Daily Archives: December 8, 2012
Remember this is a Crown Dependency. Pails into insignificance to the billions in swiss bank accounts I know some soverigns have stashed away from similar rent seeking scams. Well most leaders East of Suez till you hit Hawaii.
A former premier of the Turks and Caicos Islands (TCI) whose rule was characterised by adultery, private jets and designer suits, has been arrested on an international warrant.
Michael Misick was detained in Rio de Janeiro and is expected to face a request for his extradition for trial on the Caribbean islands.
The former chief minister faces corruption charges after a rule that is thought to have lined both his own and his supporters’ pockets. He allegedly amassed a $180m (£112m) fortune by the time he left office.
Mr Misick was leader of the TCI when, in 2007, the UK stepped in to suspend much of the constitution and take over the administration of the archipelago. He is suspected of corruption, misusing public money and profiting from the sale of government-owned land. Mr Misick has repeatedly denied any wrongdoing.
In a statement last night a Foreign Office spokesman said: “The arrest was made by the Brazilian Federal Police acting on an Interpol arrest warrant. Michael Misick faces a number of serious charges relating to corruption and maladministration in the TCI. It is in the best interests of the TCI that allegations of wrongdoing are thoroughly investigated and that Misick returns there to answer these charges.”
The arrest was sought by the TCI Special Investigation and Prosecution Team, set up in the wake of the Commission of Inquiry led by Sir Robin Auld, a retired Appeal Court judge.
In his report, Sir Robin found there was “a high probability of systemic corruption in government and the legislature and among public officers in the Turks and Caicos Islands in recent years”. The report added: “It appears, in the main, to have consisted of bribery by overseas developers and other investors of ministers and/or public officers so as to secure Crown land on favourable terms, coupled with government approval for its commercial development.”
Sir Robin also said there were “clear signs of political amorality and immaturity and of administrative incompetence”.
Mr Misick is understood to have been living in an up-market area of Rio de Janiero for months and had applied for asylum, which was turned down.
Britain’s rule of the TCI ended last month when elections were held. Mr Misick still retains support on the islands and his Progressive National Party called an emergency meeting after his arrest.
I dont know where to begin
Here if embed problems
But of course if every family followed the advice here then Santa would be unemployed, which of course was Keynes point.
So much macro misunderstanding by confusing Keynes definition of not spending (saving) with Hayeks definition of investment (saving) sigh…..
If you have missed it Pontus Renhdal has responded to my notes on his critique of Steve Keen and I have replied.
There is something the entire SFC modelling community knows it needs to do – but it is hard and not yet done meaningfully to my knowledge.
That is to model insolvency and bankruptcy.
Its hard because for sake of simplicity models are simply aggregates of the whole firm sector – not quite as bad as a single ‘representative firm’ but not far off.
Seemingly modelling interactions between firms involves modelling of agents and network effects between agents – this, with the aid in advances in Graph Theory is a fecund area of study- but it adds a whole extra tier of complexity to models. Is there a way to cut through this and capture the impacts of liquidation at a higher degree of aggregation?
This is important because it appears that the key difference between a ‘normal’ (if their is such a thing) recession and a balance sheet recession is the degree of insolvency caused by the inability to repay debt. In a normal recession profits are depressed but proportionately few firms or individuals go bankrupt, most balance sheets remains in the black, and the economy quickly bounces back. In a balance sheet recession on the other hand as one firm goes bankrupt it creates bills that remain unpaid in other firms, potentially triggering a wave of bankruptcies and unemployment and a ‘death spiral’ fall in effective demand.
The Krugmanesque concept that creditors=debtors=so what is deflated because (and there are many other reasons) bankrupt firms by definition cant pay their debts.
There is a clue from accountancy as to how to treat valuation of insolvent firms as opposed to solvent firms which I think can cut through this complexity and enable simple aggregate modelling. So far it is just a hunch but I thought I would share it as it is closely related to the thinking I have presented here on the solution to the ‘profits puzzle’.
First some definitions.
Insolvency is not the same as Bankruptcy.
Insolvency is the inability of a firm to pay its liabilities (the Wikipedia definition of inability to pay debts I think is imprecise).
Bankruptcy is the juridical recognition of insolvency. As in most jurisdictions it is illegal for most firms to trade whilst insolvent so unless false accounting is involved (which it often is) then bankruptcy will quickly follow.
The matter is complicated because their are stock and flow aspects to insolvency.
A firm is flow insolvent when its cash flow of revenues plus any reserves of equity/retained profits which provide working capital is insufficient to cover its liabilities (all debts including mercantile credit) and reserves of equity which provide working capital to the firm.
A firm is stock insolvent when its liabilities are not covered by its assets + equity.
Both of the above can be expressed precisely using the fundamental equation of accounting.
I refer to liabilities rather than debts to refer as well as bank credit (which create money) mercantile credit (and almost all commercial transactions of any scale are invoiced). Bank credit is endogenous creation of money, mercantile credit is the increased turnover of existing money (what classically was called fully covered credit) through maturity transformation between firms with strong cash flows and those without. This has become more complicated in recent years in that firms themselves are now issuing financial products which for all intents and purposes is endogenous money creation; though these products are not always fully liquid. But none the less the broad distinction between bank credit and fully covered credit (or Robinson Crusoe type savings if you are of Austrian persuasion) remains.
The fact that both stock and flow insolvency are covered by the same term is confusing. Increasingly legal systems have come to recognise that firms can be restructured by selling assets and cutting costs and still remain as going concerns with positive future cash-flow. Hence in America with have chapter 7 bankruptcy and scholars sometimes refer to the ‘end of bankruptcy’, by which they mean that flow insolvency alone is not sufficient to force closure of a firm unless the firm falls prey to an asset stripper.
The language of central banking has also evolved. We often hear that ‘banks face a crisis of solvency and not liquidity’ by which they mean that banks are stock insolvent not just flow insolvent and that an addition of equity is required.
Ok lets model this using the fundamental accounting equation
(1) Assets-Liabilities =Owners Equity, or in shorthand A-L=OE
We may represent stock insolvency, or better viability insolvency as we may better term it by the following inequality:
Whereas flow insolvency, or perhaps better liquidity insolvency can be defined as follows
The valuation of a firm that is bankrupt is quite different from that of one that is a going concern and that I think is the key.
The valuation of a firm as a going concerns involves addition of the value of goodwill. The valuation of a firm for break up purposes cannot include goodwill because there will no firm going forward. As we have blogged before the correct treatment of goodwill is critical to understanding the ‘profits puzzle’ of economics. If a firm is exclusively making profits from assets which are alienable (salable) then it might as well be bankrupt because these same assets can be rented by anyone else- which are simple transfer payments between segments of the economy. If a firm is to generate growth it has to generate value in the firms equity value over and above the firms asset value – goodwill – the franchise value of the firm. This valuation like that of any other factor (and the solution is to treat equity in franchise value as a factor) will have a factor return, and opportunity cost to keep that factor in production (which in cash terms is imply the average rate of profit in the economy) and a rental factor dependent on the scarcity value that the firm creates – or put another way the degree of oligopoly in the market or markets the firms operates. We showed in our previous post that the factor income due to equity ownership of franchise value is equal to Total Factor Productivity or the Solow Residual, its that simple.
So economic growth is equivalent to the creation of franchise value by firms, recession is equivalent to its destruction. This concept goes beyond the crude concept of ‘capital destruction’ as it avoids capital theory fallacies by carefully separating out factor returns and rents from all factors including fixed capital land rents, money rents (interest) and equity in franchise value.
So when a firm goes bankrupt its future goodwill generating capacity is zero and the firms value is solely that of alienable tangible assets.
Or put more formally:
For a solvent firm its valuation is. This is of course simplistic and assume that the owners equity portion is clearly identifiable and attracts a market price, and that similarly future cash flows and liabilities of a firm can be forecast (which does not mean that they can be forecast accurately).
If a firm is profitable it attracts a positive valuation, if not viable equity must be written off, assets sold and the asset owners matched to the liabilities must take a haircut.
As with our profits formula we can split a positive valuation into two. That resulting from its ownership of alienable assets and once from the franchise value of its equity (goodwill). As follows
(5) Going Concern Valuation=discounted cash flow stream of Franchise value+Asset Value-Liabilities
(6) Break Up Valuation =discounted cash flow stream of Asset Value-Liabilities
Subtracting 5 from 6 we have
(7) Rate of change of negative growth from bankruptcy =ΔGoodwill
So in aggregate terms ‘all’ we need to do to model the impact of bankruptcy is add a factor for goodwill aggregated in the economy as a whole.
Now you might say that this is by definition true as an accounting identity and hardly worth saying. But the lesson of the whole post-Keynesian project is that things are never too obvious not to state.
Modelling the rate of change of goodwill is easier said than done. It requires I believe a reproduction model of different sectors of the economy (rent seeking and productive) and an accurate breakdown of cashflows for each of the five factors. But, and this is the key, it can be done without the full complexities of agent based modelling. This may require an probability density function for firms of different levels of profit (and hence equity valuations) and an algorithmic to value firms differently with negative (viability insolvency) balance sheets, but it is possible and critically may be possible with most off the shelf SFC modelling packages.
One of the most contentious questions in ‘objectively’ calculating housing need is whether household size has stopped falling.
One of the most striking demographic features of the last 50 years has been the striking fall in average household size, dramatically outstripping natural population increases as the main component of household formation and therefore housing targets. Young people have through most of the post war years been leaving home sooner, divorce rates have increased and people have been living longer (which because women live longer than men results in more single person households).
In recent months some have questioned whether household size will continue to fall. Indeed this issue nearly derailed the Cheltenham-Gloucester-Tewksbury Local plan recently. The reason
Neil Hudson of Savills
During the ten years period from 1991 to 2001, the average size of the UK household fell from 2.50 people per household to 2.41. Since then, household projections have assumed that this scenario would continue and projected the ratio to fall to 2.35 in 2011 and 2.27 in 2021. However the 2011 census has showed that this ratio has remained fixed at 2.40 and therefore the household projections have significantly overstated the level of household formation since 2001.
We shall see in the 2010 based household projections – due imminently But if the average household size has stopped falling why? Divorce rates are not falling as far as I am aware, neither has life expectancy fallen?
I would hypothesize that young people are being led into enforced sharing such as living in shared flats and staying longer in the parental home because of the shortage of housing and its high costs. Household formation and the number of houses are not independent variables but mutually independent. This is what demographers call ‘concealed households’ households that would form and will if housing was /becomes less expensive through increasing supply.
Therefore I would not be surprised if household size has stopped falling, but it does not for a moment mean we need less homes – the opposite. Technologically it means in SHMAs as well as projecting forward the ‘flow’ rates of future formation we also need to project forward future rates of flow of changes in concealed households (this is often treated as a one off stock adding to need at base year).
The last desperate attack by someone who has lost an argument is to make a personal attack.
Here St Albans Cllr Bowes Phillips goes for the Man not the Ball, quite a low blow, rather than dealing with the logic or veracity of any of the issues presented.
He [me]argues that we, the elected members of St Albans are not capable of deciding what is right for St Albans,
Not true there are and where perfectly capable and broadly made the right choice, it is the exercise of democracy to which the cllr is protesting.
[He] deliberately discounts all the environmental factors that are a reality for people in this District (pressure on water supply, transport and education challenges, flood risks, coalescence with neighbouring towns, etc) and argues that we should have more housing than 250 dwellings a year, (and judging from his blog – an awful lot of flats).
This is nonsense as any regular reader of this blog will note. What I have criticized is the research report commissioned for the Council on Ecosystem Services (I have been employed as an expert on a national research programme on this issue so I know my stuff). This makes the elementary error that it is houses that create need for school places, drink water and consume electricity etc. This was debunked years ago and yet this report does not even quote the literature. It would never have passed peer review to a journal and therefore does not stand up as part of the evidence base.
May I simply refer to the 2007 Reading university research into the environmental impact of the housing Green Paper prepared for the then DCLG which makes this point with hard numbers.
A second factor is that new housing, has a much higher propensity to be occupied by existing residents than existing housing. This means that the large majority of residents to new homes will be already living in the housing market area, and so wont be generating school places, drinking water, consuming electricity, driving any noticable degree more as they will already be living in the area. Clearly this point flew over Cllr Bowes Phipps head.
There may be an impact (much less than 1:1) from new residents moving in, but this only becomes significant if one area builds and every other area does not. If every other area builds then at a national level the impact nets to zero. It is therefore the disprortionate impacts on ‘growth areas’ that really need to be focussed on.
The Cllr also attacks me for criticising formless poorly designed urban sprawl…errrr is the cllr advocating this? Are they a Tea Party member?
I did confuse Brickett Wood and Oaklands at one point because every time I have visited BRE it is BRE Garston which threw me, corrected in earlier post. What does that have to do with the issues techincal/national planning policy raised above, nothing? Illogical post from the Cllr.