David Chaston on a dishonesty culture in banks; a China mortgage bomb; what's doing us in; more migration, better equity; SOI fears in perspective; Dilbert & more

David Chaston on a dishonesty culture in banks; a China mortgage bomb; what's doing us in; more migration, better equity; SOI fears in perspective; Dilbert & more

Here's my edition of Top 10 links from around the Internet today.

We have a Monday-Wednesday-Friday schedule for Top 10. Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. 'Banking culture breeds dishonesty'
A Swiss study into banker honesty has come up with some grim results.

Researchers in Switzerland studied bank workers and other professionals in experiments in which they won more money if they cheated, and found that bankers were more dishonest when they were made particularly aware of their professional role.

This is not a generic attribute for all people in business. It singles out bankers specifically. 

The same experiments with employees in other sectors - including manufacturing, telecoms and pharmaceuticals - showed they don't become more dishonest when their professional identity or banking-related information is emphasised.

Trust in others’ honesty is a key component of the long-term performance of firms, industries, and even whole countries. However, in recent years, numerous scandals involving fraud have undermined confidence in the financial industry. Contemporary commentators have attributed these scandals to the financial sector’s business culture, but no scientific evidence supports this claim.

Here we show that employees of a large, international bank behave, on average, honestly in a control condition. However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest.

This effect is specific to bank employees because control experiments with employees from other industries and with students show that they do not become more dishonest when their professional identity or bank-related items are rendered salient.

Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm, implying that measures to re-establish an honest culture are very important.

2. The Fed's culture war
It is not only academics that are worrying about bank culture. Harvard professor Mark Roe has laid out why the US Federal Reserve is concerned and what they propose do do about the problem.

At a closed-door conference attended by senior bankers, regulators, and some academics, Federal Reserve Governor Daniel Tarullo and Federal Reserve Bank of New York President William Dudley used their bully pulpit to do something unexpected. Instead of focusing on how to bolster bank stability – channeling more capital toward the largest institutions, curbing their riskiest activities, and determining how to manage a failing bank without bailing it out – the officials discussed the bankers themselves.

Tarullo focused on managerial misbehavior, arguing that managers who do not comply fully and willingly with regulations should face tougher sanctions than they do now. Instead of blaming “a few bad apples” for wrongdoing, he insisted, institutions should implement controls that prevent “bad apples” from poisoning the organization. To this end, organizations should embed respect for law, regulation, and the public trust in internal compensation systems.

Moreover, Tarullo cited criminal prosecution and imprisonment of individuals as the most effective way to deter illegal conduct, such as breaches of antitrust law. Of course, as he acknowledged, prosecuting an individual for such violations is difficult, because regulators lack criminal enforcement powers, evidentiary hurdles are high, and the circumstances are often uncertain. But regulators have not taken enough advantage of the authority that they do have to punish errant managers: they can ban these individuals from working in finance.

 

3. WDKHLWA
Things are hot in Australia early this year. It's going to be tough for them over the 2014-15 bushfire season I suspect. But the weather is very cold in the US northeast. Twitter had some amazingly good photos which are worth sharing. (H/T JC.)

The first shows the storm over downtown Buffalo, and makes the point that weather effects are sometimes specific even if the news coverage suggests the event affect 'everyone'.

And secondly, what do you do when you are snowed in?

4. Hiding dodgy investments off balance sheet
Respected Bloomberg commentator William Pesek thinks China may be building a weapon of mass destruction: a mortgage bomb.

The first Chinese interest-rate cut in more than two years is a stark recognition that the world's second-biggest economy is in trouble.

After years of piling ever more public debt onto the national balance sheet, it makes sense to have the People's Bank of China take the lead in propping up gross domestic product. Yet while today's benchmark rate cut should help stabilize growth, the move also adds to worries about looser credit that could pose risks to the global economy. Case in point: mortgages.

One of China's few reforms in the mid-2000s was securitization of loans, which began with a trial program in 2005. Three years later, Wall Street's crash made the bundling and selling of loans and assets a pariah among financial instruments, and the experiment was shelved.

Since 2012, though, securitization has not only returned but flourished. According to Choyleva, issuance reached $28 billion in the first nine months of the year, compared with $16 billion between 2005 and 2013. While most sales have been of auto, corporate and credit-card debt, those of mortgage-based securities are rising. In July, the Postal Savings Bank of China did the first residential mortgage-backed deal in seven years, and the markets are buzzing about more to come. These market rumors fit with the housing-as-stimulus narrative.

5. A bear with a very sore head
When economies are on an unsustainable course, international finance often acts as a fast-forward button, pushing countries over the edge more quickly than politicians or investors expect.

One example is Russia. It is a wounded economy and is closer to crisis than either the West or Vladimir Putin realise says the Economist.

The immediate worry is the oil price. Mr Putin is confident it will recover. But supply seems set to increase, with OPEC keen to defend its market share. American government agencies predict oil prices could average $83 a barrel in 2015, well below the $90 level Russia needs to avoid recession (and to keep its budget in balance). If global demand weakens—Japan has slipped into recession since the latest round of forecasts—the oil price could fall further. That would immediately prompt investors to reassess Russia’s prospects.

Then there are the debt repayments. Russia’s firms have over $500 billion in external debt outstanding, with $130 billion of it payable before the end of 2015, at a time when few Western banks want to increase their exposure to Russia. Even firms that earn dollar revenues may struggle to pay their debts. Rosneft, an oil giant, recently asked the Kremlin to lend it $44 billion. Mr Putin has so far resisted, but he cannot let a company that is 70% state-owned and employs 160,000 people fail. There is a lengthening queue of troubled Russian firms. Non-performing loans were rising even before interest rates were raised to 9.5% to defend the rouble. Meanwhile Russian banks are reliant on the central bank to replace deposits that their customers are understandably spiriting into dollars.

Directly or indirectly, many of these bills will end up with the Kremlin, which is why its reserves will be vital. They are evaporating: down $100 billion in the past year, following failed attempts to defend the rouble. And the book-keeping is dodgy. Of the reported $370 billion reserve pile, more than $170 billion sits in the country’s two wealth funds. Some of their assets are iffy, including various stakes in Russia’s state-owned banks and debt issued by Ukraine that Mr Putin’s own aggression is fast rendering worthless. 

 

6. A map of what's doing us in
Interest rates are a 'cost' of money. But they are trivial compared to the cost of premature death. That is something the University of Washington has been looking at in their Global Burden of Disease database.

Click on this graphic below to go to their amazing interactive charts.

7. Uber's been ubered in New Zealand already
Reading the business press of other countries teaches you that Uber is 'disrupting' the taxi industry big time. But it's not a New Zealand story. Uber is here but it is making little headway. In fact it may already be withering here. It can't compete with New Zealand's taxis. And it never will be able to, it seems. 

That is because New Zealand actually deregulated the taxi industry many years ago; in 1989 to be exact. The barriers to entry are very low. Uber 'works' when the taxi industry is artificially supported by tradeable but restricted official licenses.

For example, most Australian taxi licenses, which cost way more than can be justified by the fares, are owned by uptown professional investors and private superannuation funds. They stand to lose most of what the paid if Uber gets a foothold. These people are politically connected. The Australian taxi industry is a giant rort supported by the government. They claim public safety is at risk with unlicensed operators. But they don't want you looking at New Zealand for ideas ... it would undermine their whole unjustifiable existence.

8. A gigantic change
Choking smog in Beijing and Shanghai, pollution protests, and now an historic agreement between China and the US over carbon emissions means the world is in for some huge changes. Bloomberg News explains:

China, which does nothing in small doses, will need about 1,000 nuclear reactors, 500,000 wind turbines or 50,000 solar farms as it takes up the fight against climate change.

Chinese President Xi Jinping agreement last week with President Barack Obama requires a radical environmental and economic makeover. Xi’s commitment to cap carbon emissions by 2030 and turn to renewable sources for 20 percent of the country’s energy comes with a price tag of $2 trillion.

The pledge would require China to produce either 67 times more nuclear energy than the country is forecast to have at the end of 2014, 30 times more solar or nine times more wind power. That almost equals the non-fossil fuel energy of the entire U.S. generating capacity today. China’s program holds the potential of producing vast riches for nuclear, solar and wind companies that get in on the action.

9. More migration, better global equity
In a world where one part - the developed world - is graying fast and won't have enough workers to sustain it, and another part - the developing world - is exploding with young people who need jobs, Bjorn Lomborg thinks the answer is staring us in the face.

In fact, these contrasting trends present an ideal opportunity for global demographic rebalancing. By easing restrictions on migration, developed countries could bolster their dwindling workforces with young people from developing countries. These migrant workers’ taxes would help developed countries fund services for the elderly, and their remittances would help their home countries.

This approach has enormous potential benefits. Indeed, a modest 3% increase in the developed-country workforce would provide a larger economic boost than removing all remaining trade barriers. Moreover, every dollar invested in this initiative would produce nearly $50 in returns, making it an exceptionally effective use of limited resources.

10. Of that you can be certain
Some of you may recall I ran a chart of the weekly SOI (Southern Oscillation Index) here for a while. I started that based on an Australian Bureau of Meteorology (BOM) release that said another El Nino was coming. But I had to stop it because the data didn't confirm it, and in the end the BOM withdrew its 'warning'.

El Nino and La Nina events have been going on for millennia, even though we have only being recording the data for a relatively short while.

A week or so ago a couple of our dour cementers (probably both English) pointed out a Bloomberg story that says the BOM is warning of an El Nino again. There is no doubt the cycle will turn - we will get both in the future as in the past. But the implication is that the coming one will be 'worse' and have 'worse' consequences.

Fortunately the BOM supplies the data for the average SOI for each month over the past 100+ years. You can download that here. I did to make the following very long term chart. What I found was interesting. Recent El Nino / La Nina events are less intense than they have been in the past. And the extreme levels were all recorded back in the early part of the twentieth century. Based on this, I am not sure we have a lot to fear from future SOI deviations.

(I am not a AGW sceptic, but all the consequences are not necessarily alarming for New Zealand - even though I am certain less carbon use would be better for the planet.)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

14 Comments

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#9 - I am not against immigration but to say it is good for the people is rubbish.
 
Look at England - They have been bringing in immigrants for at least 60 years - has that helped the average English person?
 

As an average English person, I can field this one.   The answer is yes.  
People have been coming to England for centuries.   It's what makes us so bloody awesome.  
 

Hi Austin F - I to was born in the UK and i to am awesome. However i did it for myself i did not need immigration or anything else to prop me up.
Sorry to heare you were different and unable to make it without help from immigrants.
 

As an average welsh person who lived in quite a few places incl London for 10 years, um no.
Its being turned into an over-crowded, approaching 3rd world cesspit, enjoy.
 
regards

Hi Steven - Austin F should try telling Maori that they are also awesome people just because of immigration. And by implication - if it were not for immigration they would not be awesome people
See what responce he would get.
 

I wasn't talking about how awesome I am personally - I was talking about England and the English, generally.    The country's achievements (good and bad) have been due to having wave after wave of immigrants going back centuries.   If you want to close off the borders and emulate the success of Norh Korea - who follow this policy quite rigidly - then make an argument for it and convince us to change our third world, cess pit ways.

For #10, where it says "You can download that here. I did to make the following very long term chart" should the word here be a clickable link?

arghh! yes. Sorry. Updated now, with
http://www.bom.gov.au/climate/current/soihtm1.shtml

Rather dubious claims from the taxi industry. A taxi from Auckland Airport to the North Shore can be almost as expensive as a ticket from Tokyo to Nagoya on the bullet train (350 km).

It's a completely deregulated industry in New Zealand. If you think you can make money taking people from the airport to the North Shore by charging less, you are welcome to "make a huge amount of money".
 
140 mln people annually use Japanese bullet trains. That is more than the number of passengers wanting to go from the AKL airport to the North Shore ;) I think that may have something to do with relative fares ...

Airport fares may be a niche opportunity, where the artificial regulations/costs to be got around, are the fees charged to taxis by Auckland Airport. Uber could presumably disintermediate that cost. So could taxis with smart phones potentially. The taxis also could avoid waiting in a queue for hours for a fare- part of their economic need for high fares.
There does seem an opportunity to pre agree a taxi/ride cost for a specific route, and also to know with some certainty when the taxi/ride is going to turn up. These both are modest frustrations with the current service. Taxis themselves could fill the gaps with smartphones. The disruptive technology may be decent and easy to use apps; not different cars.
Separately there presumably is scope for car pooling on trips to work, where the driver is happy to charge a smallish fee because he/she was going there anyway. That probably competes with public transport/parking more than taxis.

#9 - I thought most of the developed world was already facing unemployment levels that are high by historical standards. What would we do with a large number of new migrants? Or am I wrong somehow?

Re no 5. The Russian economy is very dysfunctional  largly because it has not had the time to reconstruct itself after the disintegration of the USSR. With its huge energy resources and a population that is used to austerity and has a more collectivist outlook than the US, UK or he EU ,who  also have dyfunctional economies, I would not discount it as eventually leading the world out of the present malaise, along with China.
Once again the propaganda about Putin comes to the fore  Russian aggression?  The US and the EU fomented the Ukrainian crisis and the annexation of Crimea was done in self defense by Russia with the vast majority of Ukrainians supporting it.

Are you Russian? I haven't yet seen such failure of reason on this topic with the exception of Russians brainwashed with their culturally specific mixture of nationalism and anti-Westernism.
 
Anyway Interest.co.nz is no place for your ignorant conspiracy theories in defense of Putin's abuse of power. Go find a truther website to assist with your self-deception.