightly so. Sic transit Gloria.
But it is not just those foolish banks and foolish borrowers who have been hurt by the sub-prime meltdown, the collapse of venerable financial institutions, and the clumsy reactions of legislators (none of whom seem to understand how modern capital markets work -- for example, how short trades are a balance to long trades). The so-called “ripple effect” is surging much further afield and, as those waves advance, they are claiming a lot of victims and inflicting a lot of storm damage.
One is reminded, with mixed feelings, of the great Austrian economist Joseph Schumpeter’s phrase about “the perennial gale of creative destruction” that accompanies all capitalism. It certainly is bringing down a lot of trees, with many more to fall and reveal only their inner rot.
Some of the casualties have been at the forefront of all media headlines: Bear Stearns, Northern Rock, Lehman Brothers, Washington Mutual, the Halifax Bank of Scotland. Others, like Morgan Stanley and Goldman Sachs, have had to turn themselves into a different sort of financial creature to survive.Even those entities with capital assets enough to pick through and purchase parts of their fallen comrades in this gigantic yard sale (I’m thinking here of Barclays, Lloyds, Goldman Sachs, Bank of America, Morgan Stanley, Warren Buffett) are themselves diminished in their absolute capital standings, though they will surely stand stronger in a couple of years’ time.
It is unlikely that this board game of “roadkill and vultures” will stop soon, since a lot more medium-sized banks are on the verge and probably wouldn’t have received much practical help from the Congress’ first gigantic, ill-focused recovery package, which rightly met its nemesis on Monday afternoon.
In the meantime, tens of thousands of highly paid traders and bank staffs are losing their jobs and their fancy spending habits are contracting, which in turn will hit many more jobs further down the pecking order. Small businesses that hoped to expand their workplaces, or a young scouple wanting to buy their first apartment (and NOT on a 105 per cent mortgage), will find themselves hampered. Small and big people are hurt. The Chinese investment agency, which put many billions into Fannie Mae and Freddie Mac, is licking its wounds, too. But cast a glance at some of the other unintended consequences of the sub-prime debacle. As the so-called globalised economy contracts, many of the companies that provide its underpinnings will feel the pain. Expect to read that Boeing and Airbus have accepted significantly longer delivery schedules to various airlines for their super-long-range jetliners; and expect that Korean shipbuilders will note a marked reduction in future container-ship orders.
Expect that oil exploration plans will be revised — downwards. Expect that the providers of high-tech office equipment, desktops and super-computers will see a tumbling of orders — in proportion, really, to their horrible loss of share value on NASDAQ over the past while. This is not a time to be in Silicon Valley. Better by far to be producing single-malt Scotch whiskey. At least you can sip it.
This contraction is also witnessing a tumble in the price of all commodities, especially oil. It is not a bad thing, at least to Americans and other Western oil-dependent consumers, to have the future per-barrel oil price fall to, say, a mere $85, especially as winter approaches. Moreover, those tumbling oil prices will also, and more sharply, hit the arrogant petroleum-peacock-states of Chavez’s Venezuela and Putin’s Russia. They, too, will recognise more than they ever did before that they have become to a large extent dependent upon the London Interbank Offered Rate (the mysterious Libor) and the forward market price of West Texas Intermediate crude. Having to close the Russian stock market, as happened again last week, and yet also watch venture capital flow out of that country, may prove to be a nice curb on Kremlin foreign-policy posturings.
Even the rising Chinese superpower is being blasted by these distant capitalistic convulsions, although probably not to the same degree. Still, how could its Finance Ministry, seduced by the advice of Wall Street bankers and consultants to place billions of dollars into American so-called “safe havens,” not be badly shaken by the financial tumults of the past few weeks?
Should China trust the Yankee swashbuckling capitalist system? Is investing so heavily in dollar-denominated instruments such a wise thing? What will happen to its vital exports to that enormous, volatile consumer market? Already The People’s Daily in Beijing has published a noteworthy piece by the economist Shi Jianxun calling upon the world to create “a diversified currency and financial system and (a) fair and just financial order that is not dependent on the United States.” Where goes the dollar then, and its long-standing reputation as a safe haven?
At the end of the day, then, the biggest loser may well be the United States itself, and by that I mean not just the standards of living of tens of millions of its citizens but its relative military-strategic-diplomatic “heft” in world affairs. If a country’s great-power status is underpinned, essentially, by its economic and financial muscle, then the present credit-market crisis cannot be anything other than detrimental, one late blow at the end of an eight-year presidency that has already weakened America’s position in many other ways. One can only admire Senators McCain and Obama for their courage (or worry at their lack of imagination) for actively desiring to get into a White House so full of broken China.
And such a lot of this has to do with those 105-per cent mortgages and the arrogance, greed and foolishness of those who handed them out, those who took them, and the legislatures who dismantled prudent fiscal oversight. Ruefully, and as I cast a glance at my own pension holdings, I see I was right to worry about what that tabloid headline meant. In this globalised, interconnected world of ours, no man (or woman) is an island. So, in John Donne’s immortal words, “Never send to know for whom the bell tolls. It tolls for thee".

—Khaleej Times

Crossing the straits
Wang Hairong

ON September 7, Wang Yi, Director of the State Council Taiwan Affairs Office, announced several new measures to promote cross-straits exchanges. Under the new measures, Chinese mainland residents with valid permits to travel to Taiwan can travel via the islands of Kinmen, Matsu and Penghu, as can all residents in the 13 mainland provinces and cities that are open to travel in Taiwan. Although tourists from the 13 mainland provinces and cities have been able to travel to Taiwan on weekend direct charter flights since July 18, their itineraries are restricted by the fact that they can only board the planes at a limited number of airports and the flights operate only from Friday to Monday.
Traveling to Taiwan via Kinmen, Matsu and Penghu is more flexible and more direct, said Chen Yangbiao, Vice Director of the Tourism Bureau of Fujian Province, at the Roundtable Conference of the Fourth Cross-Straits Travel Fair held in Xiamen City of Fujian on September 7. According to Chen, ships traveling daily between Xiamen and Kinmen depart every 20 minutes, and each trip only lasts 40 minutes, so mainland tourists could choose to leave and return to the mainland on any day. Industry analysts estimate the round-trip cost is about half that of a weekend charter flight. Although the mainland and Taiwan are separated only by a narrow strip of water, the journey across the straits has been an arduous one. Direct transportation between the two sides was at a complete halt for decades due to political reasons. In 1979, the mainland proposed a "three links" policy that promotes direct mail, trade and transportation services. Progress toward the "three links" had been slow until the turn of the 21st century.
In January 2001, the mainland and Taiwan established direct transportation for the first time since 1949-allowing passengers and cargo to use two routes, namely, Xiamen City-Kinmen and Mawei-Matsu. The first group of mainland tourists to visit Taiwan since 1949 made the trip from Xiamen to Kinmen in December 2004. The group of 55 people spent three days and two nights in Kinmen only, as they were not allowed to visit other parts of Taiwan.
As of the end of 2007, some 55,906 mainland tourists in 2,558 groups had visited Kinmen, Matsu and Penghu, about half of them in 2007 alone. The rest of Taiwan, however, was closed to mainland tourists until July 2008. The decision to open Taiwan to mainland tourists came after the mainland-based Association for Relations Across the Taiwan Straits (ARATS) and the Taiwan-based Straits Exchange Foundation (SEF) met in June and signed two agreements, one launching weekend direct charter flights and another permitting mainland tourists to visit Taiwan. The first mainland tour group arrived in Taiwan on July 4, opening a new chapter in cross-straits exchanges. Tourism administration officials in the mainland and Taiwan are actively discussing more extensive cooperation. At the Roundtable Conference of the Fourth Cross-Straits Travel Fair, the mayors of 23 mainland cities in four provinces closed to Taiwan-including Fujian, Zhejiang, Guangdong and Jiangxi provinces-signed the Xiamen Declaration on forming regional tourism coalitions and strengthening tourism cooperation with Taiwan.
In response, the Transportation and Tourism Bureau in Taiwan's Kinmen County put forth an "N+X" regional cooperation framework plan. The organization explained that N represents the mainland cities in the regional tourism coalition, while X refers to cities in Taiwan. In the first stage, "23+3," 23 mainland cities will begin regional cooperation with Kinmen, Matsu and Penghu in Taiwan. In the second stage, "23+3+2," regional cooperation will be expanded to include Taipei City and Kaohsiung City. The third stage adds 23 counties or cities in Taiwan to make "23+23."
The tourism industries on both sides of the straits should share tourism resources and engage in win-win practices, said Shao Qiwei, head of the National Tourism Administration of China, at the opening ceremony of the Cross-Straits Travel Fair. The tourism industries would not only build a cross-straits tourism brand, Shao said, but also a tourism economic rim. Relevant tourism departments and enterprises in Fujian have been working with their counterparts in Taiwan on plans for further tourism development. Travel agencies have worked together to produce various travel itineraries. In addition to designing and marketing tourism products, the two sides have been weaving a land, water and air transportation network.

—The Daily Mail-Beijing Review Articles Exchange Item

The war unwinnable in Afghanistan
Gwynne Dyer

THE main purpose of British generals, it sometimes seems, is to say aloud the things that American generals (and British diplomats) think privately but dare not say in public. Things like: “We’re not going to win this war.” That was what Brig. Mark Carleton-Smith, the senior British commander in Afghanistan, said last week at the end of his six-month tour in command of 16 Air Assault Brigade. His force saw a great deal of combat and lost 32 killed, but it didn’t lose any battles. Regular troops rarely lose battles against guerrillas. But there were no lasting successes either — which is also typical of wars where foreign troops are fighting local guerrillas.
Carleton-Smith did not say that the foreign forces in Afghanistan would lose the war. He said that they could not deliver a “decisive military victory.” The best they might do, over a period of years, would be to reduce the Taleban insurgency “to a manageable level...that’s not a strategic threat and can be managed by the Afghan Army.” This will not be news to any professional soldier who knows the conditions in Afghanistan. The question is whether it comes as a surprise to American and British politicians (including Barack Obama) who still promise “victory” in the Afghan war. Because if victory is not possible, then in the end, the Afghan government will have to talk to the Taleban and negotiate a peace settlement.
“If the Taleban were prepared to sit on the other side of the table and talk about a political settlement,” Carleton-Smith continued, “ then that’s precisely the sort of progress that concludes insurgencies like this. That shouldn’t make people uncomfortable.” The truth is that the foreign forces are backing one side in an Afghan civil war. If the war cannot end in a decisive victory for one side or the other, then it must end in a negotiated peace that is acceptable to both sides. The reason neither side can win is that they are too evenly balanced, and each can hold its own territory indefinitely. The United States allied itself with the main northern ethnic groups, Tajik, Uzbek and Hazara, who together account for about 60 percent of the population, in order to drive the Taleban from power in 2001. But the Taleban were and still are the major political vehicle for the Pashtuns, who are about 40 percent of the population.
The Pashtuns were traditionally the dominant ethnic group in Afghanistan, but in 2001 they were effectively driven from power by the other ethnic groups and their Western allies. That is why they are in revolt: The area where Western troops are fighting “the Taleban” are all the areas of southern and eastern Afghanistan where Pashtuns are in the majority, and nowhere else. In practice, the foreigners are fighting Pashtun nationalism. That is why they cannot win. On the other hand, and for the same reason, the Taleban cannot win a decisive victory either. They never established control over northern Afghanistan even when they ruled in Kabul in 1996-2001, mainly because the other ethnic minorities saw them as an exclusively Pashtun group. Moreover, most non-Pashtuns who did fall under their rule were alienated by their intolerance and brutality, and would certainly not welcome them back in sole power. But a negotiated peace deal must give the Pashtuns a fair share of power at the center, and that means giving the Taleban a share of the power. This is still seen as unthinkable in most Western capitals, but it is a thoroughly traditional Afghan way of ending the periodic ethnic bust-ups that have always plagued the country, and it will happen sooner or later.

—Arab News