G E B W E B

Here are some things you can do to ease your load on the environment:

1. Drive less
2. Fly less (I’m a sinner on this one, though…)
3. Wear a sweater instead of turning up the heat
4. Use a clothesline instead of a dryer
5. Carry your own shopping bags
6. Avoid bottled water and over packaged products
7. Cancel cable TV (really, it’s complete junk)
8. Change to energy efficient light bulbs and turn off the lights you don’t need
9. Recycle your trash
10. Buy local

Aside from the obvious positive effect this has on the environment, it will make you healthier and save you money. Now, you’ve probably heard these suggestions a million times, so if you’re still reading, you likely care about the environment and wonder if there is something else that you can do. You didn’t think I would write a post with a bunch of old, off-the-shelf actions that you already knew of, did you?

Provided you have money in the bank, which you should have, since you’ve been saving money on the above actions, the most effective thing you can do is simple: Withdraw it.

The money in the bank is not just sitting there. It is continuously fueling someone else’s consumption and causing environmental mischief around the world. The bank takes your deposit and lends it to some schmuck, let’s call him Joe, who wants to buy something, say a car. Joe then takes the money and gives it to the seller of that car. The seller, James, deposits the money in the bank. Both you and James think you own the money in the bank now, but which one is it? The answer: The fastest one of you. Of course, you will have to outrun many others as well, since the bank takes James’ deposit and lends it to Jill, who hands that money over to Jack, who puts it in another bank and so it goes on.

The only thing that limits this monetary game of musical chairs, is the fraction of each deposit the bank is required by law to hold as a reserve. If the reserve requirement is 10%, then the bank can only lend 90% of your money to Joe. The total amount of money that can be created is 0.9 + 0.9^2 + 0.9^3 + … = 1/(1-0.9) – 1 = 9. That is, 9x the original amount. So while you may think you’re saving the environment by your frugal lifestyle, your savings account is hard at work wrecking environmental damage to the tune of 9x the amount you put in there.

Well, 9x is a very conservative measure. In the USA, the reserve requirement for checking accounts is 10%. The reserve requirement for savings accounts is 3%. So if you want to earn some small amount of interest on your money, it is wrecking damage to the tune of thirty-two times the amount you put in there. There are 32 James out there who think they own the same money you put into the bank. There are 32 Joes out there who are buying Hummers, constructing McMansions or are otherwise living beyond their means, courtesy of your nimbleness.

In most of Europe, the reserve requirement is 2% for checking and savings accounts. You get 50x the wasteful spending. If this makes you feel sick, let’s look at this system in another way: It’s a giant amplifier for your voice. By taking your money out of the bank, you also force all the Joes and Jills out there to live within their means and adapt the same frugal ways that the environment so craves. You destroy the wealth of the James and Jacks out there who sell crap that you (and they) can easily live without. The same excessive leverage that fueled this consumerist monster, is also making it extremely vulnerable: If only 1% of deposit holders in Europe did this, half of the credit-based over-consumption would stop.

Where do you store money if not in a bank? Well, you can put it in the bank’s safe deposit boxes. There exists a popular misconception that this is somehow illegal. It is not, as long as you report it on your tax return. The banks, earning most of their money on the crazy money expansion they do, are not particularly happy to store cash in their boxes (conflict of interest, anyone?). They usually have a clause that you may not store cash in the box in the lease agreement. This does not matter, because the bank does not have the private key to the box, and they don’t want to know what is in your box anyways. If you have very large sums, you can get a safe instead.

With the cash safely stored in a vault, enjoy your new fifty times greener conscience. Your hard-earned savings are no longer speeding around cutting down rainforests, enabling fifty Jills to drive gas-guzzlers or buying already filthy-rich CEOs palaces, yachts and learjets.

Så er den her, bankpakke 2. Selvfølgelig sammen med våset om at “bankpakke 1″ har fungert. Det har den ikke, det vil den ikke, og det vil heller ikke bankpakke 2. Den overvåkne leser vil huske at jeg skrev om bankpakke 2 allerede i oktober i fjor. Man trenger ikke være snåsamann for å spå at mer av det samme som skapte krisen, ikke vil løse den.

Krisen er et resultat av usmakelig høyt forbruk finansiert av en kredittflom helt uten sidestykke i historien. Nå er folket og næringslivet belånt til bristepunktet, og kan ikke konsumere hemningsløst som før. Vi har en syk overkapasitet i næringslivet. Våre hjem flommer over av ubrukelig crap som vi trodde ville gjøre oss lykkelige. I stedet må vi løpe raskere og raskere på hamsterhjulet for å få råd til all skiten.

Bankpakke 2 skal hjelpe bankene å få igang utlån igjen. Hvorfor i #*@%# skal vi ha mer kreditt når det var altfor mye kreditt som har lagt grunnen for denne finansielle, økologiske og åndelige katastrofen? Som en gambler som har gått på en smell, vil Kjøpe-Kristin og Jalla-Jens doble innsatsen for å vinne tilbake det tapte. I motsetning til en gambler ved rulletten i Vegas, som har 47% sjanse for å lykkes, har de null håp (*).

Du tenker kanskje: Er dette noe å gnåle over da? 100 milliarder er jo mye mindre enn den første bankpakken. Les denne artikkelen fra Dagens Næringsliv nøye.

Løsningen er todelt, der 100 milliarder skal deles likt i to fond: Statens finansfond og Statens obligasjonsfond. De to fondene blir to selvstendige juridiske enheter. En slik tilførsel gir bankene økte utlånsmuligheter på 500 milliarder kroner.

Den ene halvparten av pengene som skal brukes gjennom banksystemet, 50 milliarder, gir altså bankene mulighet til å låne ut 500 milliarder mer. (Hvis det er et mysterium for deg hvordan 1 krone blir til 10 kr i banken, bør du google etter “Fractional Reserve Banking”) Hvis vi regner med at staten gjør det samme med den andre halvparten av pengene, snakker vi om 1000 milliarder i risiko gjennom denne pakken. Det er halve oljefondet. Den andre halvparten tar krakket i aksjemarkedene seg av.

Så hvis du på noen måte er avhengig av at staten har penger – f.eks ved at du hadde planer om å pensjonere deg en gang eller kunne tenke deg at brannvesen, politi, sykehus, skoler osv. også finnes i framtida – da bør du vurdere om bankpakke 2 er noe for deg. Hvis du vil stanse denne galskapen, send meg en melding under. Hvis ikke kan du gi #*%& i å tigge fra meg når du er arbeidsløs, blakk og trenger en schilling til mat. You had your chance…

(*) Hvilke gode prosjekter er det som ikke får finansiering i dag? Det sies stadig vekk at selv gode prosjekter ikke får låne penger i dagens situasjon. Vis meg prosjektene! De som skriker etter utlån nå, er de samme *&#$%& som har lånt altfor mye allerede, og som trenger mer kreditt for å holde det gående litt lenger. Er det gode prosjekter? Albert Einstein skrev: Insanity: doing the same thing over and over again and expecting different results. Man løser ikke et alkoholproblem med mer vodka, ei heller et gjeldsproblem med mer kreditt. Det eneste vi får ut av dagens redningspakker er at vi holder det gående litt lenger. Og så blir fallet enda høyere senere.

The golden anchor is a way to remove virtually all counterparty risk while still staying reasonably well diversified. Buy a large chunk of gold, place it in a secure location and short most of this position on paper. Then go out and use the money from the shorting to buy a diversified portfolio as you normally would.

In today’s risky world, with governments everywhere competing for the biggest fiat-funded bailout, precious metals should be a part of any diversified portfolio. However, most investments professionals only recommend 10-20% of the portfolio’s net worth to be in precious metals. And most people have such precious metals investments in either ETFs or certificates. I agree that 20% is probably enough of a weighting towards silver and gold, provided you have other commodities such as oil and food in your portfolio. I’m not a certified financial advisor, but here’s what I would consider fair diversification:

• 20% Stocks (Mostly tech companies, as they create additional value for tomorrow)
• 20% Real estate (Most people far exceed this by owning their own home, only needed if you rent)
• 20% Commodities (Energy and food)
• 20% Cash (Several currencies if possible)
• 20% Gold and silver (Actually take delivery of your gold and get your own bank safe deposit box to store it)

Why do I want you to take delivery of the gold and silver? Because as things have developed, there is a new type of risk out there, that threatens to take out your entire portfolio: What if the stock exchange closes? What if the bank takes a prolonged bank holiday? 60% of your portfolio is rendered unavailable if your stock exchange or broker closes. Another 20% is unavailable if currencies are destroyed. If your gold and silver only exists in your broker’s computer or as a fancy piece of paper, you are last in line when the limited quantity of actual gold is divided. What if it is overbooked?

Having 20% of your portfolio in gold in a vault that only you have the key to open, makes you extremely unlikely to lose everything in any scenario. But why settle for 20%? Is there a way to maintain diversification and have less counterparty risk? What I propose is to own more gold, say 80% of your portfolio.

By now you have way too much gold to be properly diversified. So you go to your broker and short gold ETFs for 60% of your portfolio’s total value. Your net position in gold is now 20%. Your 60% stock portfolio is enough to maintain margin requirements for the 60% short gold position. In the event of large upward moves in the gold price, you may need to sell some of your gold to maintain the short paper position. You are still net long on gold, so such moves are to your benefit still. If gold goes down, you may want to buy more as the gold in the vault no longer covers 80% of your portfolio, but you’re not forced to do so.

There is a slight premium on owning physical gold as opposed to certificates. And there is a larger spread between bid and ask when selling. This amounts to what I would call an ‘insurance premium’ that you pay to use the above strategy. But even if the markets close or your broker capsizes, you have access to 80% of your portfolio in the vault. Depending on whether your selected currencies are still worth anything, your 20% cash position is ready as well.

The global financial system is a house built on sand. This is the main argument that the highly acclaimed mathematician Benoit Mandelbrot makes in his 2004 book “The Misbehavior of Markets”. And here we are, at the dusk of 2008, having seen global markets plummet an average 50% the last few months. Could he be on to something?

Mandelbrot wastes little time in the introduction and you get the main ideas simply by reading the first part of the book, titled: “The Old Way”. This is nothing less than a full-scale assault on the underlying assumptions of modern finance. He shows how the Capital Asset Pricing Model (CAPM), Markowitz Portfolio Theory (MPT) and the Black-Scholes options pricing method – the most important elements of orthodox financial theory – are all based on two shaky assumptions:

1. The magnitude of price moves are distributed according to a Bell curve, with small movements the most likely, and huge movements nearly impossible.

2. Price moves are temporally independent. At any given moment, all available information is priced into all securities, and thus the next price move is completely independent of the previous one. This is the heart of the Efficient Market Hypothesis.

Mandelbrot wastes no time shooting these assumptions down. The first assumption can be discarded fairly fast: Take the daily closing price of your favorite stock, currency or commodity and put them in a spreadsheet. Then take the log of each price to get relative price moves. Calculate all the daily differences and calculate a mean and standard deviation for the price moves. Now look at the largest moves: How many standard deviations are they? For instance, the 29% price move in the Dow Jones on October 19, 1987, has a probability of 1 in 10^50 based on standard financial reckoning. So what, you may say, we recognize these moves as “measurement errors” or “freak acts of God”. But these are the days when fortunes are made or lost. A model which simply discards the risk of such days, will effect a false sense of security.

The second assumption is harder to attack, but statistical tests show that the absolute size of price moves is correlated across days. If yesterday had a huge price move, you are more likely to see a huge price move today. Mandelbrot captures this in the concept of “trading time” – basically that time moves faster on volatile days and slower on dull days.

Of course, the author of this book should be known to anyone with even a slightest interest in popular mathematics, programming or computer graphics. As the founder of fractal theory – the theory of ruggedness – he has lent his name to the Mandelbrot fractal. Mandelbrot argues that price charts exhibit fractal behaviour: They are self-similar. If you remove the axis labels, you cannot tell if you’re looking on a 5-minute intraday chart or a long-time chart spanning decades. He also shows that simple fractal generators can create much more convincing fake charts than convential financial models can.

What are the implications of this? As I write this, my girlfriend is writing her Chartered Financial Analyst (CFA) exam. Her study material places great emphasis on the CAPM, MPT and Black-Scholes. And in the six volumes of study material, there is but one meager warning that these methods may not always work… Great, we have a horde of financial advisors and analysts out there who think they know how to diversify portfolios so that they give the optimal return for a given risk. But they are not even close to being able to quantify risk. Their alphas and betas are calculated with a mathematical distribution that does not fit the data. The map does not match the terrain, but our financial navigators are nevertheless taught that such discrepancies are small and that the current map is better than no map.

Is it better than no map? I would argue no. A man with no map is less likely to fall off a cliff than a man with a map that says there is no cliff.

In the context of banks, the picture gets particularly disturbing. A bank takes deposits and lends the money to others. In most countries there are reserve requirements, which dictates how much of the deposits should be available as cash or deposits in the central bank at all times. A common requirement is 10% (which is the US requirement). (As a side note, Canada has not had any reserve requirements since 1992. I have not been able to find any numbers for Norway, and Sweden also has no reserve requirement. Jordan is perhaps the safest place to have a bank account, with an 80% reserve requirement). The way risk is calculated on the bank’s assets forms the foundation for how much capital the bank will set aside to weather any financial storm. If risk is severly underestimated, the bank may end up having insufficient capital and go into bankruptcy.

Of course, if banks had completely transparent book-keeping and disclosed all their losses continuously, then the bank would declare bankruptcy just as its net value becomes 0 and the effect is that you have assets than can be liquidated to back all its liabilities. Of course, the banks’ book-keeping these days is extremely opaque, and their assets (loans, of which many might go bad) extremely illiquid. It doesn’t help that mark-to-market accounting has been suspended, so that the book values are far from what these assets would fetch in a forced liquidation. The end result is that when your bank finally declares bankruptcy, its assets will be inadequate to satisfy all the depositors demands.

But it says my deposits are insured! Indeed, sporadic bank failures are not a big problem because bank deposits are backed by government deposit guarantees up to a certain amount. However, the funds set aside for the deposit insurance schemes are based on similar risk calculations. The Federal Deposit Insurance Corporation (FDIC) does not set aside money equal to the full amount of deposits it insures. If even one big bank fails, the FDIC will have to draw on the goverment to do one of the following:

1. Spend more tax money to back the guarantees. You pay more taxes to pay yourself your money back. This is by far the most likely option, since most people will have trouble comprehending the previous sentence and are prone to accept this alternative.

2. Print money. The inflationary effect of this ensures that the money you receive is worth less than the money you had in the failed bank, and whatever money you earn every month is also going to be worth less. The net effect is likely to be that the bank deposit is lost. (This is also the kind of move that can lead to the collapse of currencies or even governments if it’s not carried out with extreme care.)

3. Don’t honor the deposit insurance. The deposit is lost. Prepare for riots in the streets!

Either way, your bank deposit is effectively lost. Anyone who tells you otherwise is saying you can have something for nothing. Depending on what option is chosen, you may or may not get to release your anger on bankers and politicians by going after them with torches and pitchforks. (You can tell that I’m favoring option #3)

The end result, guys, is that wherever risk in securities are measured, a new formula which can account for the sometimes violent swings in securities prices is needed. This is particularly important in banking where the public’s money and the stability of society is at risk. Stronger reserve requirements will follow, and bank failures can be a once every 10^47 years event, instead of once every 20 years.

Fredag 24. oktober vedtok Stortinget enstemmig en plan, som ikke løser finanskrisen, som ikke er i folkets beste interesse og som vil gå inn i historien som den verste sløsingen med fellesskapets midler noensinne. Om ikke neste “redningspakke” blir enda større… Det er den dette innlegget handler om.

De 350 milliardene vi allerede har gamblet vil ikke stanse finanskrisen. Det har vi sett bl.a i form av redningspakken i USA, som tvert i mot førte til en dramatisk forverring av krisen. Bankene vil komme skrikende og forlange mer. Og mer får de, hvis ikke vi stanser dem.

Finanskrisen lar seg løse uten å bruke en krone av skattebetalernes penger. Årsaken til krisen er mangel på tillit mellom selskapene. Tillit skaper man gjennom åpenhet. Krisen er over på en, to, tre hvis vi gjør følgende:

1. Alle finansielle instrumenter (aksjer, opsjoner, obligasjoner osv.) må verdisettes etter markedspris. Hvis ingen er villige til å by på instrumentet, så er verdien null. Det hjelper ikke at banken har et hemmelig dataprogram (en modell) som sier at verdien er hundre milliarder. I så fall får banken legge ut kildekoden til modellen og forberede seg på å forsvare den for omverdenen.

2. Finansielle derivater, sertifikater og obligasjoner som til nå har vært handlet direkte mellom selskaper, må handles gjennom en offentlig godkjent tredjepart (en slags børs) med krav om tilstrekkelig kapitaldekning.

3. Gearing over 12:1 forbys. DnB NOR opererer f.eks med gearing på 25:1, som i praksis betyr at banken er konkurs om eiendelene synker med 4% i verdi. Dette er hasardspill i milliardklassen, og utgjør en uakseptabel risiko for samfunnet forøvrig.

Bankene vil selvfølgelig ikke ha noe av dette, fordi de foretrekker å skyve tapene sine over på staten. Ved hjelp av målrettet skremselspropaganda mot våre stortingsrepresentanter og krav om øyeblikkelig handling har de greid å lempe 350 millarder kroner av sin risiko over på skattebetaleren – 73000 kr på hver av oss.

Dessverre er det for sent å stanse den første redningspakken. Men vi krever at den ovenstående planen blir iverksatt før vi kaster bort en krone til av fellesskapets midler. Utdanning, helse, pensjoner, veier og tog er viktigere enn banksjefenes bonuser!

Geir Kokkvoll Engdahl