What banks do with our money?

There have been lots of seminars, discussions and numerous articles on the recent “liquidity” crisis in our banking system. Rising imports, stagnating exports, capital flight and unspent capital expenditures, among others, have been identified as the primary reasons for the current crisis. Some have also identified the currency note shortage last Dashain when depositors could not withdraw adequate amounts of cash from their respective banks as being another critical reason for the current liquidity problems because many depositors could have lost faith in the commercial banks’ ability to meet their demand for deposits.

In this article, I will try to shed some light on the role of banks as financial intermediaries where they take short-term deposits and provide long-term loans, and the potential liquidity crisis that banks could face from this inherent mismatch between their assets and liabilities. A commercial bank is primarily involved in mobilising deposits and providing loans, i.e., they channel deposits from individuals into loans for borrowers. In the process, they earn a profit from the spread between the average cost of their deposit aka “cost of funds” and the average lending yield. The higher the spread between the lending yield and the cost of funds, the higher will be the bank’s profit. Banks can mobilise deposits either through low-cost current and savings accounts (CASA) or through high cost fixed deposit (FD) accounts. So it’s in a bank’s interest to mobilise as much deposits as possible from low-cost CASA to widen their interest spread. However, since there is no withdrawal limit on CASA (as they are demand deposits), the average deposit on such accounts can be highly volatile. FD accounts, on the other hand, have fixed tenures, so banks can plan beforehand when and by how much there could be potential deposit withdrawals from these accounts. Because of the respective trade-offs between the cost and volatility of both CASA and FD accounts, commercial banks try to find the optimum balance between the two whereby they can minimise their cost of funds.

When a commercial bank mobilises deposits, it can invest that amount either in liquid assets such as government bonds or lend it out to borrowers who are interested in either meeting their working capital needs or investing in manufacturing businesses, real estate, hydro power and so forth. Generally, government bonds (read T- bills) have a lower yield than the average lending rate on the loan portfolio of commercial banks. So it’s in a bank’s interest to allocate as much of their assets to higher yielding loans than government bonds. However, because most of these capital intensive manufacturing plants, hydro projects and real estate ventures have long durations, banks have to wait for a substantial period before they get their principal back. T-bills, on the other hand, have a lower maturity period, and they can even be used as collateral to borrow funds from the central bank. Hence, like in the case of deposits, banks try to find the optimum balance between high yielding but longer duration loans with low yielding but liquid government bonds.

Now, as mentioned above, it’s in a bank’s interest to mobilise as much deposits from low-cost CASA as possible. As a demand deposit, funds in CASA have immediate maturity; however, banks believe that depositors’ unpredictable needs for cash are unlikely to occur at the same time. With this belief, they are able to make loans to projects with a long duration. In the process, banks are borrowing short-term and lending long, which results in an asset-liability mismatch. Almost all banks have some sort of an asset-liability mismatch on their balance sheets. When banks do lend out demand deposits for long-term projects, a systemic risk can arise in the banking system if an individual bank cannot meet the withdrawal demand of its depositors. Trust is paramount in the banking system. Every depositor trusts banks to deliver cash when they come forward with a withdrawal slip. If the depositors feel that their savings is at risk, then a sudden surge in deposit withdrawals and the bank’s inability to meet the unexpected demand can lead to the self- fulfilling crisis of “bank run”.

One way out for banks would be to follow a “narrow bank” concept, i.e., invest all their demand deposits in short-term assets. However, this not only affects the profitability of a bank due to lower yields on short-term assets but also reduces its ability to lend out to productive sectors such as manufacturing, and that affects the overall economy. Hence, the concept of narrow banking has been discredited in most countries (however, because of the recent financial crisis, voices have emerged to move towards narrow banking).

In the context of the ongoing liquidity crisis in Nepal, the trust of depositors in the banking system has been undermined due to the currency shortage last Dashain. As a result, many depositors who had to haggle with bank officials to withdraw their own savings during the festival haven’t channelled their savings back into the banking system. According to Diamond and Dybvig’s seminal research on banking crises, one of the most potent tools to build the general public’s trust in the banking system is deposit insurance. As of now, there is no provision of deposit insurance from the government side although the last budget did mention it.

To address the problem of an asset-liability mismatch in Indian banks, which is stifling infrastructure development, the Indian government announced the concept of “take-out” financing during the last budget of 2009/10. Under the Indian government’s take-out financing scheme, India Infrastructure Finance Company Limited (IIFCL) – an Indian government owned entity – will buy out long- term loans from banks. Minimising asset-liability mismatches, this scheme enables banks to enter into long-term project financing as they can sell their loans to the IIFCL after a certain time frame. Though the recent initiative of Nepal Rastra Bank to provide refinancing is a welcome step, a similar kind of take-out financing scheme is necessary to mitigate the liquidity problems that arises from an asset-liability mismatch in banks as well as encourage banks to lend towards productive sectors.

From the bank’s side, there should also be proper and rigorous focus on asset-liability management. Most commercial banks in Nepal don’t follow the concept of duration management in their balance sheets. Much of their senior management’s focus is towards increasing the absolute volume of deposits and loans rather than properly managing asset-liability to maximise profits. When mangers focus only on increasing the deposit or loan volume, adverse interest rate movements can seriously undermine a bank’s profitability and its asset quality.

However to be fair to bankers, they also don’t have tools to properly manage the mismatch between assets and liabilities. Generally, interest rate derivatives, currency derivatives and swaps are used extensively by foreign banks to match their assets with their liabilities. With Nepal Rastra Bank’s recent decision to allow commercial banks to use derivative instruments, I am hopeful that in the days ahead, banks will be better equipped to deal with asset- liability mismatch problems.

Courtesy:- GARP

ETFs & Fund Statistics

TOP PERFORMING EMERGING MARKETS BOND FUNDS

Funds	1-Year Return	3-Year Return	Yield (%)
Franklin Templeton Emerg Mkt Debt (FENDX)	56.0%	9.7%	3.7%
TCW Emerging Markets Income (TGEIX)	47.1	12.1	5.6
SEI International Emerging Mkts Debt (SITEX)	38.5	7.5	7.8
RiverSource Emerging Markets Bond (REBAX)	38.5	7.6	4.0
Federated International High Income (IHIAX)	38.4	6.2	6.0
JPMorgan Emerging Markets Debt (JEDAX)	37.1	2.3	5.2
Goldman Sachs Emerging Market Debt (GSDAX)	36.6	7.2	7.2
Fidelity New Markets Income (FNMIX)	35.8	8.8	6.8
Pimco Emerging Local Bond (PELAX)	35.6	NA	5.7
Fidelity Advisor Emerging Mkts Income (FMKAX)	34.8	8.6	6.2

MUTUAL FUND ASSETS (billions)

Type	February, 2010
Stocks	$4,890.5
Taxable Bonds	1,824.0
Muni Bonds	472.2
Money Markets	3,139.4

 

The combined assets of the nation’s mutual funds increased by $87.0 billion, or 0.8%, to $10.971 trillion in February. Stock funds posted an inflow of $117 million in February, compared with an inflow of $16.92 billion January. Among stock funds, world equity funds posted an inflow of $5.12 billion in February, vs. an inflow of $10.11 billion in January. Bond funds had an inflow of $26.54 billion in February, compared with an inflow of $27.25 billion in January.

TOP PERFORMING CURRENCY ETFS

ETF	1-Year Return	YTD Return	Assets ($mil)
WisdomTree Dreyfus South African Rand (SZR)	33.6%	3.6%	$11.6
WisdomTree Dreyfus Brazilian Real (BZF)	33.1	0.9	155.3
CurrencyShares Australian Dollar (FXA)	32.7	4.1	716.1
WisdomTree Dreyfus New Zealand Dollar (BNZ)	25.0	-1.4	17.9
CurrencyShares Canadian Dollar (FXC)	21.9	4.5	621.2

 

WORST PERFORMING CURRENCY ETFS

ETF	1-Year Return	YTD Return	Assets ($mil)
PowerShares DB U.S. Dollar Index (UUP)	-8.1%	2.52%	$1,600.0
WisdomTree Dreyfus Chinese Yuan (CYB)	-0.8	0.04	746.4
Market Vectors Chinese Renminbi (CNY)	-0.7	0.05	31.0
Barclays Asian & Gulf Currency Reval (PGD)	0.8	-0.10	6.5
CurrencyShares Euro Trust (FXE)	2.8	-5.24	651.5

 

LARGEST EXCHANGE-TRADED FUNDS

Fund	Assets (billions)	1-Year Return	Yield (%)
SPDR Trust (SPY)	$73.4	42.2%	1.79%
SPDR Gold Shares (GLD)	42.3	30.4	0.00
iShares MSCI Emerg Mkts (EEM)	36.7	60.4	1.38
iShares MSCI EAFE (EFA)	36.6	46.8	2.58
Vanguard Emerging Markets (VWO)	24.8	66.3	1.30

ETF Costs come in four varieties.

1. Expense ratio: Applies to both open-end funds and ETFs. All investors pay this charge for management fees and administrative expenses. For example, VTSMX = 0.18% (Investor shares), VTSAX = 0.09 (Admiral shares) and VTI = 0.09% (ETF shares).

2. Commissions: This cost only applies to accounts at brokerage firms. This is the charge to buy or sell open-end funds and ETFs through the brokerage firm. Most firms charge a higher commission to trade open-end mutual fund shares than the same dollar equivalent of ETF shares. There is no commission charge if your funds are in the custody of Vanguard and you buy open-end funds directly from Vanguard.

3. Purchase and redemption fees: This cost only applies to a few Vanguard open-end funds. Fees range from 0.25 percent to 2 percent and are charged by Vanguard to buy shares or to sell shares within a specified (usually short) period of time. Purchase and redemption fees differ from a commission because the money goes back into the fund rather than to a broker. These fees are meant to discourage short-term market-timing.

4. Trading spreads: This cost only applies to ETFs because they are traded on an exchange. The spread is the difference between what you pay for a fund and the true net asset value (NAV) of the fund at the time you bought it. This can range from a few pennies per share to about 25 cents, depending on when you buy and the liquidity of the underlying securities in the ETF.

More on:-

Bogleheads Investment Forum

HSBC ETFs (Launched in Aug 2009)

HSBC FTSE 100 ETF fact sheet(pdF)

Virtual Water:- a trade instrument!

Producing goods and services generally requires water. The water used in the production process of an agricultural or industrial product is called the ‘virtual water’ contained in the product. For producing 1 kg of grain we need for instance 1000-2000 kg of water, equivalent to 1-2 m3. Producing livestock products generally requires even more water per kilogram of product. For producing 1 kg of cheese we need for instance 5000- 5500 kg of water and for 1 kg of beef we need in average 16000 kg of water (Chapagain and Hoekstra, 2003). According to a recent study by Williams et al. (2002), the production of a 32-megabyte computer chip of 2 grams requires 32 kg of water.
If one country exports a water-intensive product to another country, it exports water in virtual form. In this way some  countries support other countries in their water needs. Trade of real water between water-rich and water poor regions is generally impossible due to the large distances and associated costs, but trade in water-intensive products (virtual water trade) is realistic. For water-scarce countries it could therefore be attractive to achieve water security by importing water-intensive products instead of producing all water-demanding products domestically. Reversibly, water-rich countries could profit from their abundance of water resources byproducing water-intensive products for export.

The concept of ‘virtual water’ has been introduced by Tony Allan in the early nineties (Allan, 1993; 1994). It took nearly a decade to get global recognition of the importance of the concept for achieving regional and global water security.

Virtual water is the water ‘embodied’ in a product, not in real sense, but in virtual sense. It refers to the water needed for the production of the product. Virtual water has also been called ‘embedded water’ or ‘exogenous water’, the latter referring to the fact that import of virtual water into a country means using water that is exogenous to the importing country. Exogenous water is thus to be added to a country’s ‘indigenous water’ (Haddadin, 2003). If it comes to a more precise quantitative definition, principally two different approaches have been proposed and applied so far. In one approach, the virtual water content is defined as the volume of water that was in reality used to produce the product.

This will depend on the production conditions, including place and time of production and water use efficiency. Producing one kilogram of grain in an arid country for instance can require two or three times more water than producing the same amount in a humid country. In the second approach, one takes a user rather than a producer perspective, and defines the virtual water content of a product as the amount of water that would have been required to produce the product at the place where the product is needed.

More on:-

http://wp.me/phTYb-dS

Wikipedia

Virtual Water Trade(pdf)

Smart People Dumb Quotes

James Watson

The Racially Charged Rant

[I am] inherently gloomy about the prospect of Africa [because] all our social policies are based on the fact that their intelligence is the same as ours—whereas all the testing says not really.

Bill Clinton

The ‘Yes, But’

When I was in England, I experimented with marijuana a time or two, and I didn’t like it. I didn’t inhale it, and never tried it again.

Linus Pauling

The Problematic Prescription

Seventy-five percent of all cancer can be prevented and cured by vitamin C alone.

Lee Iacocca

The ‘Huh?’

We’ve got to pause and ask ourselves: How much clean air do we need?

William H. Stewart

The Hype Believer

We can close the books on infectious diseases.

John Mayer

The TMI

My d–k is sort of like a white supremacist. I’ve got a Benetton heart and a f–kin’ David Duke c–k.

(this one is hilarious….lol)

Peter Duesberg

The Underestimator

That virus is a pussycat.

Wilhelm C. Heuper

The Underestimator (Part Two)

If excessive smoking actually plays a role in the production of lung cancer, it seems to be a minor one.

Thomas Edison

The Pooh-Pooh-er

I have determined that there is no market for talking pictures.

Hillary Clinton

The Overblown Danger

I remember landing under sniper fire. There was supposed to be some kind of a greeting ceremony at the airport, but instead we just ran with our heads down to get into the vehicles to get to our base.

(haha…)

Paul Ehrlich

The Chicken Little

Population will inevitably and completely outstrip whatever small increases in food supplies we make … The death rate will increase until at least 100 [million]–200 million people per year will be starving to death during the next ten years.

(haha..wat an approximation..there)

Joe Biden

The Anachronism

When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about the, you know, the princes of greed. He said, ‘Look, here’s what happened.’

(…lol..what if he hadn’t said it??? no one would know!…lol)

More on:- Newsweek

ROF:-Radio Over Fibre-Wireless@home

Besides carrying digital data, optical fibers can also transmit radio signals for wireless communication. So-called “radio-over-fiber” technology has been used to provide access to radio dead zones, but new research is looking into using this technology to broadcast wireless closer to home.

Radio over fiber (RoF) modulates an optical wavelength in the fiber with a radio signal. This solves the attenuation problem during transport of the signal, while allowing the centralization of signal generation and processing equipment. A wireless signal can be simply relayed down the fiber to remote antennas that cost relatively little to install and should be immune to upgrades. RoF is already being used to transmit wireless signals into hard to reach areas like tunnels and stadiums.

In his talk, Mikhail Popov of Acreo AB in Sweden reviews options for taking RoF into homes and buildings along the optical access (PON) infrastructure, as part of a general trend toward merging wired and wireless communication. Fiber in this case would already be carrying Internet traffic, but it could also carry cell phone conversations transmitted over a remote antenna installed in the premises. In a multi-user scenario, the radio signals would pass directly onto the fiber without any processing. However, for a single home, it would make more sense to set up a “femtonode” that converts the radio waves from wireless devices into Internet data and uses the home Internet connection to connect to other mobile users. In any case, this network sharing could provide indoor wireless coverage at a fraction of the cost of relying solely on outdoor base stations, Popov says.

In the future, wireless home networks may be built on an RoF skeleton. As of now, most homes and businesses use WiFi to connect to laptops, but soon TVs and other media devices may need a wireless hook-up. One way to get more bandwidth is to trade WiFi for ultra-wideband (UWB), which can support data rates that are 1,000 times faster. The trouble is that UWB can only travel approximately 10 meters and is unable to penetrate walls, so there needs to be a way to distribute the signal throughout a house or building.

One solution is to use optical fibers. In a separate talk, Benoit Charbonnier of R&D Orange FT Group in France will describe a UWB RoF network that he and his colleagues have built. Their design calls for the UWB signal being transmitted and received by access points in each room. These access points simply relay the wireless signal over the fiber network to a central hub that down-converts the radio frequency to facilitate processing. This network architecture allows all the hardware to be transparent to whatever wireless products are being used in the home. Charbonnier will present recent test results that show his team’s RoF network can distribute a 3 Gbit/s signal with good fidelity.

The research is being presented at the Optical Fiber Communication Conference and Exposition/National Fiber Optic Engineers Conference (OFC/NFOEC) — the world’s largest international conference on optical communication and networking — from March 21-25 at the San Diego Convention Center.

More on:- ScienceDaily

Long term rise in borrowing rates

Long-term interest rates are rising, and the question of why has huge stakes for the economy — and has become a Rorschach test for financial market watchers.

During the past month, the rate that the federal government must pay to borrow money for 10 years has risen steeply — to nearly 4 percent on Monday, from 3.6 percent on March 4. That higher number is likely to drive up a wide range of other commonly used interest rates, boosting what home buyers must pay to take out a mortgage, and raising borrowing costs for companies looking to expand.

For optimists, there is a benign explanation. With the economy performing better, the Federal Reserve will eventually have to raise interest rates to stave off inflation, and in anticipation of higher future rates, long-term investors are already demanding compensation. Moreover, the strong economy is making investors confident enough to move their money into risky assets such as corporate debt from safe government bonds, creating a gush of money away from Treasury securities.

Others are more pessimistic. With public debt levels soaring around the world, the supply of bonds has begun to outstrip investors’ appetite for them. Some investors may be questioning whether the United States will ever get its fiscal house in order and are demanding higher rates because the federal government seems to be a riskier borrower than in the recent past. Meanwhile, investors’ expectations about inflation may edge up, leading them to require higher interest rates.

Even with the recent increase, rates remain low by any historical standard. Nonetheless, higher interest rates could be a drag on growth, particularly if increased mortgage costs stifle the nascent recovery in the housing sector.

Rates have risen during a period in which economic data have mostly exceeded expectations, underscored by the addition of 162,000 jobs in March, the best month for employment growth in three years. In the latest piece of good news, the National Association of Realtors said Monday that its index of pending home sales, a forward-looking indicator of housing activity, rose 8.2 percent in February.

Moreover, the rise in long-term rates has coincided with investors’ expectations that the Fed will raise its target for short-term rates sooner rather than later. Although Fed leaders have said they expect to keep their interest-rate target very low for “an extended period,” investors think there is a 45 percent chance they will raise rates by their September meeting based on trading in futures markets. A week ago, those markets were pricing in only a 35 percent chance of rate hikes.

As for the other leg of the rosy scenario — that the rise in bond yields reflects people moving money out of safe instruments such as Treasurys and toward riskier assets — market data also offer some confirmation. The difference in rates between government bonds and corporate bonds has narrowed over the past month, and the stock market has risen.

“This is more an outcome of a robust recovery than a risk to that recovery,” said Dean Maki, chief U.S. economist at Barclays Capital.

“My view is, this rise in yields is what you expect to happen as a recovery comes together, and not something to worry a lot about,” said Ethan Harris, chief economist for Bank of America-Merrill Lynch.

But even Harris and others who hold that view acknowledge that there are some reasons for angst in the recent run-up in rates.

The government auctioned $118 billion in debt last week, part of its ongoing effort to fund current budget deficits and roll over old debt that has matured. Fewer buyers than expected showed up, contributing to a steep rise in rates last week.

That suggests bond investors are coming to terms with the large needs for funding coming from the U.S. government — and other sovereign entities — in the near future, and are insisting on higher rates given the flood of new federal debt to be issued.

The Federal Reserve last week ended a program to buy $1.25 trillion in mortgage-backed securities, and foreign buyers have shown less interest in U.S. government debt, factors that reduce the pool of buyers for those assets and drive up interest rates.

A related but more long-term risk is that bond buyers could come to think that the government will not be able to rein in its budget deficit to a sustainable level, making investors demand more compensation because of this risk.

“You’re losing some very price-inelastic demanders . . . and that’s probably a little bit of what is going on with higher rates,” Harris said. “Once the economy gets into full recovery, you have to figure the equilibrium rates should be higher given the structural deficit the U.S. has.”

Another factor that can drive rates up is a rise in inflation expectations. After all, if investors think that a dollar in the future will be worth much less than it is now, they’ll require a higher rate of return to invest their money.

But because the Treasury Department also issues debt that is adjusted for inflation, it is relatively easy to untangle whether rising inflation expectations are at work by looking at prices of the two types of bonds. That data suggest that investors expect modest inflation over the coming decade, just over 2 percent per year.

Some analysts are skeptical of the idea that fiscal fears could be a major reason for higher rates.

“I don’t buy it at all,” said Robert Barbera, chief economist for the Investment Technology Group. “There’s been no new news about the fiscal picture. We didn’t just discover that there are big budget deficits over the last 60 days. What has changed over the last 60 days is the economy is doing a hell of a lot better than expected.”

Saudi Arabia:- International lending might decline

 International lenders have become more cautious about lending to the Gulf in the wake of the defaults in 2009 by two major Saudi family conglomerates, the Saad Group and the Al Gosaibi Group, and the ongoing debt-management problems of Dubai’s government-related entities, as well as more minor defaults in Kuwait and Bahrain (the latter directly linked to the Saudi defaults). These developments have raised fears of further large-scale corporate defaults to come, and have prompted concerns that Saudi corporations’ international access to credit will suffer. This will in part depend on the outcome of negotiations between the groups and their creditors. However there is a possibility that the groups will discriminate against foreign creditors; the Saad Group has already reached a settlement to repay 85% of its debt to Saudi banks, but has not done so with foreign creditors. If this happens, it will have an adverse impact on international risk perceptions of Saudi corporations, affecting the availability and cost of credit, which could become particularly problematic if there is a second wave of the world financial crisis. Moreover, if the Saudi government is seen as having helped local firms, but not foreign firms, to recover the sums they are owed, this would have a negative impact on perceptions of the government’s attitude to foreign investors and business partners. Firms depending on international bank credit may wish to be as transparent as possible in order to reduce uncertainty, and should review the availability of alternative sources of financing.

Interview with George Soros:- end of financial crisis?

George Soros, the financier and philanthropist, is author most recently of The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. He spoke with me in Washington, D.C., where the IMF and World Bank are meeting, on Sunday.

Nathan Gardels: Let’s talk first about the nature of the crisis. Thanks to low interest rates, global liquidity and deregulation, we have had a 25-year, self-reinforcing credit expansion bubble, leading to “irrational exuberance,” as it was once said, in financial markets. Now we have the self-reinforcing crash of the stock and credit markets –“irrational despair” — not justified by the economic fundamentals in the real economy.

How does this pattern fit your theory of reflexivity and your new paradigm for understanding finance?

George Soros: The key to understanding this crisis — the worst since the 1930s — is to see that it was generated within the financial system itself. What we are witnessing is not the result of some exogenous shock that knocked things off balance, as the prevailing paradigm, which believes markets are self-correcting, would suggest. The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.

The paradigm I’m proposing differs from the conventional wisdom in two respects. First, financial markets don’t reflect the actual economic fundamentals. Expectations by traders and investors are always distorting them. Second, these distortions in the financial markets can affect the fundamentals — as we see in both bubbles and crashes. Euphoria can lift housing and dot.com prices; panic can send sound banks tumbling.

That two-way connection — that you affect what you reflect — is what I call “reflexivity.” That is how financial markets really work. Their instability is now spreading to the real economy, not the other way around. In short, the boom-bust sequences, the bubbles, are endemic to the financial system.

The current situation is not just about the housing bubble. The housing bubble was merely the trigger that detonated a much larger bubble. That super-bubble, created by the ever-increasing use of credit and debt leverage, combined with the conviction that markets are self-correcting, took more than 25 years to grow. Now it is exploding.

Gardels: What ought to be the “circuit breaker” that short-circuits the distortions that inevitably destabilize financial markets?

Soros: If bubbles are endemic in the system, then government regulators have to intervene to prevent bubbles from getting too big. Governments have to recognize that markets are not self-correcting. It is not enough to pick up the pieces after the crisis.

Gardels: Does the presence of the 24-hour global financial news cycle amplify and exaggerate distortions in the financial markets?

Soros: Without question, they accelerate the process. At the same time, I wouldn’t overstate it. At the end of the 19th century, you didn’t have 24-hour cable, but nevertheless you had the same kind of bubbles. Throughout the 19th century, when there was a laissez-faire mentality and insufficient regulation, you had one crisis after another. Each crisis brought about some reform. That is how central banking developed.

Gardels: How come all the efforts of the U.S. government so far — the $700 billion rescue package, low Federal interest rates, backstopping deposits and commercial paper — have not stemmed the crisis?

Soros: The U.S. authorities bought into market fundamentalist ideology. They thought that the markets would ultimately correct themselves. U.S. Treasury Secretary Henry Paulson epitomized this. He thought that six months after the Bear Stearns crisis the market would have adjusted and, “Well, if Lehman (Brothers) goes bust, the system can take it.” Instead, everything fell apart.
Since they did not understand the nature of the problem — that the market would not correct itself — they did not see the need for government intervention. They did not prepare a Plan B.
As the shock of the Lehman failure set in, he had to change his mind and rescue AIG. The next day there was a run on the money markets and commercial paper markets, so he turned around again and said we need a $700 billion bailout. But he wanted to put the money in the wrong place — taking the toxic securities out of the hands of the banks.

They have finally now come around — with the government buying equity in banks — because they see the financial system is on the verge of collapse.

Gardels: Now that the U.S. authorities are at last on the right track, what are the key components of resolving the crisis?

Soros: The outlines are clear. There are five major elements.
— First, the government needs to recapitalize the banking system by buying equity stakes in banks.
— Second, interbank lending needs to be restarted with guarantees and bringing LIBOR (London Interbank Offered Rate) in line with Fed funds. This is in the works. It is going to happen.
— Third, we must reform the mortgage system in the U.S., minimizing foreclosures and renegotiating loans so that mortgages are not worth more than houses. Stemming foreclosures will cushion the fall of housing prices.
— Fourth, Europe has to fix a weakness of the Euro by creating a safety net for its banks. While initially resisting this, they have now found religion and done it at their meeting in Paris on Sunday.
— Fifth, the IMF must deal with the vulnerability of countries at the periphery of the global financial system by providing a financial safety net. This is also in the works. The Japanese have already offered $200 billion for this purpose.
These five steps will start the healing process. If we implement these measures effectively, we will have passed through the worst of the financial crisis.

But then, I’m afraid, there is the fallout in the real economy, which is now gathering momentum. At this point, repairing the financial system will not stop a severe worldwide recession. Since, under this circumstance the U.S. consumer can no longer serve as the motor of the world economy, the U.S. government must stimulate demand. Because we face the menacing challenges of global warming and energy dependence, the next administration should direct any stimulus plan toward energy savings, developing alternative energy sources and building green infrastructure. This stimulus can be the new motor for the world economy.

Gardels: At the end of the day, won’t we be looking at a vastly different global financial landscape? The U.S. will decline as the top power. It will have, along with parts of Europe, socialized banks and loads of debt. Communist China will be the new financial power globally, flush with capital and a major investor in the West.

Soros: U.S. influence will wane. It has already declined. For the past 25 years, we have been running a constant current account deficit. The Chinese and the oil-producing countries have been running a surplus. We have consumed more than we produced. While we have run up debt, they have acquired wealth with their savings. Increasingly, the Chinese will own a lot more of the world because they will be converting their dollar reserves and U.S. government bonds into real assets.

That changes the power relations. The powershift toward Asia is a consequence of the sins of the last 25 years on the part of the United States.

Unraveling ‘Math Dyslexia’

 

Daniel Ansari is an assistant professor and Canada Research Chair in Developmental Cognitive Neuroscience in the Department of Psychology at Western. He is using brain imaging to understand how children develop math skills, and what kind of brain development is associated with those skills.

Research shows that many children who experience mathematical difficulties have developmental dyscalculia – a syndrome that is similar to dyslexia, a learning disability that affects a child’s ability to read. Children with dyscalculia often have difficulty understanding numerical quantity. For example, they find it difficult to connect abstract symbols, such as a number, to the numerical magnitude it represents.

They can’t see the connection, for instance, between five fingers and the number ‘5’. This is similar to children with dyslexia who have difficulty connecting sounds with letters. In a recent study Ansari and graduate student Ian Holloway showed that children who are better at connecting numerical symbols and magnitudes are also those who have higher math scores.

Ansari says parents and teachers are often not aware that developmental dyscalculia is just as common as developmental dyslexia and is frequently related to dyslexia. There is a great need to increase public awareness of developmental dyscalculia.

“Research shows that many children have both dyslexia and dyscalculia. We are now exploring further the question of exactly what brain differences exist between those who have just math problems and those who have both math and reading difficulties,” says Ansari.

Using functional Magnetic Resonance Imaging (fMRI) to study the brains of children with math difficulties, Ansari says that it becomes clear that children with developmental dyscalculia show atypical activation patterns in a part of the brain called the parietal cortex.

This research holds tremendous promise for people who, in the past, had simply accepted that they are ‘not good at math.’ Understanding the causes and brain correlates of dyscalculia may help to design remediation tools to improve the lives of children and adults with the syndrome.

A report of this research is forthcoming in the Journal of Experimental Child Psychology.

“We have some cultural biases in North America around math skills,” says Ansari. “We think that people who are good at math must be exceptionally intelligent, and even more dismaying and damaging, we have an attitude that being bad at math is socially acceptable. People who would never dream of telling others they are unable to read, will proclaim publicly they flunked math.”

Ansari says that math skills are hugely important to life success and children who suffer math difficulties may avoid careers that, with help, might be a great fit for them.

An article by Ansari entitled “The Brain Goes to School: Strengthening the Education-Neuroscience Connection,” will be published in the upcoming Education Canada, the magazine of the Canadian Education Association. In the article Ansari says technological advances such as fMRI have provided unprecedented insights into the working of the human brain.

“A teacher who understands brain structure and function will be better equipped to interpret children’s behaviours, their strengths and weaknesses, from a scientific point of view, and this will in turn influence how they teach,” says Ansari.

More on:- Science Daily

CE:-Understanding Human Interactions with Complex Systems

Cognitive Engineering

—a multidisciplinary field that focuses on improving the fit between humans and the systems they operate—emerged in the early 1980s and has many applications, including intelligence analysis and command and control. 

It combines knowledge and experience from cognitive science, human factors, human-computer interaction design, and systems engineering. However, conitive engineering is distinguished from these applied research disciplines in two primary ways: its specific focus on the cognitive demands imposed by workplace environments and its concern with complex sociotechnical domains in which actions must be conditioned on the expected behavior of other agents, both human and autonomous Cognitive engineering (sometimes called cognitive systems engineering) was identified as an important activity in the early 1980s, though it has earlier roots in human factors and ergonomics. 

 

 

 

 

 

The lure of technology has been that it will make our lives easier. The reality is that technology has made our lives more stressful than ever. Our bosses have continuous access to us (Blackberries, cell phones, and DSL), our customers have fewer resources and are therefore demanding the highest performance at the lowest cost, our adversaries are striving for the competitive edge and have instantaneous access to the same information as we do, our families just want our time, and the information technology industry continues to give us ever more gadgets to help us balance these often competing demands. 

 

 

 

 

 

 

Information technology affords tremendous capacity for data transfer by increasing the availability of data, enabling interoperability between systems, and massively increasing bandwidth and processing. One result is people (warfighters, students, health-care professionals, educators, bankers, etc.) drowning in data and information while frequently lacking real knowledge. 

 

 

 

 

 

 

Goal-based performance requires that information be transmitted seamlessly as knowledge to the decision maker. System complexity is moving the role of systems engineering away from a single individual being a forcing function of hardware and software decisions to that of an interdisciplinary team collaboratively integrating hardware, software, and human considerations in system design trade-off analyses and decisions. 

 

 

 

 

 

The goal of cognitive engineering is to provide a better fit between the human operator and the system so that the operator can more effectively perform tasks. 

 

 

 

 

 

Current human behavior models can make very accurate performance predictions for a single individual interacting with a simple state machine such as an ATM. Recent research has shown promising results for predictions in more complex, dynamic domains such as air traffic control, with extensions to team interactions.

  

To Read More on CE:- John Hopkins University APL(pdf)