Teaching ethics

While we are on the subject of humanity (Yueyue) in China, it occurs to me that we need to teach ethics not only to the Chinese but to many on Wall Street as well. Unfortunately teaching ethics is not as easy as teaching Mathematics — there is more of a cultural/religious context — but IMO every educational system should place as much emphasis on ethics as on the hard sciences. And ethics should be a compulsory subject in most university degrees — especially business and sciences.

It is a long time since I studied ethics but have never forgotten the outstanding example set by a handful of British Quakers more than a century ago. Some of their businesses have enjoyed tremendous success and are now household names in the UK — Cadbury, Barclays, Lever — demonstrating that ethics and (long-term) success are not strange bedfellows, but go hand in hand.

Some are simple examples of altruism like the model village William Lever built in 1899 at Port Sunlight to house workers from his soap factory.

Others showed how to behave when confronted with an ethical dilemma. Cadbury had opposed the 1899-1902 Anglo-Boer War in South Africa. His biscuit factory was in dire straits and about to go under when he received a huge order to supply British troops in South Africa. He now faced a moral dilemma: either go against his principles or go out of business and lay off his workers. He resolved the conflict by accepting the order — enabling him to keep the factory afloat and his workers from losing their jobs — but on the condition that he would only cover his direct costs. He refused to take a single penny of profit on the entire contract.

There are examples of altruism, self-sacrifice and moral courage from many nations and religions. Feeding students a steady diet throughout their education would go a long way towards ensuring that our next generation of leaders, both in politics and business, show more humanity and compassion toward their fellow man.

Toddler’s Death Stirs Ire in China – WSJ.com

“The most important thing for Chinese people right now is making money and pursuing their own interests,” said Jin Liang, deputy director of the Shandong Institute of Behavioral Science in eastern China. “Our education system doesn’t teach ethics. Environment is very important in determining people’s behavior, and right now Chinese culture is sick.”

Others have argued that the problem is largely a legal one. They point to a series of cases in which Chinese Good Samaritans have helped strangers only to be later blamed and sued.

The most famous such case occurred in Nanjing in 2007, when a young man named Peng Yu was sued after he escorted an elderly woman to the hospital after she had fallen and broken her leg. The court ordered Peng Yu to pay 40% of the woman’s medical bills, explaining that “according to common sense” he wouldn’t have helped her if he weren’t in some way responsible for her fall.

via Toddler’s Death Stirs Ire in China – WSJ.com.

Humanity seems to vary greatly between countries …. and sometimes within countries. I myself can only recall experiencing kindness when I lived in Africa, but at the same time would read news stories like the Cape Town woman whose car overturned on a country road, leaving her trapped inside with a broken leg and pelvis. Passersby dragged her free of the car before raping her and making off with her handbag.

If there was some way of measuring humanity in a country, on a scale of 1 to 10, I am sure that you would find a strong correlation between humanity, stability and economic prosperity.

Scandinavian countries would probably rank highest on such a scale. Interesting that, before introduction of a religion (Christianity) which emphasizes humanity toward your fellow man, their Viking ancestors would have ranked near the bottom. Perhaps there is hope for all of us.

Regulators Seize Main PMI Subsidiary – WSJ.com

The main subsidiary of mortgage insurer PMI Group Inc. has been seized by insurance regulators in Arizona, and will begin paying just 50% of claims beginning Monday, according to its website…… Mortgage insurers have suffered from billions of dollars in losses on policies they sold in the years just before the housing bubble burst. PMI alone has reported about $3 billion in losses since the fourth quarter of 2007.

via Regulators Seize Main PMI Subsidiary – WSJ.com.

Europe’s highly-leveraged banking sector

Comparing common equity to total assets, 10 major European banks are leveraged more than 25 to 1 (a ratio of less than 4.0%).  According to The Big Picture, Dexia is the highest at close to 77 times, but the others are:

  • Deutsche Bank
  • Credit Agricole
  • Credit Suisse
  • Commerzbank
  • Barclays
  • ING
  • BNP Paribas
  • Societe Generale
  • UBS.

Using total equity may indicate slightly lower leverage but the results offer some idea as to why the  issue of recapitalizing banks is taking so long to resolve.

Obama Announces Complete Drawdown of U.S. Troops From Iraq by Year’s End – ABC News

“Today, I can report that as promised, the rest of our troops in Iraq will come home by the end of the year,” the president [Obama] said. “After nine years, America’s war in Iraq will be over.”

via Obama Announces Complete Drawdown of U.S. Troops From Iraq by Year’s End – ABC News.

Doesn’t it just inspire you with confidence in the political system when battlefield decisions are made to coincide with the presidential election campaign — and enemies are notified of troop withdrawals two months in advance — so they can plan a “going away” party for your troops.

Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate

The eurozone’s creeping fragmentation is primarily the result of the mutual dependence of banks and governments. In the eurozone, banks are vulnerable to sovereign-debt crises because they hold a lot of government bonds – frequently issued by their country of origin. Governments, for their part, are vulnerable to bank crises because they are individually responsible for rescuing national financial institutions. Each episode in the current crisis illustrates the fragility caused by this interdependence.

via Three Ways to Save the Eurozone – Jean Pisani-Ferry – Project Syndicate.

Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge

The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed’s monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed’s actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market’s neck.

The Fed’s quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so.

via Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge.

I agree that the Fed should not interfere with interest rates. It causes market imbalances that later lead to recessions and bubbles in stocks and housing and threaten the very survival of the banking system the Fed is trying to protect.

QE achieved the opposite of its stated objectives, raising long-term interest rates with lowering unemployment, but did not really increase the national debt by a dollar. Sales of  bonds by the Federal Treasury to the Federal Reserve is like the US government selling to itself. The Fed is just an off-balance sheet, special-purpose entity (think Enron, bank CDOs and other bad smells) created by  the government and banks in 1913 to  bypass restrictions in the Constitution on the issue of bank notes. In all but name it is a division of the US Treasury. The majority of the “independent” board of directors are political appointments. Ever seen a dissenting vote coming from one of the political appointees? Regional board members, where most dissenting votes come from, are a minority appointed by regional banks. They can dissent, but when it comes to counting the votes they’re outnumbered.

Greece: Banks and Pols at Impasse

The debate over how to divide the costs of rescuing Greece is one of the central questions European officials hope to resolve at a weekend summit that comes almost two years to the day after a newly elected government in Athens admitted that the country’s finances were “off the rails.”

……On Wednesday evening, an unexpected gathering of top European officials and IMF Managing Director Christine Lagarde in Frankfurt failed to bridge a divide between Germany, which is footing much of Greek’s bill and supports larger private-sector losses, and France, which is more concerned about the impact of greater losses on its banks.

via Greece: Banks and Pols at Impasse.

My money is on Germany — and a bigger haircut for banks. Then the next headache is how to recapitalize the banks. The cause of the problem: Basel II allowed 50:1 leverage on government (including Greek) bonds.

Gold monthly chart

Spot gold remains in a strong primary up-trend on the monthly chart. Breakout below support at $1500 — or a 63-day Twiggs Momentum cross to below zero — would warn of a reversal, but respect of $1500 support would indicate another primary advance with a target of 2300*.

Spot Gold Monthly

* Target calculation: 1900 + (1900 – 1500 ) = 2300