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“The Economist” Deals Four Aces: Europe Suing Banks on Derivative Scams … Private-Equity’s Big Debt Problems … Bernanke & Greenspan Still in Denial … Spin, Science & Climate Change

by Paul B Farrell, JD, PhD
| | 4/21/2010

The Economist deals four-aces: I read it right after seeing Polanski’s new film, Ghostwriter, which, along with the Hurt Locker and Green Zone, dramatizes some of the big issues we already know about Iraq War political shenanigans. Loosely based on Tony Blair’s secret cooperation with the CIA during the war, we can see why after all these years Washington pressed the Swiss to arrest Polanski. Two pop phrases come to mind: Revenge is best served cold. And there’s no fury worse than politicans scorned. Here are The Economist’s four aces for investors searching for signs of the new bubble/bust cycle:

Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis … The desire to rescue a damaged reputation is a powerful motivator. That is one conclusion to draw from a new 48-page paper written for the Brookings Institution by Alan Greenspan, the 83-year-old former chairman of America’s Federal Reserve. A man once hailed as the world’s outstanding central banker is now routinely blamed for the asset bubble and subsequent collapse. This is Mr Greenspan’s attempt to set the record straight. The crisis, he argues, stemmed from a “classic euphoric bubble” … Greenspan says it is impossible to anticipate crises … central banks were innocent and impotent bystanders in a global macroeconomic shift. … This explanation is broadly similar to the idea of a “global saving glut” which Ben Bernanke, the Fed’s current chairman, has long espoused. …  There is something odd about central bankers denying any responsibility at all for long-term rates … Monetary policy may be a blunt tool to deal with asset bubbles. But that does not mean it is irrelevant …

Cities in the casino: A derivatives farce makes its way to court in Milan. Others are sure to follow … one of the great advantages of financial innovation, it was often said, was that risk would end up going to those best qualified to hold it. In fact, much of it seems to have ended up in the hands of those least able to understand it. How some of it got there may soon be revealed in an Italian court. On March 17th four big banks, 11 bankers and two former city officials were charged with fraud in connection with the sale of interest-rate derivatives to the city of Milan. The trial is due to start in May. The prosecution relates to a huge bet on interest rates that the four banks—UBS, JPMorgan Chase, Deutsche Bank and Hypo Real Estate’s DEPFA unit—helped the city authorities to take in 2005. …

Private-equity managers face a difficult outlook: Less debt … The locusts went hungry in 2009. The private-equity industry, the bête noire of many a European politician, managed just $81 billion of buy-outs, compared with more than $500 billion in 2007. Indeed, almost anything that could go wrong for the industry last year did so … Private equity has prospered for most of the past 25 years … easy access to cheap credit, rising asset prices, a relatively stable economy and a friendly regulatory environment. But credit was neither available nor cheap last year. … Private-equity firms realised only $68 billion last year, down from $324 billion in 2007 … there are very few Googles—high-growth, well known businesses that can trace their initial success to private-equity or venture-capital backing. And in a slow-growth economic environment, it will be very difficult for the industry to start generating such examples in the next few years.

Spin, science and climate change: Action on climate is justified, not because the science is certain, but precisely because it is not. Climate-change legislation, dormant for six months, is showing signs of life again in Washington, DC. This week senators and industrial groups have been discussing a compromise bill to introduce mandatory controls on carbon.  … However much bosses may care about the planet, they usually mind more about their bottom line, and when times are hard they are unwilling to incur new costs. …  The problem lies not with the science itself, but with the way the science has been used by politicians to imply certainty when, as often with science, no certainty exists. … Plenty of uncertainty remains; but that argues for, not against, action …. rather than feeding voters infantile advertisements peddling childish certainties, politicians should treat voters like grown-ups. With climate change you do not need to invent things; the truth, even with all those uncertainties and caveats, is scary enough.

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