Musings of a modern guy

The North Koreans must be the one set of negotiators who have caused the Bush Administration the maximum problems. When the Bush Administration came to power 8 long years ago, they heavily criticized the deal that the Clinton administration made with the North Koreans where the North Koreans agreed to cap their nuclear activities in exchange for more facilities and guarantees of energy. When the Bush Administration came to power, they announced that the world has changed, states that stand against the US will not be treated lightly, and they will be the one that bring the North Koreans to heel. And then 9/11 happened; the Bush administration got rid of the Afghan Taleban and Saddam Hussein in Iraq, but North Korea still remains as unpredictable as ever.
As per North Korea, the current situation has arisen because the previous agreement where North Korea will be taken off the list of nations that support terrorism has not been followed, and hence it is reverting back to having an ongoing nuclear program:

North Korea has made another move toward possibly restarting its suspended nuclear program, the U.N. nuclear agency reports. At the reclusive nation’s request, the International Atomic Energy Agency has removed surveillance equipment and seals from the Yongbyon nuclear facility, agency spokeswoman Melissa Fleming said. The move clears the way for North Korea to reintroduce nuclear material to the facility. The North has told the IAEA that it will do that in a week or so.
Last week, a South Korean news agency reported that North Korea was restoring a reactor at Yongbyon nuclear complex and no longer wanted to be removed from a U.S. list of countries that sponsor terrorism. But a senior U.S. diplomat has said the announcement could simply be a bargaining ploy in the long-running negotiations. The U.S. had seen no indications North Korea was actually rebuilding its reactor, the diplomat said. North Korea had agreed to disable the Yongbyon nuclear complex by October in exchange for a pledge from the U.S. to lift some sanctions and remove North Korea from a list of countries that sponsor terrorism.

When dealing with the North Koreans, it sometimes seems that the Bush Administration is all at sea. In the midst of the attempts by the Bush Administration (and the 6 nation effort) to try to cap the North Korean nuclear efforts, the North Koreans blew a hole into this effort and tested a nuclear bomb, becoming a declared nuclear bomb. One can only wonder what the North Koreans will do next, especially when it is not clear who the current leadership of North Korea actually is.

Ever since President Thabo Mbeki took over from the much more famous Nelson Mandela in 1999, he has always seemed firmly in command. He maintained a normal Government with no radical policies, unlike many of the other Governments nearby that had thrown off a colonial yoke (in the case of South Africa, it was the overthrowing of the apartheid regime). Even when he was bitterly criticized for his absolutely anti-science AIDS position and a few other policies that seemed a bit out of whack, he never seemed fallible. And yet, in a matter of a few months, he has fallen so hard that his career seems all over, destroyed from within the party. It was only last year that he lost the leadership of his party, losing the position to ANC President Jacob Zuma:

Eleven South African ministers have resigned as President Thabo Mbeki prepares to leave office, the government announced Tuesday. Mbeki’s successor — most likely African National Congress deputy president, Kgalema Motlanthe — will be sworn into office on Thursday. Three deputy ministers have also tendered their resignations, a government statement said.
Earlier this month, the ANC asked Mbeki to step down after a judge threw out the corruption, fraud and racketeering case against Zuma, calling it invalid and accusing Mbeki’s government of political interference in the case. Critics of Mbeki alleged he pushed for the corruption charges against Zuma. The case against Zuma — who replaced Mbeki as ANC president last year — was thrown out in September 2006, but the National Prosecuting Authority recharged him.

However, inspite of all the polite words, the parting has been bitter. The ANC, the party to which President Mbeki belonged to, itself asked him to step down; in effect accusing him of pushing the case (and influencing) against the ANC President Zuma. The only consolation for President Mbeki is that his supporters are with him, and are resigning.

It has been decades now that Wall Street has been run by big investment banks. The exact names may keep changing as some of the smaller firms became bigger, and some of the bigger firms fall (and of course, names keep on changing with mergers and acquisitions), but the basic structure of large investment firms that handled investments for individual depositors as well as large institutions (as distinct from banks who depend on deposits for their cheap source of capital) has more or remained constant for so long that most people do not know of any other mechanism on Wall Street. And then suddenly, in the space of an year, Poof!, it all disappears. It started late last year when reports started coming in of problems in the category of non-collateral high-risk loans known as sub-prime. And these loans were in turn converted by financial magic into a range of investment instruments (explaining at more this level of detail will make this a highly technical discussion !) that were traded by a variety of financial institutions including banks and investment firms. When these sub-prime loans started collapsing, the sheer extent of these loans the subsequent losses caused huge losses for those holding these instruments.
Once people sensed that these investment firms were in danger, further credit to them was slow in coming, people started withdrawing their investments, and then the credit rating agencies started declaring them as various shades of high-risk, junk status. Once this happened, for all practical purposes, these institutions were finished, with the actual spiral of destruction collapsing very fast. And, now with the Administration and Federal Bank of the USA very worried, they have taken steps to prevent some of the more huge ones:

Federal regulators converted Wall Street’s remaining stand-alone investment banks - Goldman Sachs and Morgan Stanley - into bank holding companies Sunday night. The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. But it also puts Goldman and Morgan under the Fed’s supervision, increasing the agency’s regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives. In the past eight days, the federal government announced a $700 billion plan to rescue the financial sector by buying up troubled mortgage assets and an $85 billion emergency loan to insurance titan American International Group. Also, Lehman filed for bankruptcy and Bank of America took over Merrill Lynch.

So, even though both these huge huge firms were not in immediate financial danger, they were sensing that they were in grave danger of running afoul of sentiment. In a scenario where investment banks were automatically assumed to be in danger, neither of these firms would have wanted to be the next company picked up for speculation; once in the target of negative public sentiment, even a profitable investment bank could quickly reach the edge of collapse.
This action goes against the normal distance that the US Government would like to maintain from the private market, but politicians of all shades have realized the extreme danger to the economy, and are willing to run with this. Making these investment firms as companies that will act like normal banks will give far more stability.

Islamabad is the capital city of Pakistan, and the home to its political leaders and a military garrison as well. One would expect that the city has many layers of security, especially since there is an open conflict between the Pakistani Government (under incredible pressure by the US Government), and the Pakistan Taleban and Al-Qaeda (both of whom oppose the policies of the Pakistani Government). There have been attacks in Islamabad (and other Pakistani cities) before, but the latest truck bombing of the Marriott takes the situation to a new level. The very scale of the attack, which has almost destroyed the hotel and led to a huge number of casualties shows an escalation of the attack on the Pakistani state from the terrorists within. The Marriott is very close to the Parliament building, and in an ironic note, the Pakistani President had just given a speech in which he had promised to combat terrorism. The Marriott is also a symbol, being a favorite gathering point for foreigners and for the elite within Pakistan; and has been attacked before (the last time a security guard died when the suicide bomber he managed to prevent from entering blew himself up):

Officials said they were worried the building, which burned through night after after the blast ruptured a gas pipeline, would collapse. A security official said many people leapt to their deaths from upper floors. The bombing came shortly after new President Asif Ali Zardari, who faces a desperate struggle against Al-Qaeda and Taliban militants, delivered his inaugural address to parliament only a few hundred metres away.
The attack appeared to be timed to cause the maximum number of casualties, coming as the hotel was thronged with families holding their evening meal to break the daily Ramadan fast. Eyewitness Mohammad Jamil said the truck exploded just outside the heavily-secured hotel’s gates. He said the force of the blast sent the truck flying into the air, and knocked him over onto the street.

This attack, in a zone that is supposed to be security intense, was all the more shocking for the sheer scale and enormity of the damage (the bomb blew a crater 40 feet deep in front of the hotel, and caused a fire inside the hotel). It is also an intelligence failure of the highest order, given that the Government had no warning that such an attack was imminent, and will also lead to speculation about the involvement of the intelligence agencies in such an attack. Further, there were some US intelligence agents visiting Islamabad at around the same time, and there is speculation that the attack could have been aimed at these visitors as well.
Pakistan is confronted with grave choices - It has to decide whether it wants to cave into these terrorists or to prevent the country from slipping into their hands. It has tried to make peace with them, but that does not work since the Pakistani Taleban believe that they are in the right and their ideology and practices have to prevail. It also makes the rest of the world suspicious about whether Pakistan really wants to fight these terrorists or not.

For the last many years, China has been the leading supplier of a large range of goods to the world. Unfortunately, for the last few years, China has also been facing the brunt of massive quality problems. Seafood, paint, toys, toothpaste, and many other products have been found to be contaminated in one way or the other. There have also been injuries and deaths due to these quality issues, with many different contaminants having been found. The latest one to emerge as a major scare is the problem about contamination of milk, causing milk from some of the largest producers being now evaluated:

Shop shelves in China and elsewhere are being cleared of popular dairy products after tests found contamination in regular milk as well as baby formula. Inspectors found that 10% of liquid milk from three of China’s dairies was tainted with melamine.
The scandal first came to light in milk powder that killed four infants and sickened more than 6,000 others. Suppliers are suspected of diluting milk to cut costs, then adding melamine to make it appear higher in protein. Melamine is an industrial chemical normally used in plastics, and is banned from food stuffs.

This is yet another problem over the quality levels of products made in China, and something that the Chinese Government would do well to repel with some fast action.

This is a time that no Economic Affairs Minister (or Secretary of Commerce), and Central Bank Governor would want to see. Imagine spending public money to shore up private companies ! Balance that with a risk to sentiment if such large companies, immensely integrated in the economy, suddenly collapse. The potential that overall sentiment becomes very negative is too huge. So, public officials, even if against intervention in the market economy, have to balance such intervention against the need to prevent economic sentiment from turning negative (and such a need is central to their jobs of shepherding the economy to growth and prevent malaise such as a depression or low growth).
All these sentiments came right to the fore when the question about what to do about the economic giant, AIG came to the fore. Suddenly, after the sale of Merrill Lynch and the collapse of Lehman Brothers, problems revolving AIG and its credit problems were a massive problems to the US Government. It could let Lehman Brothers go down the tubes, but not so AIG. The extent of AIG’s integration into the economy made a resurrection seem a very obvious, and given that it was unlikely another private party could intervene, it was finally the US Federal Reserve that intervened and provided AIG the life support (in the form of a massive loan) that it needed:

American International Group Inc. averted the worst financial collapse in history by accepting an $85 billion federal loan and giving the government a majority stake. The U.S. reversed its opposition to a bailout of AIG, the nation’s biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that “a disorderly failure of AIG could add to already significant levels of financial market fragility,” according to a Fed statement late yesterday.
AIG gives up a 79.9 percent stake to the government and senior managers including Chief Executive Officer Robert Willumstad, 63, will give up their jobs. The two-year revolving loan gives AIG time to sell assets “on an orderly basis,” the New York-based insurer said late yesterday in a statement. The U.S. has the right to discontinue payment of dividends to AIG’s common and preferred stockholders, who are already reeling from a 94 percent drop in common shares this year.

The question that now remains is about which is the next major company that is on the danger list. The Government has already rescued the 2 housing giants, and seen many other major corporations in serious trouble. In many cases, these companies get into trouble since their investments have been massively damaged by the sub-prime credit issues, or since they were holding derivatives that were backed up by these assets. Now, these are worth as much, and downgrades by credit-rating agencies push them down a spiral; they are not able to raise money either through loans or by selling stocks (since stocks have declined in value). This is a downward spiral that takes them down very fast when they are near the end.