Who's to blame for the crisis, part 2

Exam period report: two down, seven to go!

First days of the new year turned out particularly conducive to various musings about economics. Several questions have been running through my head, but they all have one common denominator…

Did US politicians think increased home ownership ratio would solve social problems and make many poorer US citizen happier?

Did Alan Greenspan think pursuit extremely loose monetary policy that eventually sent property prices soar would bring Americans closer to fulfilling their dreams?

Did mortgage borrowers who could not stand any chance to repay mortgages off their income think they would refinance their loans endlessly thanks to ever-increasing property prices?

Did “financial engineers” think Gauss-Copula would work miracle and turn subprime loans into prime securities?

Did David X. Li. think if one subprime mortgage is a lousy underlying security, two subprime mortgages are two lousy underlying securities, ten subprime mortgages are ten lousy underlying securities, then million subprime mortgages bundled together and packed as Mortgage-Backed-Securities would make up triple-A securities?

Did credit portfolio managers at banks think they could push away the credit risk from their balance sheets through securitisation and did they think it would not return to them?

Did risk analysts at banks think they would always recover principals and interests on subprime loans through foreclosures and selling houses on the market at higher prices?

Did shareholders of those banks think focusing on short-term profit was a sound growth strategy?

Did governments and regulators think greed could, in long run, do more good than harm?

Did market participants think they could reap an extra profit without taking an extra risk?

Did CFOs of Polish companies which speculated on currency options think they had just discovered a gold mine?

Did borrowers who had taken out mortgage loans denominated in foreign currencies when zloty was overvalued think they had stroke a great deal?

Did grannies who bought stocks or invested in equity funds think stock prices could plummet in the coming months?

Did Greeks think living beyond their means would sustain economic growth in their country?

Did Irish home buyers who bought properties despite steep prices think the prices were still reasonable given their growth potential?

Did pension fund managers from all over the world which were buying summer houses on Spanish coast think the demand on them in the coming years would be so high that it would drive prices even higher?

Did Ben Bernanke think keeping interest near zero would kick-start the US economy?

Did analysts at the end of 2007 think stock indices would fall by roughly 50% in 2008?

Did PiS, Samoobrona, LPR and PO think by raising spending and cutting taxes and sickness benefit contribution they would turn around Polish public finances?

Did Polish airlines managers think oil price would rise to 200$ per barrel and hence purchased future contracts at 150$ per barrel (they had to pay so much when prices dropped to 40$)?

I could flog the dead horse and reassert they all took it for granted that nothing could go wrong. Or, alternatively they knew everything was goings to collapse, but they thought they would escape the disaster?

In July I tried to park swiftly in front of my house. I did not manage to manoeuvre properly and smashed into the fence. It ended up with a dented bumper. I did it because I thought would simply make it (today at home we recalled that accident after my father dropped his mobile phone into the toilet bowl). But three months earlier pilots of a plane thought they could, or rather should, or even had to touch down the plane despite thick fog and poor communication with air traffic controllers. They thought they could, somehow, make it. They did not. 96 people died.

I will not dare to pass judgement about the causes of Smolensk disaster, but the dented bumper was a result of nothing but my own thoughtlessness.

The ongoing crisis does not just have one, financial, facet. As outlined above, this is also the crisis of thinking, or a result of years of thoughtlessness.

Almost a year ago I drew a conclusion that the crisis was caused not by greed, but by lack of fear. Now another conclusion – the crisis was also caused by LACK OF FORETHOUGHT…

Or maybe... Did they think, or did they believe?

Beer and Loathing in the Square Mile

Except for a good book about North Korea, I could not have made any better choice on the Christmas and the subsequent slack period (how I call those days between Christmas and New Year’s Day when everything Polish economy comprises of is ticking over) read. I amm in two minds whether “Cityboy” is must for everyone who wants to work or works in banking, but the memoirs by Geraint Anderson, former investment banker, who shows his readers around the darkest nooks and crannies of world’s financial capital are surely a valuable read.

Before I set out to read, I was a bit afraid the book (I read original version in English, again thanks for Michael Dembinski for buying me it in the UK) would contain a lot of slang and a blend of colloquial and offensive language. My guesses proved right, but either I am already familiar with most of those phrases or it is written in such an intuitive way that I never had problems understanding the plot. Actually over 400 pages resulted in around 200 new English words, half of which I will surely fail to memorise.

I was not shocked by debauchery depicted in the book. Lifestyle sky-high bonuses paid in the City entail and the “culture” of investment bankers’ entourage have been widely described since the financial meltdown of late 2008 and those who, like me, delved into it earlier should not suffer any shock.

But what truly upset me was the ignorance, although it should not have…I generally know how to value a company and even if you ask me to value a certain public company, I will refuse to do it, for a simple reason. Every valuation rests on assumptions which are in fact subjective projections of future cash flows, profits, dividends. The very valuation is a simple task every high-school leaver could perform, if they were only given all formulas and data. The data makes a problem and you cannot even prove an analyst making wrong assumptions. This is why you can come across discrepant valuations of big Polish companies (example: in 4Q2010 KGHM was valued by two brokerage firms at 126 PLN and 175 PLN (31 Dec 2010 close ca. 167 PLN) and Pekao S.A. was valued by other two brokerage firms at 145 PLN and 201 PLN (31 Dec 2010 close ca. 179 PLN) that put you on the spot as a market participant.

Steve Jones (the character of the book, in fact Anderson himself), a history graduate, is hired by a bank in 1996 without having any in-depth knowledge about finance. His brother, at that working in the City, arranges an interview with him and then someone decides to take him on. One good change that has been made in the City since than is that history graduates have no chance to become bank analysts and nepotism is not so widespread. In Poland, on contrary, graduates of history or political science work at banks, but they open accounts and sell cash and mortgage loans in bank outlets, so at least they do not stand a chance to get really high.

The way Jones deals with clients is slightly despicable. He openly admits what he tells clients about results of his analyses is ‘bollocks’, but he wins their trust by taking them to bars, restaurant, concerts. In fact, what he does seriously matters in business and Jones knows how to entertain people. Plus this way is widely accepted as all banks have budgets for taking clients out and Jones most of the time has fun on the house.

Money… is what life in the City revolves around. Money is not what actually makes you strive for perfection; pursuit of money teaches you how to break rules to get a higher bonus. Executive turn a blind eye on reprehensible practices as long as they do not tarnish a bank’s reputation and as long as they do not come to the light. You have to make a profit, it is up to you how you make it, you only have to remember you must not get your bank into troubles… Compliance rules – they are worth as much as the paper they are written on. Insider trading is the order of the day, what marks out the boundary between acceptable and unacceptable demeanours is not decency but risk of litigation or adverse publicity.

Financial results of the banking industry much hinge upon goings-on on the markets. Bull markets mean good times are rolling in, when bears dominate trading floors business is winding down, bonuses are tiny (just 50,000 pounds per year…) lay-offs are in the offing.

The dominance of money means that for cityboys every asset can be priced. This view goes into extremes when bankers try to price women and some even delude themselves that those young chicks, their mistresses who are with them only for money, really love them. As the picture of the city clearly indicates, money does not bring happiness. Broken families, broken relationships with family and friends, divorces, sex as a substitute of love, nervous breakdowns, burnouts – is what cityboys (or “deranged fuckwits”) experience. And even if after a few years, despite spending a lot they manage to amass a fortune, they are unable to give it up, they do not make do with what they have, they get addicted to earning money and yearn for more… Meanwhile in the city there are no real friendships, the crucial element of survival there is learning to get on with relentless rivalry.

As Anderson precisely points out, the City destroys the world all around. Huge salaries of the bankers are driving the costs of living in London up (once Anderson mentions that prices in most shops seem extortionate to him, despite his sky-high earnings). This why I would not fancy Warsaw becoming CEE’s financial hub. Most inhabitants of Warsaw would be probably impoverished as a result of local inflation (prices adjusting to earnings of financial elite) and would be totally priced out of property market.

The author also explains why playing the stock market is a zero-sum game. If you buy stocks before their price goes up, you buy them from someone else and the other market participant does not in fact lose their money, but they incur the costs of missed opportunities, resulting from not holding a certain stock.

Anderson describes in the book a few job interviews he had throughout his career. They totally do not resemble the ones I have had in my much shorter career. In the City employers look for ruthless and greedy rat-racers, even the knowledge is not the most important as it is all ‘bollocks’ after all. In Poland, in turn, I was almost always asked substantial questions concerning my academic knowledge and hard & soft skills, and they often asked about pastime activities, hobby, balance between private life and work. In Poland banks do not (thank God) seek callous money-oriented graduates, integrity is an asset, compliance rules are enforced, nepotism does not seem to exist and people without proper academic background are not employed. In Poland banking industry appears to be rose-coloured, even if it does not offer enormous salaries (the pay is decent and commensurate to efforts, skills and experience).

At some moments I felt affinity with Anderson, for instance when he revealed he had worn a suit he had bought in a charity shop for six pounds three years into his career. It reminds of my first , eight-year-old suit (slightly worn-out and knackered by dry-cleaning), which still comes in useful for every day office work. In Poland times when you were judged by the clothes you wore are over. Style matters, brand tag no longer. But unlike Anderson into his career, I do not pay over the odds for brand-name clothes, but try to pick good quality stuff.

And the book is a must for every beginning stock market player. It may leave you disillusioned but shows the truth of how markets behave. And tells the truth who is privileged on the market. Anderson spent 12 years in the city and between 1996 and 2008 markets evolved. He went through roaring late 1990s, bursting of dot-com bubble, bear market of 2000-2002 and last gasp of prosperity from 2003 to 2007. He left in March 2008, when financial world began to capsize. He came to a right conclusion that old truths about investing are out-of-date in the days when markets are driven by big speculators and volatility is much higher that it used to be. Additionally, he draws an accurate picture of depravity within the financial industry that led up to the financial meltdown. No new ideas committed into paper, but it was quite nice to read a former banker saying who was (partly) guilty.

My feelings about Mr Anderson are still ambiguous. On one hand throughout his whole career he did not stoop as low as his colleagues, at least he realised he was paid far too much and obediently paid taxes, unlike his fellows, who all practised tax evasion and whose effective tax rate was lower than the one of their secretaries. But on the other hand, for twelve years he led a life of alcohol-addicted, coke-sniffing, self-indulgent party-goer whose weekly wages were equivalent of most people’s yearly wages and rode the gravy train more by luck than judgement. But after all I think by writing “Cityboy” and laying bare the murky and devious reality of the City, he atoned for all his previous misconduct.

Hell on Earth

Prompted by the missile incident that occured on 23 November 2010 and the recent rigged presidential election in Belarus, I began reading about authoritarian and totalitarian regimes. The one which gripped my attention most was North Korea – the most isolated country in the world and the last Stalinist regime on the whole planet. While reading through some articles, I ran across mentioning in passing a Polish documentary depicting the regime - Defilada, by Andrzej Fidyk.

The short (65 minutes) documentary was shot in 1989, when North Korea was celebrating 40 years of its existence. The festivities coincided with Olympic games in Seoul in 1988 and were meant to outshine the sporting event. The director was allowed in North Korea and shot a striking film. He deliberately shot it and left to the audience. Not a single word of comment has been added, a sinister picture of life in the country is being shaped in a viewer’s head. Shots of lavish parades are interspersed throughout scenes from daily life and utterances of North Koreans who speak about their lives dedicated to Kim Il-Sung, hereinafter “the Great Leader”.

The most shocking phenomenon that permeates everything in North Korea is the cult of personality. Ubiquitous Great Leader’s presence is felt at every corner. What the North Koreans speak about The Great leader is nothing but gruesome twaddle, similar to the one known from Stalinist Poland, but much worse.

The North Korean’s mindset is a result of years of brainwashing which has its onset short of after the moment of birth. From the age of around 3, children at nursery school study childhood, early life and accomplishments of the Great Leader. Belief that Kim Il-Sung is a half-god is instilled in children from the earliest stage of their life, when they take in everything they are told. The regime’s excellence at social engineering is truly dreadful. Further on, the indoctrination continues to turn out fairly deranged citizens who venerate the Great Leader.

The right word to use in the context of cult of personality in the country is reverence. The Great Leader is revered. North Koreans would be even ready to go on pilgrimage to a toilet bowl on which he sat (this is not said in the film). The description of the Great Leader, spread by omnipresent propaganda apparatus, reminds of Chuck Norris jokes, which spurred peals of laughter in Poland and across the world some five years ago. The most disarming one was that of the Great Leader who came to an institute of technology and solved problems too difficult even for most outstanding scientists.

According to official propaganda, North Korea is a land of milk and honey. No wonder the authorities want to spare its citizens suffering caused by seeing the outer world and do not allow them out of the country. The land where things go on much worse is the neighbouring South Korea, a fascist country enslaved by imperialist occupiers from the United States.

Just after the armistice was signed in 1953, the demilitarised zone between two countries was created. The border between two Korean countries is said to be the best protected border in the world. The existence of Korean Wall (not as notorious as Berlin Wall) remains a subject of disputes, but it surely has its place in North Korean propaganda. Before the wall was erected, some despaired South Koreans battered by American occupiers fled their country to seek asylum in the land of milk and honey. Now the concrete wall is the obstacle and helpless South Koreans have to stay imprisoned by cruel capitalist regime.

It cannot sink in to me that North Korean really believe in the whole shit there are told about their Great Leader and the country they live in. In socialist Poland virtually everyone, including comrades from the PZPR knew that whole “superiority of socialism over capitalism” is just an ideological rubbish. No other totalitarian country has managed to shape mindsets of its citizens as expertly as regime of North Korea has done.

Post-stalinist Poland, run by Mr Gomulka, Mr Gierek and Mr Jaruzelski, in comparison to North Korea appears as an oasis of freedom (therefore I argue it should not be called totalitarian, but authoritarian country). And socialist Poland was a part of the Soviet bloc, its bad fate after WW2 was a result of political decisions of movers and shakers (the main player in the game of dividing Europe was Stalin, Churchill and Roosevelt succumbed to his demands). Poland could not leave it for political and military reasons without running the risk of being brought to a heel by fellow bloc members; while North Korea’s torment results now, after the Soviet Union fell apart and China rejected Maoism, from the decisions of its own leaders (or to put it bluntly some obsessed mobsters).

I wonder if fear is an indispensable element of life of North Korea. For us, no doubt, it is, but we must not forget North Koreans were brought up in the system based on fear and their perception of reality is so distorted that they may not realise what they feel is fear (a vague concept I am trying to convey, I know it is hard to me to put it in words). I will not hazard a guess they have learnt to get on with fear. Fugitives from North Korea have to undergo a long-lasting process of rehabilitation to function in a normal society properly.

This brutally proves the cruelty of North Korean regime. How inhuman the Great Leader’s son must be to spent millions of US dollars on uranium enrichment programme, while millions of North Koreans are starving?

The only explanation of how people keep on living in North Korea is that they get by because they have never experienced freedom and have never seen how a normal country functions. They take all absurdities and degeneration as natural. Maybe some of them even experience some kind of happiness drawn from family life. Surely the unawareness of living standards in civilised world eases their pain.

The question how to handle North Korea is a pain in the world’s neck. World leaders cannot shrug off its existence, as long as it threatens to use its alleged nuclear weapons. The cruel tormentors who run the country could, in the most simple view, be wiped off this world with the benefit to everyone. Even in case of (Heaven forbid) nuclear war, resorting to use of bombs to annihilate leaders of North Korea (probably in vain, as they would stay safe in bunker hideouts) would mean killing thousands (or millions) of innocent people. A few times it occurred to me that wiping North Korea off the map would put 23 million of citizens of the country out of their misery. I know it is cruel, but faced with a choice of living in North Korea as a native, I think I would consider putting myself out of misery.

Bringing down (somehow) the totalitarian regime would not translate into freeing the country. The problem would remain and apart from economic costs of aid for North Korea, the goal to teach North Koreans, dehumanised by years under the Great Leader’s and his son’s rule, how to function in a normal society could be unattainable. Those people do not await liberation, but we can hold out hopes for economic crisis that would topple the government. All communist regimes fell down because of economic difficulties and North Korea has to follow the same path, although it will be much more complicated.

Benevolence

This year, the time has come. In the past years, before Christmas I promised myself to share some of my wealth with the ones in need. I know, it is a but hypocritical, it is done only around Christmas, because everyone else does it and later people forget for the rest of the year. In the past years my low income was a lame excuse to confine to a few zlotys, this year I decided it was high time to endow some foundations and charities. I began to earn some “real” money, next year my earnings will be really decent, so apart from paying taxes which are aimed at redistributing wealth, I should help my fellow men off my own bat.

In the past days, when I had some free time (scarce commodity) I have pondered upon this issue. The topic triggers a lot of questions, concerning legitimacy, percentage of income that should be shared with others, discretion, moral duty and many more.

Virtually everyone agrees the disadvantaged should be given aid. Opinions how to do it wisely vary. In socialists’ view, the state should be solely responsible for redistributing wealth. The richer should under constraint pay not only higher taxes, but should also give to the state apparatus a higher percent of their income. Liberals, in turn, claim it should be the civil society that takes over function of helping the poor. People, as they say, can set up foundations and charity organisations and endowing them should be a moral duty.

Both approaches have substantial downsides. The statist one assumes the state is omnipotent and will allocate the collected resources effectively. This is impossible – the whole bureaucratic apparatus costs too much and will never be effective – once we had such system in which the state oversaw everything and it failed. The liberal one carries a naïve assumption people will be ready to share their wealth with the worse-off, which is overtly false. Most people are greedy and even if they do it, they will give out only a tiny percent of their earnings. Here there is a fix for it. In many Anglo-Saxon societies donating large sum to charities is a benchmark of one’s social status. There is some bit of pressure from society. But if it was not about boasting about the endowment on a party, would they be ready to give their money away that eagerly? I realise it is better that giving no money at all; no matter if the well-off outbid one another who donates more, the disadvantaged benefit from this. My take on the issue is similar to my view of CSR – most companies do it to maintain a good image, not because they care about those parentless children. Mechanics of the endowment is identical – people do it because they care about their prestige, benevolence is just a side effect.

And I have also realised that even if I was most open-handed I could afford, my contributions would still be hypocritical. I could not sympathise with beneficiaries of my help, just because I have never experienced homelessness, famine, shortage of money, severe illness or any other kind of misery. No big tragedy has affected me yet, my family have, thank God, never been destitute. But on the other hand, as I have also never experienced luxuries, I feel I am in between. Much above me are those whose opulence would dazzle me, much below are those whose poverty is beyond my comprehension. Probably the bigger the gap is, the harder it is to take in a fellow man’s woe.

In addition, giving money is taking the path of least resistance. I may have fewer banknotes in my wallet, by bank account may be credited and the strain is over. Good deed is done, conscience is clear. It is not that simple, as long as I still avert experiencing misery.

Also a man’s wealth determines his problems. For people who struggle to make ends meet, the problem might be if they will not run out of cash to buy bread for children. For those a bit better off, who surely can afford to stock up on bread and smoked hams, the problem might be paying for a child’s school trip abroad. The richer you are, the further from scraping along your problems are. A reason to complain for my colleagues might be that they can afford only a suit for 1,000 PLN rather than five times more expensive one. Or, as this year, that the Christmas bonus was not an equivalent of new compact car’s value, as it was in the years of prosperity (2006 or 2007).

Yesterday I had a Christmas party in my office. It was thrown in an empty unfinished sizeable room in our office building in the very centre of Warsaw. Looking outside the windows could you see Palace of Culture, hotels, busy streets full of well-off people running pre-Christmas errands in haste. Food and drink was in abundance, everyone was pleased to get together… I wonder if I was the only one who thought about families who cannot make ends meet during the party. Once again the Band Aid’s song reverberated in my head…

It's Christmas time

There's no need to be afraid

At Christmas time, we let in light and we banish shade

And in our world of plenty we can spread a smile of joy

Throw your arms around the world at Christmas time

But say a prayer

Pray for the other ones

At Christmas time it's hard, but when you're having fun

There's a world outside your window

And it's a world of dread and fear

Where the only water flowing is the bitter sting of tears

And the Christmas bells that ring there

Are the clanging chimes of doom

Well tonight thank God it's them instead of you

And there won't be snow in Africa this Christmas time

The greatest gift they'll get this year is life

Where nothing ever grows

No rain nor rivers flow

Do they know it's Christmas time at all

Here's to you raise a glass for everyone

Spare a thought this Yuletide for the deprived

If the table was turned would you survive

Here's to them underneath that burning sun

You ain't gotta feel guilt, just selfless

Give a little help to the helpless

Do they know it's Christmas time at all

Feed the world, feed the world, feed the world

Feed the world, feed the world

Let them know it's Christmas time again

Does anyone hear “the clanging chimes of doom”?
Is anyone thankful “tonight thank God it's them instead of you”?

But Polish bankers are not as spoilt as their counterparts from the City or Wall Street. Here the banking system is totally different (in Poland investment banking is just fledging and will never develop for good after Mr Crisis spelled the death of it) – there is no such depravity, earnings and bonuses are not sky-high and expectations are different. More about one depiction of London’s bankers circle in the New Year’s Day post!

Another happy return

Those yearning for a longer weekly piece, please get on to Polandian, where I’ve enumerated some things that get on my nerves. Now I’m awaiting some mud slung at me by unfailing commentators. The post on Polandian is not actually very optimistic and as all my postings was written on the spur of the moment, left for the posterity after a brainwave had come over me.

What can cheer one up in a period when daylight is so scarce? Mikołajki - a Polish custom of giving token gifts to your near and dear is still alive. For five years of studying of SGH, where there are no fixed student groups I’ve forgotten how it feels, but this year I got caught up in the exchange of gifts in my office. My boss drew a person on my behalf and handed me a slip of paper containing the name. At the beginning I thought it was a considerable nuisance, as deciding what to buy to a twenty years older woman seemed a hard nut to crack. But then I used my brains, found my colleague’s profile on Goldenline and discovered we both are fond of U2 music. After a short research in the Internet I ordered a book “The Name of Love” about the band’s lyrics. Another colleague watched her reaction on Monday, when the gifts were handed (I was absent) and said she had been pretty delighted. I picked up my present on Thursday. I think the hand-painted bauble will be a nice decoration, but surely also proves someone had no idea what to buy (I was tipped off that one guy from sales (rather reticent) does it in his spare time). Next Friday we have a Christmas party – something I haven’t enjoyed since 2005. SGH is not really conducive to socialising…

The centre of Warsaw is lit by Christmas decorations. To the right – ul. Emilii Plater, modernised this summer is designed be the high street of Poland’s capital to bewitch Warsaw’s inhabitants and tourists. There are always some people who stick around there every day and who don’t take notice of its brilliance. I took a few snaps in the dark, without a tripod, on the display of my camera they seemed sharp, but after transferring them to my computer the photos turned out to be a bit blurred. Maybe next week I’ll take the camera again to get it right.

A widely publicised event held yesterday was a Złota 44 construction reopening ceremony. Orco (property developer), after a court handed down a ruling favourable to the developer and thus brought the dispute over the building to the close, is going to resume construction works in January. Façade of the building should be finished by Euro 2012 and the building will be finished by the end of 2012. Time will tell if the splendid edifice will overlook Warsaw, but yesterday’s ceremony was nothing but a misfire. I don’t understand what the whole hype about the whole 15-minutes long event was about. They played some music, lit the building with flashy spotlights and thus thanked Warsaw for patience. Some people stopped by to watch the so-called show, but majority remained indifferent.

A step in good direction is the new timetable of suburban trains. Substantial improvements in transport links from my suburb to Warsaw will come into effect tomorrow and I’m glad to learn about it, as from 1 February 2011 I plan to commute by train. From tomorrow on, there will be five trains between 7:00 and 8:15 (including three double-deckers) and eight between 6:30 and 9:00 (four double-deckers). I only wonder whether the services will be reliable. During last two weeks cards were stacked against them. In the long run I plan to commute by car and leave it on P&R Okęcie (currently under construction), next to W-wa Okęcie bus & tram terminus and then take a tram to the centre. The only problem is how to get there before the dual-carriageway bypass of Warsaw is built… I’ve heard local roads between Dawidy and Raszyn are jammed in the morning. And if more trains run in the morning, will it mean more people will drop their cars and go to town by train? Will the carriages be packed?

Now a small request to Mr Santa Claus. I bought some stocks in late November? Please bring me a substantial rally and keep all skeletons in the cupboards locked up until the end of the year.

Was it really about trust?

A follow-up to the story from late August. Not a breakthrough hitherto, although things have moved on a bit. I still haven’t got back a single zloty out of one thousand I had lent my ex-classmate over six months ago.

I tried to get in touch with Karol a few times, he wrote back to some text messages, but never picked up a phone. Once, in mid-October he claimed he had made a transfer to me a month earlier. When I told him I hadn’t received any money he couldn’t believe it, but also couldn’t submit any receipt of bank transfer executed. Funnily enough, not only didn’t he have any confirmation slip, but also he didn’t know to which bank account he had transferred the money. The next day he dropped me another text in which he asserted he had just transferred money and asked for a reply when I got the money. Needless to say I once again I didn’t see a single zloty.

On 19 November Karol’s mother called me. To my surprise it turned out he had told his family about much more transfers sent to me. She also added he wouldn’t return any money to me because he was “undergoing a therapy” and pledged to take over his debts. We also arranged a meeting next day, in the evening. I met up with her in her house in Piaseczno. Once well-furnished and well-maintained flat has lost its finery. Karol’s mother was quite jittery (they still have some other problems in the family) and explained she was desperately trying to borrow some money to straighten things out. I think I managed to talk her out of turning to a loan shark (who the f*ck invented the name of the company which surely doesn’t cater for provident people?) and suggested she should apply for a regular cash loan in a bank. She also asked me not to call Adam (Karol’s brother) because his nerves were frayed after months of sorting out his brother’s problems and having two full-time jobs for a few months to earn more money.

The sentence about the therapy was the most puzzling. The first supposition that occurred to me was that he had got addicted to gambling and lost all his money as a compulsive casino-visitor. Then I began putting the pieces of jigsaw puzzle together, all goings-on from the day I had lent him the money and the possible sequence of events began to unfold it was even more frightful than gambling.

Schizophrenia is a quite possible explanation. Did he lie he was a chairman of a student organisation or did he think he was? Did he have a job or did he think he had a job? Did he think he had had ordered those transfers and was he really baffled because he couldn’t find any documents to prove it? Was his strange behaviour at home, before he moved out, about which his brother told me, a sign of developing mental illness? Probably I’ll never find out the truth about what has happened, but if it’s really schizophrenia, it’s a tragic story. Karol and his family might have met a tragic fate. He was an up-and-coming lawyer, now, regardless of what he’s being cured from, he’s not going to finish his studies. His family, once well-off are now almost destitute. Will they manage to give him a helping hand after they lost all their ample savings getting him out of troubles? A fellow blogger’s wife, who is a psychiatrist, told me care from family and friends is essential to return to a rather normal life after symptoms of schizophrenia recede. Or will he be left to his own devices on account of his misdeeds?

For two weeks they Karol’s mother didn’t call me. If she fails to do it for a while, I’ll get in touch with her in January. Her assurances to pay me off sounded credible, so I’ll give them at least a bit more peaceful period before Christmas. I told her the repayment wasn’t urgent for me and I could wait for some time, but in the long run I wished to get the money back. I hope we’ll agree on a repayment schedule and I mull over what then. Given their situation and mine, I think it would be wise to write down a part of the debt, but only when they repay more than a half of it in time.

Another question is if I’ll every lend any money (except small change everyone can afford to lose) to anyone. I think lending some money (no more than a few hundred PLN) to friends I keep in with regularly doesn’t have to be ruled out. The other thing is securing the loan by signing a loan agreement, which enables me to claim my money in a court. But if I had signed a valid loan agreement with Karol on that hapless day, would I be better off now? I could sue him, I would have to lose time for wrangling with Polish judiciary system and quite probably the court would hand down a ruling favourable for me, but what would the ruling mean in a situation when my debtor is out of cash and, moreover, insane? Maybe his family would go to a great extent to repay the debt? Who would cover the litigation costs? Finally, I’d have to listen the whole sanctimony…

Hmm… I know by dint of age I’m wet behind ears and maybe I don’t handle the matter properly… So what do you make of it?

On broken promises

In 1990, before presidential election, Lech Wałęsa promised to turn Poland into “second Japan”. In 2007, before parliamentary election, Donald Tusk promised Poland would follow the path of Irish economic miracle and would become “second Ireland”. Both politicians have gone back on their promises and Poland has not taken a leaf from Japanese, nor Irish book. Now do not grumble, we should be grateful they have failed to put those economic miracles into practice.

What do those two countries have in common? The lie on different continents, both experienced periods of long lasting economic growth, both were held up as examples of excellent economic performance, both made quantum leaps, both have been going through severe crises and even despite being hit by them are now far higher developed then the moment they were in “square ones” of their growth path.

Japan got up of its knees over ten years after WW2. Thanks to easy borrowing terms, support from the government and protectionist measures Japan’s industry began to grow rapidly. Japan corporations relied on cutting-edge technologies and were highly efficient what helped the country boost its exports and flood markets of developed countries with high-quality and reasonably-priced products. In 1960s annual GDP-growth rate was running at above 10%, in 1970 it slowed down due to oil crisis, but Japanese economy soon adjusted to rising demand on energy-saving technologies and not only rode out the crisis, but even emerged from it stronger. The period when interest rates were low, pace of economic growth remained high and inflation low lasted until 1990. The last five years of boom were marked by surging stock and property prices – both tripled between 1985 and 1990. Companies and individuals eagerly borrowed money from banks to buy assets, since interest rates on loans were far lower than returns on stocks or properties. The bubble burst in 1990 and the economy of Japan slipped into a period of sluggish growth for a decade. Banks were hardly hit by write-offs on non-performing loans, individuals and companies struggled to repay the debts they had run up in the times of speculative frenzy. Customers were reluctant to spend, what caused the domestic demand to decline. Firms instead of investing in capital stock were paying back its debts. Interest rates were slashed to near zero to stimulate the economy, but neither banks could grant new loans, nor were the enterprises keen to take them out. GDP growth rate averaged out 1% in the 1990s. Adverse effects of bursting of sizeable economic bubble are felt until now.

Ireland in a relatively short period of time turned from backward agricultural country into one a modern, fast-growing economy. The economic miracle is often put down to Social Partnership under which government, employers and trade unions settled on taking a concerted effort move the country forward. They did bring it off, inflation was on decline, growth rate was on the rise, the country attracted outward direct investments owing to corporate tax cuts. For many years Ireland ran budget surpluses and consequently its public debt was decreasing. Good economic performance was fostered by low interest rates and deregulated financial industry, which caused the property bubble to arise. Banks were lending recklessly and bubble grew splendid before it burst. From then Irish banks reported huge numbers of defaults among borrowers, their capitals shrunk as a result of losses on non-performing loans, the government had to bail out most banks and the bail-out programme has caused the public debt to mount. Now not only Irish banks but also the Irish state is on the verge of insolvency.

So what do they have in common? Economies of both countries have been hurt by bursting bubbles. In both countries interest rates were abnormally low for an extended period of time (there was no need to raised them as there was no threat of rising inflation), banks loosened their lending criteria and foisted loans upon almost everyone. In both countries prosperity was brought to a halt by bursting bubbles.

But brush aside economic aspects of economic bubbles, take a look at them from psychological perspective. Bubble (as any other misfortune) inflates when people take for granted nothing bad can happen. Japanese and Irish banks took for granted the property prices would only go up, so even if a borrower failed to repay their debt, they would foreclose a property and recover the money. Individuals and firms also took for granted asset prices would only go up. When an economic bubble is robust almost everyone believes the boom will last forever. Voices of sceptics who claim the disaster is imminent are drowned out.

It is very hard to crack down on the bubble, because as long as it swells, it is convenient to everyone. Government gets higher proceeds from property taxes, property developers count up sky-high profits, banks make lots of money on mortgage loans, property owners are happy because their wealth is increasing, flat broke non-owners are over the moon because banks are leaning over backwards to give them 40-year mortgage for a tiny, dilapidated 30-square-metre flat. And the unemployment is falling, because construction sector needs more workers, who do not get paid worse than qualified workforce. And bear in mind efficiency in construction sector is low, so economic growth generated by it is in a way delusive.

Lessons to be learnt? Do not let property bubbles happen. In the long term they always do more harm than good. Imbalance in an economy will sooner or later cause a turmoil and those to pay for any possible bailouts will be taxpayers. Interest rates on mortgages should not be low (cheap corporate loans have positive impact on the economy in the long run)! Lending for housing purposes should be under supervision! Poland escaped the scenario of bursting property bubble. Property prices did double in some cities between late 2005 and late 2007, but the boom was not followed by bust. Interest rates were never too low, Polish financial supervision did its best to curb lending, particularly in foreign currencies. Banks’ profits in boom period were not as high as they could be, some applicants had their mortgage applications rejected, but Poland averted a much worse scenario. May we never try to repeat any country’s path to economic miracle. Mr Wałęsa and Mr Tusk did not know what they were saying. Their promises were made just before bubbles in Japan and Ireland burst.

Funnily enough, Poland was going through a property boom when Prawo i Sprawiedliwość was in power…

More on economic bubbles in 2011, after I graduate (in my MA thesis I explore the topic, some excerpts to be translated into English and published here after I “defend” it).

So when can you say you speak a language – part 3

I’ve drawn inspiration for writing this post from another post, dated 5 November 2010, which had come out on The Economist’s Johnson blog. The author touches up on an issue that I’ve pondered upon many times – describing one’s command of a foreign language. Any assessment of someone’s linguistic competencies is a very difficult task and the outcome will probably never be objective. Definitions vary, depending on who you ask. Some people say you speak a language if you can communicate in basic everyday situations, others point out you can claim to speak a language if you’re (almost) as fluent as a native speaker.

This discrepancy is emphasised in Johnson’s short article, the author leaves room for coining a definition to the commentators and puts forward his own definition. In his view, he can say he speaks a language, if he can go to a country and work there as a journalist. In Johnson’s definition it means a person who declares they speak a language should be able to communicate without awkwardness in typical situations in understands most of what they are told. However, when I first read the post I wondered what his work in the capacity of journalist meant. After all I’ve inferred it meant he had to garner information in a foreign language and then to write an article in English, so he didn’t have in mind mastery which would allow him to write an article in a foreign language, to a foreign newspaper.

I, in turn, distinguish between “knowing a language” and “speaking a language”. Knowing is about passive command – if you know a language you understand written word, can read newspapers and books in a foreign language and can understand what is being said, so it doesn’t make a problem for you to listen to radio broadcasts or watch films in a foreign language. Speaking involves active use of a language – speaking it in everyday situations and using a language at work, writing e-mails, reports, letters, and even a blog. Hardly ever can a learner afford just to know a language, this competency may prove sufficient only to translators who translate into their native language and probably to no one else. The rest have to speak a language to be able to express their ideas in a foreign language.

The problem of describing linguistic competencies has been solved quite effectually by the Europe Council. Its officials have worked out a framework which sets out six levels of linguistic competencies, which has become a standardised and widely-accepted method of measuring one’s command of a language. It may solve the problem, but you have to be aware such a grid exists. Most people are still oblivious of it.

Actually I can’t tell the difference between myself and someone who struggles to string together a sentence in English, but somehow gets by. They know English and I know English, consequently “know” appears to be a very imprecise word. The most frequent occurrence when the sentence on(a) zna angielski is when a Polish company needs to have its website translated into English and an employee who knows English best is assigned this task. If you happen to read some drivel consisting of manifold English words put together without rhyme or reason and can’t make head nor tail of it, such situation has probably happened.

I’m a sluggish blogger, so before I set about compiling this bunch of reflections on learning languages, another blogger, whose attainments usually pass unnoticed, has come up with another theory. His concept is a brilliant combination of complexity and simplicity – in his view you can say you speak a language if you have command of a language comparable to a command represented by a five-year-old native speaker of a language. I read this a few times and was deeply enchanted by the theory. Read between the lines and you’ll grasp what it takes – spontaneity. You speak a language and it doesn’t seem it’s rehearsed, your feel comfortable using it, you express your thoughts at ease and with pleasure, you switch smoothly to that language without discomfort (even when being woken up in the middle of a night), you can hold conversations on all topics you are familiar with in your mother tongue. I could add that you should also think in a foreign language.

In Polish there’s a vexing phenomenon that makes my hackles rise. Take any ten CVs of job applicants and I bet you’ll fish out at least one in which an applicant would describe their command of English angielski – biegle; sometimes to prove it they add information about a certificate they hold (if they claim to be proficient, it’s usually FCE or CAE, neither confirms proficiency). Being very critical towards Polish nation’s linguistic skills, I find it hard to suppress my displeasure with this complacency. Do those “masters in English” realise that proficiency means mastery comparable to an educated native speaker of a language? Do they realise among Poles born and bred in Poland, who still live here, there are few are far between who are really proficient in English?

I don’t claim to be proficient in English (funnily enough nor in Polish), I describe my command of English as “fluency”. This involves some inaccuracy, but leaves far less room for a possible letdown. I rarely have problems understanding written word (I still encounter some new words but I usually can make out their meanings out of context), for some time I haven’t had any problems understanding English speakers in face-to-face conversations, regardless of their accent, but watching films in English is not always easy for me. I’ve been developing my writing skills as a blogger, but I surely need more opportunities to speak…

As Johnson points out it takes immersion to become proficient, for this reason you can’t expect to master a foreign language without working on four key competencies (reading, listening, speaking, writing) and you won’t be considered a master if you make grammatical errors a native speaker wouldn’t make. And there’s another aspect – it takes long to master a language, but much, much shorter to forget it (at least in the active aspect), maintaining high linguistic is a challenge comparable to acquiring them. So let’s face it – use it or lose it (faster than you think)!

Over. Off to brush up on my English!

Turn on your printing machines

This post may be treated as a follow-up to my short essay on monetary policy from December 2009. On 3 November Mr Bernanke, the governor of Federal Reserve Bank, announced the launch of QE2 programme under which the central bank of USA will buy up government securities in the total amount of 600 billion dollars to kick-start US ailing economy.

Almost two years after Fed’s discount rate was slashed to 0.00% – 0.25% range US economy is still in the doldrums. Unemployment rate fluctuates around 10%, figures of economic growth are positive mainly thanks to large-scale stimulus programmes which slowly peter out (the two factors above combined give a new buzz-phrase “jobless recovery”), consumer prices also levelled off, but central bankers say despite extremely loose monetary policy deflation is still a much bigger threat than inflation.

The recent crisis has changed American consumers’ habits. Before the meltdown an average American household had negative savings and consumers generally tended to consume more than could afford, thus propelling world economy. This was easy to attain, as banks were eager to provide them with lending and turned a blind eye on creditworthiness criteria many borrowers didn’t meet. Much has changed since then. Consumers are now reluctant to part with cash they have, their propensity for spending and borrowing has declined. The tough lesson of crisis they have learnt will probably bring about a gradual shift from spending and borrowing towards saving.

Also banks, severely hit by write-offs on bad loans have modified their credit policies. Gone are the times when credits were foisted upon not creditworthy borrowers, these days bankers think twice before the grant a loan. Just think what happens when a loan goes bad. Can it be prevented? Can financial standing of a debtor be monitored effectually? Probably not. How long does it take to recover money? Sometimes years. What the recovery ratio will be? No one knows – a bank can recover principal and interest, a principal only or nothing, and costs have to be borne to wrangle with bad loans. Is there any alternative? Is something less risky?

Regular readers of this blog surely remember the story of 1,000 PLN lent to an ex-classmate. I still didn’t get that money back. For a comparison, on my worst speculation on stock market I lost 23%, so out of 1,000 PLN put in I still could put out 770 PLN (minus transaction costs), so it’s much more than zero. Stock markets look like an alternative. Stock indices reached their many-year lows in late winter 2009, bottomed out and since then have risen by 50% - 100%. The bull run was spurred on by loose monetary policy. Ample liquidity provided by central banks was not directed at lending activities, but at stock and commodity markets. Yes, the capital markets are said to anticipate changes in real economy, but this time market valuations discounted a rapid recovery owing to a flow of newly printed money. Just look at it from the perspective of a bank. A central bank gives you an unlimited credit facility, you begin to buy fundamentally undervalued stocks. If you don’t have power to drive the market up, you just pull back. Such a scenario is unlikely, so the prices do go up and because you are obliged to comply with mark-to-market accounting rules, your profits also rise. You report profits to shareholders and get a generous bonus from them. This is how it works… And there’s no need to grapple with bad debts, positions can be closed as quickly as they were opened and after all at the end of the day stocks will be distributed to some nitwits who will believe the prices will be rising forever and eventually will be end up duped. Stocks seem riskier assets than loans, but for the reasons I delineated above I think this is where the money from QE2 will go.

I forgot to mention the mechanics of the programme. Fed will not be buying up securities from individual holders but from financial intermediaries, i.e. banks, with a view to provide them with extra liquidity that should buoy up the economy through bank credit channel. However, the Fed is not in the authority to tell banks to turn the new money into corporate loans. Bank are free to do with that money whatever they won’t and this money in the long term will cause lots of bubbles on asset markets (excluding real estate market) to arise. The beneficiaries of the programme will be mostly financial institutions and other speculators who might strike it rich on increasing market prices. The programme might result even in hampering recovery, mostly if prices of commodities (crude oil, copper, even food) shoot up. Finally, it will cause US dollar to depreciate against other currencies and make US exports more competitive. And in the long run the rising money supply will result in higher inflation. I surmise Fed in liaison with US government were absolutely aware of long-term implications of this decision, mostly because it will allow US government to pay off its whopping debts, at the expense of its creditors, at the expense of the rest of the world actually.

Markets have witnessed a substantial rally from the beginning of August as speculators have anticipated the move of Fed, they could only bet how big the scale of the programme would be. Fed met their expectations, but hopes for a continued rally in the coming months might be dashed. Markets have priced the programme before, another price surge will ensue soon as the new money has to be allocated somewhere, but a significant correction should not come as a surprise. How long can stock prices rise if the economy is on its knees and even near-zero interest rates and printing money fail to bolster it up?

The experts tear Mr Bernanke’s move into pieces. One of the most eminent investors, Jim Rogers said the governor of US central bank “doesn’t understand economics (…) all he understands is printing money”. I would like to remind you mustn’t turn on your printers and print as much money as you want because you or your friends are hard up for cash. It is a crime! But Mr Bernanke can do it and he is not dubbed a criminal.

For the past few days I’ve been mulling over a concept of economic crime. Is there anything like this? In Poland we have police departments that deal with przestępczość gospodarcza those are economic crimes, but I’d prefer “business crimes” term. In Polish public discourse there is an insult szkodnik gospodarczy (economic pest), used by Andrzej Lepper and his fellows to describe Leszek Balcerowicz and his fellows, or conversely, by liberal intellectuals to name statist populists. But I don’t recall hearing about zbrodnia ekonomiczna.

General Wojciech Jaruzelski chose the lesser of two evils and declared martial law, many Poles have forgiven him. Current prime minister failed to carry out painful, but necessary reforms, but if he had had more courage, many Poles with hindsight would forgive him. Will the world forgive Mr Greenspan and Mr Bernanke their thoughtless decisions?

I believe one day we’ll bear the brunt of what is getting under way now. The next financial meltdown will be much more severe because indebted government will not be able to step in and bail out financial institutions on the verge of bankruptcy. I don’t claim to have come up with this scenario. Many far wiser people have spoken about such scenarios much earlier, it is estimated to come to a pass in 2014 or 2015. Before it happens we will witness era of super bubbles, so take advantage of it before the whole machinery goes under :)

Forecasters got it wrong, again

If my memory serves me right it was around the middle of September when first warnings of extraordinarily harsh winter appeared in the media. According to some long-term forecasts (based of mathematical models) published round about two months ago, the coming winter would be extremely frosty and snowy in Europe.

Predictions of met offices across the world, all heralding severe cold in the coming winter were picked up by sensation-chasing media in Poland and abroad which launched out into scaremongering campaign. The fear of imminent harsh winter led to many misrepresentations, including the most widespread one, which credits Polish meteorologists with predicting the coldest winter in 1000 years on the assumption that the Gulf Stream has weakened… This shows how gossips are put about. One Polish meteorologist said the Gulf Stream held up well and did not seem to abate at all and somebody mistranslated it and sent out into the uncritical rest of the world.

Articles heralding the harsh winter give two reasons why such scenario is conceivable. Firstly, the alleged demise of the Gulf Stream, caused by the oil spill in Mexico Gulf. Not confirmed officially piece of information, disseminated by conspiracy theorists. The other cause is far more plausible, as we already experienced it last winter when most of the Europe was in the fetters of winter and during this summer’s heat wave. Those are disruptions in air circulation that may prevent the masses of warm air from getting into Europe and may draw in arctic and continental air from north and east.

I don’t remember much from the forecasts for the last summer, but according to meteorologists this September would have been cold (partly right) and rainy (right), October would have been chilly (right) and wet (wrong). The last decade of October was said to bring first snowfalls. And here forecasters parted with their luck. The last days of October brought beautiful sunshine and warmth blown in from over Sahara. Hot spell continued on the first day of November, when temperature in the afternoon hit +17C. The consecutive days were balmy – in the evenings on last weekdays temperature still hovered above +10C, yesterday day-time high hit +15C and even despite gusty wind one could feel pleasant warmth (no wind chill!). Today the weather was rather inclement, next days will probably bring gloomy and grey Polish autumn, but no winter on the horizon. But according to long-term forecasts, November would bring typical winter with snowfalls and sub-zero temperatures (at the present wide of mark). Well, those forecasts are fallible. Now let’s look at what Polish long-term predictions say about the weather in the coming months…

December – winter in overdrive, sub-zero temperatures will cause snow to linger, to boot Poland will be plagued by gales.

January – some thaws and hot spells will give us some occasional breaks between attacks of winters

February – dry and frosty, I surmise this means inflow of chilly continental air

And spring will come later than usual, will be cold and dry.

Funnily enough, German long-term forecasts predict early winter followed by… early and warm spring. I believe my western neighbours :)

According to predictions I’ve read this winter will resemble the last, 2009/2010, one, which went down in history as snowy and cool. Do two harsh winters in a row happen that often? Data for Poland do not bear out absolutely any correlation. How about past winters?

2009/2010 was remembered as cold (actually temperatures in December and Febauary were normal, January was very frosty) and snowy (not because of high precipitations, but because the snow didn’t melt).
2008/2009 was normal in terms of temperature of snowfalls.
2007/2008 was warmer than average with almost no snowfalls at all
2006/2007 was one of the warmest in the history and lasted from the third decade of January until the end of February
2005/2006 was cooler than the last winter and kept Poland in its grip until late March
2004/2005 saw a brief cold snap in late November and then proper winter hit around 20 January and refused to let up until mid-March.

First snowfalls in Warsaw were respectively on: 14 November 2007, 22 November 2008 and 14 October 2009. Winter has failed to turn up as early as in the previous year, but it seems unlikely that we’ll see Warsaw brought to a standstill by a layer of white flakes earlier than in 2007 and 2008. Time will tell. I want white Christmas and then winter may go away.

How about short-term predictions. If there are any prophets (of doom) among the readers, please mark your presence somehow. I have two questions.

1. On 9 November stocks of Warsaw Stock Exchange will be floated on… Warsaw Stock Exchange. They were offered for 43 PLN per share and after reading “The Intelligent Investor” and having done a brief research, I deemed them to be overvalued and settled on not subscribing for them. Then it turned out the demand from institutional investors had surpassed 25 times supply. What will the open price on Tuesday be? Will it fetch profits to subscribers?

Update, 10 November. Open price was 50.75 PLN (I do not regret not subscribing for GPW stocks. I still think they are much overvalued, but I'm glad the Polish treasury made a good deal on taxpayers' behalf, in the meantime I struck another, more profitable deal with use of money I would have had to freeze), close price was 54.00 PLN (ever-time high till now).

2. Bulgarian clairvoyant Baba Vanga is said to have predicted the outbreak of Third World War for 10 November 2010. Finally a prophecy that can fulfil quickly, I don’t have to wait until December 2012 :)

Update, 10 November. Not a WW3 in sight. But conspiracy theorist claim the puzzling California missile case might indicate the prophecy is fulfilling.