Twin Falls, Gooding, Jerome, ID, and Regional Economic Outlook for 2005

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Twin Falls Economic Report done by me; Twin Falls, ID has potential for additional car washes, Detail Centers and mobile washing units. Twin Falls has enough water in their reservoirs to make it through the Summer for farmers and agriculture industries. Mike BuRec said recently that even if this winter has a snow pack of 20 feet we will not be back to normal levels. American Falls is at only 14% capacity. Palisades is at 12% and Jackson Lake is at 65%, but remember fires take water too. Water in the rivers and reservoirs is important for many reasons, and realize that 2/3 of all fresh trout worldwide come from Magic Valley South Central Idaho and Snake River. The Shoshone Falls are 212 feet high,

[http://www.waterfallsnorthwest.com/waterfa...tail.php?id=864]

higher than Niagara Falls and has often been called the Niagara Falls of the West. If water situations get too bad and not adequate snow pack in 03-04. We had heard of talk from David McAlindin of the City of Twin Falls Economic Development Dept.

http://www.idoc.state.id.us/idcomm/profile...s/TwinFalls.pdf

that he felt comfortable that the water situation is safe and supply good for businesses. They are working hard to help diversify the industries and recruit non-agriculture, cleaner industries. The region grows all kinds of important food items. Sugar Beets, Potatoes, Dairy, Alphalfa, Sheep, Beef, Hay, Grain, Wine, Beans, Wheat, barley, Sweet Corn, Grass Seed, Oats. They need the water. The supply is said to be better than was predicted or feared and that there is more than enough for summer, but this leaves little to spare in case of a mild winter.

The water supply contains arsenic, from natural erosion and also from previous chip manufacturing, Barium, Chromium, Fluoride and Nitrate from excessive fertilizer run off. These are at present levels not in violation, but the NPDES permitting is going into harsher BMPs and enforcement and has caused a few companies, which do food processing to be unable to get permits, costing future jobs; Glandia Foods, Inc. in Gooding.

The local Senators are working on Ethanol to help out and that initiative could be great for ID. McDonalds has been hit by economy and adverse PR from that Bull shit law suit in Canada about people getting fat from eating at Mickey Ds. Recently McDonalds has also called for lessening of Antibiotics, steroids and other growth hormones, which is a little bit of an issue for farmers, since right now with the Beef, Mad Cow, moratorium in Canada some of those cattle come from ID as well as the milk and ID is a huge Dairy State in the Southern area. Learn about the importance of the Dairy industry in the US and in Southern ID;

[http://www.dairybusiness.com/links.htm] .

Also hurt by the economy and fewer people going out to eat at QSRs, Restaurants are Kraft Foods, McCain Foods (125 people laid off), J.R. Simplot, which closed the Heyburn potato plant and laid off another 50 people at another processing plant. These companies collectively laying off a total of 600 people in the region. Also blamed are the war in Iraq and lessened travel. Paper is a big water user also and Boise Cascade has had other issues with economic issues. Dairy is up about 6-10% over the last year why? Could it be the increase in Starbucks (6000 plus locations) and the cr?me and milk in the Frappachinos using milk? Yes some is. Also of worry is the NM Case law regarding the minnows and Rio Grande and Heron reservoir, such an issue with low water levels in Idaho would be the same as the Sarbain Oxley issues in the Corporate World, it would be catastrophic for agriculture in South Central Idaho. But all in all things have been good and have had a net gain even with the bad news. Dell has hired 700 people in nine months in Twin Falls. Also hiring have been Home Depot. We talked to a fiber optic multi-plex line installer who could not seem to get a job in his profession and therefore Home Depot gave him a lower level job at $12.00 per hour.

A waste of brain capacity no doubt but certainly enough to live with the cost of living in Twin Falls which is low due to power and water prices really inexpensive. Twin Falls, Jerome and Gooding had substantial growth in housing. One thing that may hurt the area is the move to try to get seniors out of their cars. Elderly are super worried about losing their drivers licensing, it can be a traumatic experience rivaling a lost loved one, meaning their freedom is gone, some would rather just die, it is that serious as I have discussed with many seasoned seniors. They will not be moving into the Gooding Golf Course areas if this persists. But the area is growing. A few of the outskirt cities are not fairing as well. Burley had a recent “Crazy Days” and Regatta Jet Boat Races, which is a good tourist draw to help locals, non-profits and retailers. All in all we saw a lot of good stuff; ISU-Idaho State University is putting in a 50K dollar nursing facility. Which will employ many people. Solo Cup employed an additional 68 people after earlier in the year laying off 100 people. West Farm added 27 people. Davisco hired 10 workers on Monday. Hamilton Manufacturing is hiring 30 additional workers, but they may have a power problem if prices increase?

Teton Wireless is setting up Satellite to WiFi high speed Internet Networks with points throughout the area to help increase the clean industry companies to the area. Kodiak Northwest has got a new snow-removal innovation. And we found many interesting as heck micro market niche manufacturers such as; Golf Swing Aids, Spider Cultivator, Beet Pulp Cattle feed, Plastic Calf Cottages, Yo-yos (seriously, that’s where they make em’), Dome Awnings for homes, Fish Pumps, Basque Smoked Chorizo Sausage (and it is good too), Foam Boxes for Fish, Baler Twine, etc. So there are some strong niches that are helping the area. The Sea Food industry has had a bit of discounting due to the slowing in restaurants, but the Sushi is not any fresher lately. This has hurt the Fresh Trout industry, trout are in nearly all rivers and lakes in ID as well as those, which process the fish in the area. The Local Chamber of Commerce in Twin Falls had done a tremendous job in their recent Hot August Night non-profit fair, where they auctioned a Jeep off, as they profiled local businesses. The Chamber cares about local small businesses. Alamlgated Sugar is buying more 129,000 pound trucks. S and G Produce is Building Warehouses and expanding, over 10% of all the worlds sugar comes from Southern ID. Sugar Beets grow extremely well in ID, better than most anywhere. Gooding also gets in on the non-profit community efforts with events such as the huge “Spuds Festivals.” Wendell and Jerome has had much growth along I-84 than the towns like Buhl, Filer, Castleford, Hagerman.

One issue hurting the region is the Beef import Taxes by the Japanese and things might get tough and they are worried about Mad Cow if it comes to the US. We Japan to knock that off right now and possibly increase tariffs on something they sell us. Meanwhile lots of debate on the WTO issues of genetically modified crops. Super Corn is a good deal for the world. These issues with genetically modified foods and possibly modifying wild weeds into killer weeds is not a good debate since we are talking about corn, not mountain grown Sun Flowers, Pumpkins, Squash, Blue Berries, Cranberry which is grown near native vegetations. We are not talking about rice. They are already growing it all over the world anyway. And we have already modified crops of all types by cross breeding, same thing just slower in number of generations. Hell we modify people the same way by our own “Melting Pot.” Mixing Asian, Hispanic and Middle Easterners in Los Angeles? What’s the difference, Arthur C Clark predicts in his book “3001” we will all be looking quite Asian, which is probably correct seeing as this is how things are going with 3.5 Billion Chinese? The EU and 15 nations are developing criteria and it will probably be where people or consumers have a choice and we will see what they buy? Guaranteed genetically modified will win, people like full fresh looking vegetables and fruit. These issues are putting things in Southern ID at a wait and see point and causing issues with capitalization.

Even so Twin Falls area has had a net gain in jobs, which are non-agriculture. 3750 people went back to work and 3440 lost their jobs in 2003 net gain of 210. It is a slow go, but things are picking up. The increase is mostly due to growth and construction, most of which is box stores in the Twin Falls and the new home construction in Jerome and Gooding. In Pocatello the steel plant laid off 40 people and we are seeing this throughout the North West; Steel Plant Closes in OR.

We are noticing some good downtown renovation on Main street in Twin Falls. On the “Messer Block” they won an award for dedication to Historic preservation. As you know we are excited to see downtown areas revitalize and bring people back to the community and a place to talk and the attitude of hometown meetings seems to be done in conversations with locals and therefore more power to the people and more reasonable and less linear decision making like in the suburbs.

There is a bit of a drug problem there which ranges from 18-40 and has to do with Crystal Meth. But they seem to have a handle on it with a new drug court program to get people o break the addictions, which seems to be working and gets people back to work. Fairly good success rate and better than prisons which is also a big employer outside of Boise area. 86% of the people in that program where between 21-40 and were there for substance abuses with Meth. Others include Weed, LSD, Heroin, Mushrooms, Cocaine, Ecstasy and three time drunk drivers. One person interviewed by the local newspaper said he had a construction job and was back on the right track. Downtown Twin Falls is a bummer to navigate if you are new to the area because if you are looking for a location on Second and Second Street, it could be one of seven corners? Ouch. Even the older locals laughed when the city council wanted to therefore change all the names after the founding fathers of the town and current city leadership? Typical. Either way it is a tough deal, luckily the diagonal streets are not in abundance. Twin Falls has 64,000 population, Jerome 18,400, Gooding 14,000. .

Many cities such as Burley, Burl and others in the area have a zero or negative growth rate. Twin Falls 1.9%, Jerome 1%, Gooding hard to say, guessing 1.6%. The jobs in the area seem to be Retail, services, Farm and Ag and then Professional in that order. White people make up 89%, and the population is just slightly older than in Nampa or Boise and more similar to Lewiston and Pocatello; 45-65 age groups make up 20.9% of population. We also found Carl’s Pressure Washing Supplies in Idaho Falls a superb vendor for assistance and a Landa Steam Cleaner Dealer also.

As far as tourism the Falls are worth seeing and draw in some 530,000 visitors to stay for the day and spend money each year. The major employers we found were The Sugar company with 425 people and growing (literally), Circle A Construction 325, Clear Springs foods 430, Dell 700, Independent Meat 216, Glandia Foods 430, Jerome Cheese 150, Lamb Weston 850, Magic Valley Medical Center 1115, Seastrom Manufacturing 170, Seneca Foods 200, Spears 275, Solo Cup 115. All in all the area has the employment base to drive a strong middle class as this economy continues its climb to a rebounding and strong pounding recovery.

"Lance Winslow" - Online Think Tank forum board. If you have innovative thoughts and unique perspectives, come think with Lance; www.WorldThinkTank.net/. Lance is an online writer in retirement.

Is This a Housing Crisis Or a Financial Crisis?

One built the other, I would say and it was then encouraged by still other factors. Many people are apt to tell you that this is not a worldwide problem and was created in the United States. Yes, our government contributed to the problem but greed by owners and investors was the main cause after inflating prices. The out of control housing costs caused this financial situation. It definitely is a world wide financial crisis caused by an overinflated real estate market that has spread over nearly the entire globe. European realty costs are as inflated as American pricing.

Real Estate locations all over the world have seen unprecedented market prices that had never previously been reached. Property from Ireland to Russia as well as Eastern Europe went way out of control as did pricing in places like Australia and the Far East. Possibly greed is more a human condition than just something that occurs in America. If the cause began in the US, investors and property owners went along with it everywhere else. They were just as happy to go along for the ride and line their pockets like everyone else. Profit is never left on the table for long. Regulation in other countries may not have been solidly in place as well as at home in this country.

This crisis was constructed from such a long stretch of increasing inflated costs just about everywhere. There wasn't a sign of a possible correction for this run away train and it was allowed to go haywire. It jumped the track and rolled over a few times. Most intelligent people and economists especially, could see that at some point, this expanding unstoppable bubble would have to burst eventually. Many of these same people believed it wouldn't happen for a few more years and it wasn't their problem anyway. Many modern day speculators turned to the real estate market for investment. It was more reliable than the stock market and their change of profit required less risk.

Banks and investment houses were involved in increasing the problem merely by encouraging the borrowing of money against the equity in people's homes. Some businesses like special realty mortgage companies were created just for the purpose of buying and selling mortgages. Their main function was to do nothing but the refinancing of properties and this was their line of expertise. These businesses became a whole new industry unlike anything we had seen it the past. People were encouraged to refinance loans at low interest rates and take their profits to spend on travel, investment or anything that caught their fancy. So, homeowners would just take the money out and spend, spend, spend. The money financed cars, toys, computers and boats.

There was no end in sight. The money provided by banks and financial organizations should have gone into housing enhancements but did not. This seemingly free money did not go into renovations or expansion of the properties to be quite frank. Once in a while, some people did the right thing and did the housing renovations but they were not required to by these banking institutions that had few rules. It was no rules, just right! Where there is no control, there is bound to be corruption and the rest is history.

Even the government got into the task of encouraging banks and lending institutions to relax their loan requirements and policies so more people could own homes. They sought perfection in an imperfect word. Put all the poor people that couldn't afford home ownership into their own places. Many individuals that were not adequately qualified or could not hope to repay those loans were given the ultimate opportunity to purchase their dream house and enter the housing market. They would now be a proud owner and could move out of their rental units. The government, in addition to these relaxed banking regulations, had encouraged ownership thus helping the housing industry to go further out of control. Some of the regulations that were relaxed had been put into operation long ago following the great depression of 1929. This was the crash of 1929 that our parents and grandparents may have told you about.

In those days, they had suffered so badly that they didn't ever want that financial crisis to ever rear its ugly head again. They had known the sacrifice brought on by mismanagement of financial assets in an earlier time. Did we forget about that historical masterpiece? Well, history always seems to repeat itself, doesn't it? We should never ever let our guard down again. By removing regulations or at least relaxing them, has helped this bad situation to re-emerge from its entombment.

The current housing market and now its realignment had built the very basis for this current financial meltdown. Human greed and government interference have spun the wheels to new heights. Hopefully, we can get our priorities straightened out and the necessary regulations back in place. Many years from now, I'm sure it will happen again but for now let's get our house in order.

John Sprague is an American currently working in the mideast. He enjoys writing and working on his websites in his free time. He has a new site at http://www.marketingkindreds.com/

His website has photos of the mideast and marketing articles that you may want to view.

Money Changes Everything - Twenty-Two Writers Tackle the Last Taboo

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Money Changes Everything
Twenty-Two Writers Tackle the Last Taboo with Tales of Sudden Windfalls, Staggering Debts, and Other Surprising Turns of Fortune
Edited by Jenny Offill and Elissa Schappell

We live in a tell-all culture. Sex, troubles with our kids, complaints about our spouses, and even our indiscretions are acceptable dinner table conversation-or at least ok while sharing a latte. Our money side in contrast is kept hidden from view.

Money is loved, feared, and worshiped. Some see it as dirty, not in keeping with a spiritual life, unnecessary. It can make a god-fearing person swear and ordinarily loving couples spit fire. Money can change everything.

The editors of this book put it this way, "To shine a light on how much we make, how much we spend, how much we owe, and how much we've got secretly socked away is to give others a potent glimpse into the values we live by. Because of this, admitting to money troubles can often feel like admitting to a weakness of character."

The money troubles coin has two sides. "Shrinks have coined the phrase "affluenza" to describe the angst and aimlessness that arise from being so wealthy you don't have to work for a living. Yet despite their insistence that affluenza can be a genuine hardship, therapists are finding it a hard sell to make others feel sorry for their clients. Most people can sympathize with the pain and struggle of the less fortunate, but the anxieties that attend being "too rich" are much harder to imagine" write the editors.

So silence and hiding are the order of the day whether the wolf is at the door or the view from the penthouse leaves you wanting.

Jenny Offill and Elissa Schappell, brought together twenty-two great writers who agreed to write about how their lives have been shaped, complicated and/or enhanced by this often hidden aspect of our lives.

The writing is sometimes comic, as in Chris Offut's story Porn Bought My Football. It can also be achingly sad and as in Marian Fontana's, A Dollar A Tear, about the money she received after her husband was killed in NYC on 9/11.

The writing is always brilliant.

Fred Leebron and Kathryn Rhett are married and each recalls their version of the money game as they describe their early lives together. Did they really experience the same things? His is titled For Richer, hers, For Poorer. It represents the wedding vow but also the way money can divide otherwise loving couples.

Walter Kirn in Treasure Me tells of failed marriages because they were based on his using his money to perhaps buy affection and love. He "tallies up just how much it costs to have sex" and does it in a very funny way.

Daniel Handler, author of the Lemony Snicket series and no slouch in the money earning category wrote a few pages titled "Winning." His idea for this essay was to buy a $1200 bottle of wine. He begins by asking, "Do you want to know what a $1200 bottle of wine tastes like? Of course you do."

His agent warns him that he shouldn't write this essay. "$1200 on a bottle of wine?" she asks. "It's immoral. People are going to attack you. People are going to call you an immoral person" she warned.

"That's what I'm interested in," said Daniel. "I keep telling people about this bottle of wine. First everybody wants some, then everybody thinks it's immoral. This is the thing with money."

And so it is and the remaining eighteen writers pose equally thought provoking ideas through their behind the scenes, behind their money accounts. Have some fun with these writers and think about your own money stories. How has money or a lack of it had an impact on your life over the years?

Gregory Anne Cox, certified life coach, was one of the early female graduates of the Culinary Institute of America in Hyde Park, NY. She spent 20+ years in the hospitality industry, and recently, cooking privately for some of the country's rich and famous on the eastern end of Long Island in the Hamptons, NY where she currently lives with her husband and 4 cats.

Currently Gregory offers teleseminars on Midlife wellness, one on one and group coaching, is an author and speaker on the topic of midlife women's mind and body tune ups and heart health. Her newsletter and blog, both titled The You Revolution, keep subscribers and clients up to date on what's new in feeling and looking better than ever in the second half of life.

Website:http://www.livebettercoach.com/

The Blog:[http://www.theyourevblog.com]

Relevance Of The Book "Take This Job And Ship It" During 2008 Presidential Elections

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Senator Bryon L Dorgan, in his book "Take This Job and Ship It", looks at "outsourcing" as a consequence of global economy. He considers it as a threat to American economy and sends an alert message to all the people in the nation. "With the trade deficit of over $700 billion a year, millions of lost jobs, and millions of families whose American dreams shattered, its long past the time to question those who claim everything will work out just fine. In fact its time to wake up and take action", according to the book. With numerous examples he illustrates the loss of the manufacturing jobs and sees it as a big problem for the country. The Senator deals with almost all areas that concern the US economy, how corporations set up tax heavens and avoid paying taxes to the US government, the oil sector, pharmaceutical companies and health care sector etc. Instead of just making us aware of the problems, the Senator goes about suggesting some solutions to the problems facing US economy especially in the trade and jobs areas after extensive research and after consulting with experts like Warren Buffet.

I'd like to suggest everyone to read this book. The issues presented in this book are relevant and needs to be addressed in the immediate future with a sense of urgency. With the presidential elections coming up, this book will be a good read for the voters and the candidates.

My reflections on the book is given below..

The economy has been changing. Until the late 19th century, all economies were agrarian. From the late 1800s until the 1960s, most developed countries moved from agrarian societies to industrial societies. The 21st century marks the change to global economy in a global village, the concept of a boundary less world; the production and marketing of goods and services worldwide. Information Technology is transforming society from its manufacturing focus to one of service. The concept of "global village" came up with the booming of internet and communication technologies. In terms of doing trade and business, national borders became less significant because of the communication technology advances and ease of transportation. Corporations are evolving to fit in a global village to do global business, which means that companies go and look for low production costs (anywhere in the world) and sell the products or services anywhere in the world? This is a business model we all have to accept and it is going to stay for at least next 20 years and technological inventions are bound to help the global business in every possible way. In a global village the terms "outsourcing" and "souring in" are not relevant. They are relevant only when we talk about countries.

Now the United States is growing 2%-3% and probably going south. Europe is growing 2%-3% and Japan is growing 1%. China with 1.3 billion people is growing 11%, India, a new resurgent power with 1.1 billion people is growing 9%; and Russia is growing 8% or 9%. Latin America and the Middle East are growing. ( I collected the data above from another article that I read in the past. )

Looking at the data above, we can see that the global business has benefited developing countries in terms of growth.

Wealth produced in a nation depends on how much we produce, not on how much we consume. Also the standard of living depends on the wealth created. So with the current global economy trends, there is a likelihood that the standard of living of the middle class in US will go down and that of the middle class in developing nations will go up. Which means that the resource consumption in these countries is going to go up. A wealthy nation, short of resources for its people, may try to get access to resources by any means. Future conflicts and wars may be for the resources if not triggered by religious fanatics.

In the book, the Senator talks about the low wage exploitations, poor working conditions and other unfair practices in the developing nations. Much of the unhappiness is focused on China, where the US trade deficit through the first 11 months of 2007 totals $237.5 billion. There could be further increases in the deficit with China according to predictions from analysts. Congress is considering bills that would impose economic sanctions on China if it does not allow its currency to rise in value faster against the U.S dollar. Businesses contend that the Chinese are manipulating their currency by keeping it undervalued by as much as 40% to gain price advantages against US companies. (Again this data is from another article on yahoo) But we have to accept that these are issues over which we have only limited control.

On top of everything, economists fear a possible recession in US.

War against terrorism and its consequences and impact on US and its economy is another related topic of discussion.

If we can not reverse global economy to our benefit, what can we do? Repeating Senator Dorgan's words "I believe our country has a right, even in global market place, to determine the kind of economy and future it wants for itself."

And who should take the responsibility?

The primary responsibility of any government in a country is to provide protection and security for its people, in a very broad sense. So ultimately it lies with the political machinery to face and solve
this problem. " We need leadership once again in America - leadership that will have the vision and courage to begin taking care of things here at home. Yes, our world is increasingly global. ..but still we all live here, and we want good jobs and the prospect of better life and an improved standard of living here. Huge budget and trade deficits threaten our future. Incompetent trade agreements threaten our jobs and undermine our manufacturing base. If these are left unchecked, the land our children will inherit will be a weaker country with fewer good jobs and less opportunity..." the book says.

I salute Senator Byron L. Dorgan for taking up the historic mission of writing such a book.

"The Great Bust Ahead" - A Book Review

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This concise description of the analysis of demographics and the correlation to markets, leads one invariable to the same conclusion as is reached by the author.  No words are minced by Daniel A. Arnold as he goes about explaining that we are at or near then next great economic depression. Recent events have shaken consumer confidence, but after you read this book you will be confident that the greatest depression of all time is around the corner.

Mr. Arnold expertly lays out the facts and correlates prior recessions and depressions to a demographic he calls the big spenders, a sub-demographic of 45-54 year olds.  Charts and Graphs are expertly used to illustrate each correlation of the demographic to the stock market history.  At the end of the book to conclusion is irrefutable.   Economic conditions are mostly dictated by population distribution and as the 100,000,000 baby boomers move toward retirement and slow down their spending, the economy will slow also.  "The boomers as a group approach in size the entire population of Japan - every man woman and child! Think of it. Try to get your mind around the magnitude of it."  The analysis is crisp, clear and concise.  The conclusion is a stark realization of an economic inevitability, a depression longer and deeper than has ever occurred in our history is immanent.

The book is based on demographic data gathered in the Vorago Database and historical data stock market data. If you are concerned about your economic future this is a must read.

Without an understanding of political, economic and social principles we are inadequate employers unable to discern the proper qualifications for leadership and doomed to lead the ship of state on a course to destruction. Ignorance is our greatest enemy. I encourage you to take a few minutes out of your day to learn more about your countries history and politics. [http://www.pippoproducts.com] is here to help you discover where we were and where we are going as a country and as a people.

The Paradox of a Predictable Failure in Risk Management

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The current crisis the world fell into two years ago had certainly the widest range of qualifying attributes: financial, economic, social, industrial, and maybe lethal as it dramatically affected and eventually destroyed lives beyond the point of no return. Described by contemporary economists as the worst ever crisis experienced by America for a hundred years, it was however another repetition of what seems to be a cyclical phenomenon: the 1929 crisis, the energy crisis in 1973, that of 1997, and more recently the internet bubble. And despite the lessons learnt from the past, with the technology evolving exponentially and the refined risk management, societies, corporations, institutions, and governments failed yet again by not having the right controls at the right time, substantially creating spiraling consequences that took investors and the wider public by surprise. The causes of the 2008 crisis raised numerous questions, some of them leading to the foundations of today's capitalism and one of the common sins of humans: greed. Nevertheless, one could have hoped that, with the dynamic of industrial countries and the norms of audit and compliance such as those of Basel II and III, in which operational risk and credit risk are separated, the international financial system would be protected against the collapse of the bank sector. But this was without counting on the intrinsic failures of these very norms, standards and risk management tools.

As a matter of fact, the crisis finds its roots in a simplified scheme: the lack of accountability, mortgages and default on large amounts of money against little income, and finally the liquidity for which the same institutions failed to have sufficient capitalization to cover immediate large needs when the whole system started to present default cracks. The problem of sufficient capitalization became a recent issue with the rise in the prices of commodities, whereas speculators can highly leverage their buying power without offering a real financial counterpart in exchange. And that's certainly why French President Sarkozy recently called for more regulations on commodity markets. However, progresses in that sense are yet to be commonly agreed or applied by governments and leaders of industrial countries.

Overall, today it is the review or maybe the prosecution of an entire system that is taking place. Questions and concerns from governments, investors, officials, and ultimately the public have found few relevant answers so far. The lack of accountability and transparency from the protagonists directly or indirectly involved in the crisis has raised anger and consternation worldwide. The cynicism displayed by bankers and financial institutions who announced remarkable profits for the last quarter of 2010 may be perceived as a new alarm bell ringing for another major financial crisis yet to come.

This paper presents some of the key issues the financial crisis brought into light in terms of risk management and lack of control from corporations, banks, auditors, credit agencies, and governments. It does not aim to provide a solution but rather gives the reader a fair understanding of what could have been avoided or improved and what may come again should the global financial modus operandi not be drastically changed.

Analysis of the Financial Crisis

An article published in the International Business Time, Financial Risk Management: Lessons from the Current Crisis... So Far, ideally summarizes thesubstantial work that has been done to date to analyze the recent economic crisis and cites examples such as: "Enhancing market and institutional resilience (Financial Stability Forum); Credit risk transfer (Working Group on Risk Assessment and Capital); Observations on risk management practices during the recent market turbulence (Senior Supervisors Group); Supervisory lessons from the sub-prime mortgage crisis (Basel Committee on Bank Supervision); Study of market best practices (International Institute of Finance), and; Risk management practices including the identification of risk management challenges and failures, lessons learned and policy considerations (International Monetary Financial Committee)."

Todd Groome, adviser in the monetary and capital markets department of the International Monetary Fund (IMF) interviewed by the same magazine, asserted that "the epicenter of the market crisis was sub-prime mortgages and structured credit products. With them came innovative financing, such as asset backed security CDOs (Collateralized Deposit Obligations) which were followed by more potent variations such as CDO-squares (baskets of CDOs), and synthetic CDOs (CDOs combined with credit default swaps)." Risks were often under-estimated partly due to product complexity and over-reliance on quantitative analysis, including that done by rating agencies which produced reports that were either wrong or purposely misleading. As Groome pointed out, "taking write-downs in illiquid markets will amplify the loss."

The downfall in housing prices impacted market downfalls. As such, creation or destruction of wealth often relates to consumer spending and as such may be uncertain. Meanwhile, the direction is quite similar. If one goes down, the other tends to follow. Negative trend implies negative trend. Nevertheless, weak risk management isn't the only reason. Banks and financial institutions regularly rely on data related to a particular period. However, economies can also experience a non-recurring event when the economy moves into unknown or grey areas.

On another plane, bad risk management still played a role. The problem is that despite the fact the models given in a particular circumstance may have been correct pretty much everyone who has them will use them, all at the same time. This phenomenon tends to increase systemic risk and as such it relates to technical market analysis. Indeed, if there is a consensus amongst users over a specific event, say a bullish trend, everyone is likely to follow that trend and buy at the same time, thus creating a momentum. But for how long will this last?

Cracks in Risk Management and Regulation Opacity

The recent crisis also highlighted a failure in risk management on a large scale, due to a failure of the techniques employed, and the fact that some of the risk managers were not well informed. The home market in the U.S. was the nest in which everything began. Low interest rates and government promoting home ownership by with no or little regulations played a role in the increasing demand for home purchases. Underwriters passed questionable loans over highly leveraged investors in order to create even more loans, fueling a spiral of non-recoverable dirty assets.

What is flagrant today, looking back at the whole process, is the fact that the risk assessment tools used by some investors, despite their sophistication, did not give a realistic picture of what was happening. In other words, although they were certainly giving sufficient information on the potential risks that lending huge amounts of money to low income individuals would create, the likelihood of such risk spreading to a rather large population was totally dismissed by the whole chain of command. Modeling rare events is certainly what the error is all about and not taking them into consideration was the effect that catapulted the system towards a major failure.

Nevertheless, numerous risk managers and experts rang the bell for potential upcoming issues several years ago and whilst greed and arrogance are the common denominators, the irrationality of the markets also comes into light. Clinging desperately to what was an announced disaster seemed to have been the pattern of behavior that inflated the bubble until explosion.

Another root of today's financial debacle are the regulations applied to some of the instruments used in financial markets. CDOs for instance, often containing a non-negligible part of subprime risk, were heavily exchanged without proper scrutiny from the rating agencies. Transparency becomes a crucial element in the markets' sustainability. And this is when the accounting standards play a key role for liability valuation and, hence, transparency. The snow ball effect is obvious: no regulations lead to poor transparency, which equally leads to disaster. The financial accounting has proven to be relevant to convey useful and accurate information to markets. Nevertheless, the concept of fair value, for example introduced by the International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB), is to "record values for assets and liabilities which are as close as possible to the values these instruments would have in an open market." As confirmed by Heckman in his essay Transparency and Liability Valuation, the IASB and FASB don't recognize any difference between methods for valuation of assets and liabilities, which has proven to have perverse consequences as some companies can use the process to turn losses into profits, since liabilities can be valuated at current market price. This has led to the misreading of the balance sheets and profit and loss statements of unscrupulous companies, providing the wrong information to investors and to some extent regulators themselves.

Impact of Liquidity and Failure of the Bank System

The current crisis has shed a light on the fact that the enterprise risk management should not only emphasize the risks to asset and liability values but also the liquidity risk. Liquidity risk is the probability of not having sufficient financial means to cover up liabilities. To some extent, posting collateral poses a liquidity threat as well. In fact, selling off an immature asset engages a loss. As the markets fall into problems, liquidity issues can be drastically worsened as liquid assets become non-liquid.

Liquidity management works pretty much like capital management. As such, the liquidity protection comes with sufficient liquid assets. On the other hand, consistency between cash flows of assets and liabilities can reduce risks pertaining to liquidity. Nevertheless, these strategies may show some limitations during conditions of heavily disrupted markets when credits are unavailable or unsecured. G. Venter in Modeling and Managing Liquidity Risk confirms that "modeling liquidity risk can start with stress tests." As such, the current market is an example of situations intimately involving assets, liabilities, and credit facilities when cash flow adequacy becomes preponderant. The idea behind the scene is to take into account in the models the different factors which dramatically impact markets. The correlation between price and liquidity comes into the picture and adequately modeling these possibilities can certainly be worth further research.

In 2006, a couple of years before the eruption of the financial crisis, Iyer and Peydro-Acalde discussed the potential risks of an interbank contagion in their research paper Interbank Contagion: Evidence from Real Transactions. They exposed and tested the impact of interbank dependencies over a fraud cause. Interbank markets are crucial to provide liquidity into the overall financial system and actively play a role in monetary policies worldwide as well. The research of Iyer and Peydro-Acalde came to the conclusion that "as the exposure to the failed bank increases, the runs stemming from the higher fraction of deposits held by other banks drastically increase. These results lend support to the theories of financial contagion due to interbank markets." This is indeed the exact phenomenon observed in 2008 when major banks reached the potential bankruptcy threat. The interbank markets dried up, obliging governments to first inject cash through loans, capital sharing or even nationalization.

As such, the Iceland bank system is now a school case of its own. The three main Icelandic banks, namely Glitnir, Landsbanki, and Kaupthing, were tightly interconnected. With a high reliance on similar macroeconomic models and business partners, they appeared to be dangerously related to one another already on paper. The chain reaction triggered by the difficulties of one bank would mean diminished confidence in other banks, thus shrunk liquidity available from potential resources and financial partners. The worst part of the picture lies in the fact that these three banks encompassed the vast majority of Iceland's financial system. Hence, one would have conspicuously assumed that a possible failure would have a dramatic impact on the Icelandic economy. However, the reality was often disguised by biased official reports about the financial health of the Iceland bank system, which certainly contributed to further deepen the crisis as investors would be grossly misled.

Eventually, the arrogance of the system ended up in a painful stake. Borrowing in wholesale markets became an issue and banks chose to open high interest savings accounts pretty much everywhere in Europe. As such, Icelandic banks, with government permission, used these savers accounts to provide the liquidity they could not obtain elsewhere. At the end of the story, deregulation and uncontrolled privatization of the financial system in Iceland led to its demise. Lack of ownership from supervisory regulators and governmental bodies and failure to recognize a systemic risk in an artificial economic growth widely contributed to the fall-out of the Iceland financial institutions and overall system.

Ultimately, when the banks were heading for failure the Icelandic government opted for a gamble on resurrection rather than closing the banks down. The government's bet failed and Iceland suffered a systemic crisis in return.

As reported by the Telegraph in its 10 March 2009 edition, it was now a matter of "twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meager or fleeting effects." A very alarming situation, quite unreal as one may have observed.Numerous economists are now warning the world's central banks to focus on the right issue now rather than later. Creating further liquidity without proper backup means such as gold or a strong economy is likely to fuel the disaster.

York professor Peter Spencer, chief economist for the ITEM Club, said at some point that the global authorities had just weeks to get this right: "The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard." For instance, in Europe, the European Central Bank (ECB) was facing a dilemma with a record high inflation forecast at 4.1 per cent in July 2008, the highest since the monetary union advent. Meanwhile, the worse is probably yet to come as fragile countries such Iceland, and now Spain, Italy and Greece, which are sharply falling into recession, may be running out of liquidity and may have to be backed up by other European members. The question at the end is: Will the European tax payers accept to pay this bill when their own country is at risk? Hence, this may show the true reality of the Eurozone: the weak solidarity of a supposedly mature organization, in fact not quite yet ready for the real thrill.

Finally, major banks like Citigroup, Merrill Lynch, UBS, HSBC and others have recently stepped forward to reveal their losses. Two years after the crisis hit the world, the IMF (International Monetary Fund) estimated the total losses to reach $2.28 trillion. But it seemed to have been just a beginning.

Passing the Risk: Who is Next?

As described above, financial crises appear to be repetitions of History. Working cyclically, they differ from their inherent nature though. For instance, the current crisis rose from the weakening of the U.S. home market and became a global crunch. Furthermore, the fact that the problem spread from financial and banking sectors to the entire economy at a global scale in such a short time made it a quite unique momentum. Increased speed, advanced communications and information technologies evolving exponentially have created a greater risk with deeper and long lasting consequences as ever before. Global markets with stronger interdependence and high complexity are paradoxically more prone to correlated risks.

Most people are driven by the simple desire to succeed and do well financially. This means they work harder, enhancing productivity, creativity and innovation. But where and when does this legitimate feeling get overtaken by greed and unscrupulous envy? Why does a minority change the principles of innovation into a gambling leverage for immediate profits?

If one considers some of the past economic crises such as the London Market Excess (LMX) fall out in the late 80's and the equivalent substitutes during the following two decades, they all started at some point from promising innovations. These initiatives were all new and seen as very profitable during the early stages. And they all implied a promise on huge benefits, fast and furious. However, the promise turned hopes into ruin and despair. Out of the multiple questions this series of dramatic and unfortunate events can raise, some of them could pose the problem of the impact of risk management that is meant to promote innovations that work and praise individuals for their will to succeed.

Two important factors can shed some light: the fact that new communication means have propelled the finance community to another level of instant profits driven by frenetic greed. Rumors, news whether good or bad instantaneously drive markets to their best or worse. Data signification is amplified far beyond comprehension in a momentum that magnifies exponentially in spiral dive fallout when not controlled adequately. And on another plane, looking at the amplitude of the issue, there is no doubt that financial markets, industries and economies are now fully interdependent. The impact economic and financial shocks can create are far beyond the spectrum of a region or even a nation and can be wide-spread on a global scale instead. While the LMX fall out was limited to the reinsurance market in U.K., the Internet bubble at the beginning of the past decade had a wider range globally but yet remained restricted to investors who had placed financial interests in the sector. From a weakening home market in the U.S., the 2008 crisis shortly developed into a global financial issue bringing down economies, industries and sometimes governments worldwide.

A parallel can be made between the LMX spiral and the subprime fiasco that ignited the global crisis. CDOs and similar financial products were created to temper the risks generated by unscrupulous investments by diluting them into cleaner credits. However, the plan did not work as expected and spread all over the credit system. In fact, Schwartzman (2008) confirmed that the LMX spiral and subprime debacles share similar roots by saying: "an attempt to mitigate risk by spreading it to market participants, a series of new and complicated instruments not understood by most people and not even well understood by market professionals, a pool of unsophisticated investors not adequately advised of the risk they were taking on, a collection of unscrupulous brokers who took advantage of the situation to increase commissions by encouraging as many deals as possible with no concern as to how they might play out in the future, and huge profits that continued as long as nothing happened to change the situation on the ground."

Conclusion: Towards a New Order?

Following the debacle of the financial and banking systems in 2008, one could have hoped that executive managers would be taking a more serious insight of what risk management is all about. Indeed, their priority has always been to successfully run corporations in which investors had shares and interests. As such, incentives based on performance should have sent a clear message to these top executives who should have then adjusted the risks they were willing to take for their company and somehow as well as for themselves as professionals. But this is the theory of should have happened and not what happened at the bottom of the chain. Indeed, the fiduciary responsibility of many was not met.

Meanwhile, the vast nebula created around financial markets has, until recently, hidden the fact that the credit crisis was in the end caused by unscrupulous people who were seeking short term profits rather than long term growth. Lenders with few scruples did take advantage of credulous borrowers, and fortunately or unfortunately these lending businesses disappeared killed by their own counterproductive strategies. Borrowers lied about their incomes to live in homes they could not afford in reality and were given full consent by lenient banking institutions. This spiral of controversial and ineffective stubbornness towards failure could have been stopped or maybe controlled if a relevant structure of regulations had been put in place. Improved and stricter regulations on loans policies could have avoided a large chunk of the crisis dramatic effects, but will those rules, if ever truly and transparently implemented, ever prevent futures crises?

Unfortunately, history reminds us that for each regulation or procedure created there is a loophole that can be exploited. Hence, the whole issue lies in the effective design of regulating systems, taking into account the various risks inherent to the relation between economies and private investments. Better focus on the matter would certain reduce systemic problems in the future and it is becoming now a serious concern in Europe and the U.S. who are looking at introducing enhanced reforms on the regulatory system and the quality of rating agencies. Improved risk management is now a definite requirement. The systems in place today are too limited to encompass the numerous issues they are intended to address. Hence, weak risk management systems imply more risk. The role statistical and probabilistic models play in the equation is far from being negligible. However, they often tend to focus on the wrong perspectives such as the occurrence of a major loss in a year rather than the likelihood of a Black Swan event for instance. As such, models must not be considered as finite and should evolve and adapt in correlation with their environment. The key to prevent markets from dramatically failing beyond control may also simply lie in the capability of predicting these rare events, a concept that is yet to be fully understood and mastered.

Olivier Raison ( olivier.raison@student.swissmc.ch ) is a graduate from the Swiss Management Centre in Zurich, Switzerland, with a Doctorate of Finance. He has an extensive experience in the fields of business finance and accounting with a worldwide exposure as a senior executive.
His research interests include modern economies and geostrategic issues in the Gulf countries as well as global finance markets. He also holds a Master in Business Administration degree from the IAE - Universit? de la Sorbonne in Paris, France.

South Africa: Shortcomings of the Ruling Elites

AppId is over the quota
AppId is over the quota

Book Title: Elite Transition
Author: Patrick Bond
Publisher: Pluto Press London

Elite Transition is a study of the new South African government economic policy choices since the dawn of democracy in 1994. It was among the first academic books to offer a detailed analysis of the post apartheid economic policy choices. It shows how the ruling party, the African National Congress's (ANC) key leaders took a turn to the right to embrace neo-liberalism. The political view, arising in the 1960s, neo-liberalism emphasizes the importance of economic growth and asserts that social justice is best maintained by minimal government economic activity and free market forces.

The book is based on analysis of extensive documentation, anecdotal information and theoretical insights. It assesses the extent to which the post apartheid government can fulfil the dream of economic freedom. It presents arguments about the reasons for continued poverty despite political freedom. It dissects a range of socioeconomic continuities from old apartheid state policies to the new post apartheid government. It draws on colonial and apartheid policy failures to illuminate the deep connections between economic stagnation and social strife.

The central argument of the book: post apartheid economic policy making is steeped in the fundamentals of the outdated apartheid form of capitalism. This, the author argues is responsible for jobless economic growth. This in turn has a multiple effect in the new state's capacity to tackle socio-economic challenges posed by years of uneven development, housing backlogs and rising levels of poverty. He seems to suggest that neo-liberalism has taken roots within the upper echelons of liberation movement, the ANC.

Author, Patrick Bond locates this fundamental shift by looking at the emergence of the second post apartheid economic policy that became widely known as Growth, Employment and Redistribution Strategy (GEAR). The first new government economic policy was the Reconstruction and Development Programme (RDP). RDP's main policy thrust was to link growth, development, reconstruction, redistribution and reconciliation into a "unified programme". Whereas the new plan, Gear sought to promote growth before redistribution. To tighten fiscal policy and loosen exchange controls while promoting foreign led investment. It was indeed a fundamental shift from the much hailed 1994 economic blueprint, the RDP.

When the new plan (Gear) was unveiled, the then President Nelson Mandela and his Finance Minister Trevor Manuel presented it as a fait accompli. Its presentation caused a rupture within the ruling ANC Alliance comprised of the labour federation COSATU and the South African Communist Party (SACP). Despite their (COSATU and SACP) vociferous objection to the policy, it was implemented with gusto.

However, Elite Transition shows starkly that the two economic policy blueprints were incompatible, and the latter destined to fail.

Bond opened a can of worms on his account about the true origins of Gear. He revealed that it was written by a committee dominated by the World Bank and International Monetary Fund (IMF) economists and policy gurus. The exposure of Gear's true authors added fuel to the fire causing the anti-Gear lobby to insinuate that it was a self-imposed structural adjustment programme.

The book clearly shows that neo-liberalism has become a key juncture between production and social reproduction in the current era of chronic unemployment and capital-led globalisation. In other words, as the ANC moved from people-centred economic development to capital led growth planning - the socio economic conditions of the poor majority will continue to worsen.

Elite Transition shows a causal a link on how first colonialism, then apartheid economic planning and the post apartheid policy maker's dithering have failed to change the fundamentals of economic planning. This failure, the author suggests will lead to further social strife.

Today, South Africa is engulfed in rolling service delivery protests. At least 40% of the country's 283 local governments had been affected by service delivery protests with 111 major incidents recorded in the year. At the same time, the employment figures put the figure of the unemployed at above 25 percent. Since Gear was launched, South Africa has lurched from one economic plan to the other - from the Accelerated and Shared Growth Initiative for South Africa (AsgiSA), the National Industrial Policy Framework, and recently (2011) the New Growth Path for South Africa (NGP).

Bond's book is an important text in the continued evolution of economic planning in South Africa even if it only shows the shortcomings of the ruling elites.

Bhekisisa Mncube is a qualified journalist and member of the Book Review Panel at the New Agenda academic journal in South Africa. Mncube is the former senior reporter (politics) at the Witness newspaper. He is also a columnist (Witness/Echo), his column 'On the High Road' appears on Thursdays.