naked capitalism

By Richard Smith, spelunker of the Web.

We started Robert Cowley’s web bio here and this is the second installment. We will be in Mayfair, London, or on the Gold Coast of Australia, and the story involves a dead Daily Mail journalist, a great racing driver, and a bad racing driver: a very bad one, in fact positively wicked. We introduce Cowley’s two pseudobanks, Eaglebanque and Investment Suisse, and trace what we can of two of his scams.

The dead journalist is Nigel Dempster. Here is his obituary and a sample of the man:

Nigel Dempster, who died yesterday aged 65, was the hot-breathed newspaper gossip ace of his day, a punctilious, and latterly careworn, chronicler of marital discord in the moneyed set.

The doyen of his metier for some quarter of a century, Dempster was cocky and plausible, to the extent that Princess Margaret became an acquaintance and informant. Straying peers and medallioned playboys came to fear a call from the dauntless, dapper Dempster.

In county drawing rooms up and down the land his column was indignantly excoriated – yet discreetly devoured. Secretaries and suburban housewives were equally addicted to his daily dispatch from the world of “luxury” yachts, “penthouse” flats and six-figure divorce settlements.
…
At his peak in the 1970s and early 1980s Dempster commanded the largest salary on Fleet Street. His subjects, drawn chiefly from the ritzier enclosures at Ascot and Cowes, were often men and women of the slimmest achievement but Dempster made them stars of faux scandal.

Such was his success that he earned more than some of the plutocrats and noblemen whose love lives he monitored. Yet proximity to the great gamblers and bed-hoppers of the age eventually corroded his spirit, if not his liver. He lost much of his money to bookmakers and by the end of his days his capacity for enjoyment was sadly diminished.
…
His English education gave him enough self-confidence to call strangers “old boy” and to keep (and wear) a large selection of public school ties. If his shoes, like his anecdotes, sometimes seemed too polished, it was because he remained deep-down an Aussie outsider.
…
Dempster contributed for several years to Private Eye, helping to write the venomous Grovel column. Here he gave vent to a far more critical appraisal of the social elite.

For a sample of his work in his declining years, we travel back to the very dawn of time, which, as far as the modern Internet is concerned, is about 2000 A.D.

Sadly, Dempster’s journalism doesn’t appear to form part of the Daily Mail online archive, but, courtesy of a couple of flukes, we can get some idea of a piece or pieces that Dempster wrote for the Mail around the 15th August 2000. The first fluke is another, unfortunately uncommunicative, blogger  who, like me, seems to have a bit of a thing going for Robert Cowley. I can patch up one of his slightly corrupted posts on Cowley’s past to restore something close to Dempster’s original text, which I don’t have:

This morning Annie Hill and her crooner husband Vince, attended by a Bailiff of the High Court, will regain possession of their Mayfair flat on which rent of £56,000 is outstanding.

Annie let the property three years ago to Eaglebanque, which paid her with a series of dud cheques on their branch in Baton Rouge, Louisiana.

‘I don’t expect to find anyone there. The telephone was cut off last week and Eaglebanque allowed a charity called the Foundation for the Arts, Sciences and Humanities to move in. I have been corresponding with a Mr George Russell of FASH but he has moved to Glasgow. Annie says she originally dealt with an Australian calling himself Sir Robert A. Cowley of Eaglebanque Securities Limited and has been to court ‘many times’ to get an eviction order.

When I get an order I negotiate with them and that means I can’t prosecute the order. But tomorrow is the day. I hope I don’t find too much of a mess.’

Via the Sydney Morning Herald’s interest in Australians overseas, and then via the Australian “Insolvency Lawyer” web site‘s interest in dodgy dealings, a closely-related piece of Dempster’s reporting turns up, rewritten:

Making a bad name for the rest of us are the Australian pair in London from the Zurich-based Eaglebanque who have moved into the Mayfair mews residence of the late superagent Dennis Selinger the bloke who handled Peter Sellers, David Niven and Michael Caine.

Selinger’s wife Debra had been having some problems getting access to the £20,000 deposit Sir Andrew Haverford and Sir Robert Cowley were said to have put down on the residence, The Daily Mail’s columnist Nigel Dempster reports.

Sir Robert, whose card also claims he is Robert, Baron Ardwallen and a Knight of the Sovereign Order of Malta, may drive a Rolls Royce, but all efforts by Dempster to verify the knighthood have drawn blanks.

Perhaps he should ask gold bug and futures spruiker, Harry S Schultz, who had a Maltese knighthood. You don’t win them for valour.

The 50-something-year-old pair also, apparently, spend some time doing whatever it is they do in Hong Kong, while Eaglebanque has offices in the USA’s deep south Baton Rouge, Louisiana and Fort Lauderdale, Florida.

Evidently it takes one Aussie outsider (Dempster) to spot the dubiousness of two more Aussie outsiders, Robert Cowley and “Sir Andrew Haverford”. So we’re off to Queensland next, where we find out exactly why these two are hanging out in Mayfair, and why they really should have been good for all that rent money, and the deposit too. From the Queensland State Parliament’s official record of proceedings (Hansard) for 11th December 2001, page 101 in the PDF:

Mr LAWLOR (Southport—ALP) (9.42 p.m.): The matters of which I am about to speak are the result of a two-year investigation by Gold Coast journalist Murray Hubbard and will be printed in detail in tomorrow’s edition of the Gold Coast Sun newspaper. Andrew John Haberfield, who lives in a palatial waterfront mansion at Benowa on the Gold Coast, is behind a major international scam masquerading as a charity called the Hope Foundation.

The Hope Foundation was started on the promise of providing humanitarian aid to poor countries, particularly after a disaster. The foundation intended buying a Boeing 747 and having it fitted out with an on-board hospital to fly into trouble spots as a first-response unit. Although a commendable idea, the reality was quite different.

The foundation acquired a Lockheed Jetstar—a smaller jet similar to a Lear jet—which was fitted out with luxury leather seats and used to take foundation executives on trips and to impress potential victims. Investing on the basis of earning a dividend while practising philanthropy of sorts, some 30 Australian and New Zealand victims lost $6.3 million by investing in the Hope Foundation. That money has disappeared from accounts held in Switzerland and Liechtenstein.

Agents for the foundation promote returns of 10 per cent and 40 per cent per month through their scheme. They unfortunately do not show how, with whom and in what country contributors’ money will be applied. There are no financial statements, no prospectus, no investment statement and, in a short time, no money. Haberfield is said to have personally gained more than $1 million from the scheme. Documents in my possession show authorisations from his business associate Robert A. Cowley, chairman of the board of the Hope Foundation, for money transfers made to Haberfield totalling more than $800,000.

The Hope Foundation has left a trail of debts in the United States, Australia, New Zealand and the United Kingdom. On foundation letterhead he has identified himself as Dr Andrew J. Haberfield and currently purports to be Sir Andrew Haberfield, a Knight of Malta’s Sovereign Teutonic Order. Robert Cowley also represents himself as ‘Sir Robert’.

Another scam is the Millionaires of the World Club, an offshoot of the Hope Foundation. For $20,000, or $15,000 cash, investors are offered a lifetime membership of the club and a promised annual rate of return of 240 per cent. Again, no-one ever sees his or her original investment again, let alone a return.

I am aware of two previous scams by Haberfield, including one in February 1999 when he attempted to set up a V8 racing team with driver Alan Jones and aspiring young driver Darren Pate. The team and racing cars never materialised and a number of suppliers and investors lost money, including Pate, who to this day is still owed $50,000.

In late 1999, Haberfield left Australia with his family for the United Kingdom with the trip paid for by the Hope Foundation. He lived the high life, drove a Rolls Royce and lived in Mayfair. I believe the Major Fraud Squad in London is very keen to speak with both Sir Andrew and Sir Robert.

Today Andrew Haberfield is back on the Gold Coast seeking sponsors and investors for a V8 supercar racing team for the 2002 season. He is working out of premises at the rear of 6 Supply Court, Arundel, and I have it on very good authority that he is failing to pay award wages, superannuation or other entitlements to those working for him.

So we have a little copy edit for the dead Dempster, ten years too late: the name is Haberfield, not Haverford. But there are our two racing drivers: the great Alan Jones, 1980 Formula One World Champion, whose due diligence is not so great, and the crappy fraudster Andrew John Haberfield, who, unperturbed by the Parliamentary allegations, did indeed end up competing in the 2002 Super Touring Cars season, in the Alan Jones team, for that season only, and won no races at all.

If only someone had pointed Jones to the report in the Gold Coast Sun before he ever got involved with Haberfield. If only he had terminated his association with Haberfield at the end of the 2002 season.

By August 2003 at the latest, as we see from the Wayback Machine, Jones has some sort of deal going with Robert Cowley too, via Cowley’s scam vehicle Investment Suisse. The Wayback Machine is slow, but if you give it time, it will retrieve the Investment Suisse page snipped here:

and the Alan Jones Consortium page snipped here (click on it to make it bigger)

Yup: as if Haberfield is not enough, Jones has a connection with Robert Cowley too. This does not bode well for Alan Jones’s finances, at all.

In fact, it looks as if Haberfield worked very quickly: he seems to have cleaned Jones out via AJR Wheels (mentioned above in the Queensland Hansard report) before Cowley followed through on his scam, a variant of the Lockheed Jetstar wheeze also mentioned in the Queensland Hansard. Perhaps Jones was in a very tight spot even before he hooked up with Cowley, because in The Sunday Telegraph (of Australia) text archive, dated June 22, 2003 we find this:

FORMER world champion race driver Alan Jones is fighting off bankruptcy after facing debts of more than $4 million.

The 56-year-old motor sports commentator, who retired from Formula One grand prix racing in 1987, has lived in luxury on the Gold Coast, owning a waterfront home, several luxury cars and four boats, including a $3 million yacht.

It is understood Jones — who won the F1 drivers’ championship in 1980 and is rated as one of the 10 best drivers of all time — sought a Part 10 Deed of Arrangement under the Bankruptcy Act late last year.

Under the agreement, which prevents him from being declared bankrupt, Jones is paying instalments totalling $20,000 a month.

…

Jones had incurred $4.1 million in liabilities, according to a report prepared by Controlling Trustee Jeffrey Crowther, from McCowans Solicitors.

The report shows Jones had assets valued at $2.2 million…

…

In his report, Mr Crowther said: “Mr Jones attributes his present insolvency to some bad business advice and the failure of a business known as AJR Wheels, which he established with a partner.

“The nature of the business was to export aluminium to the Philippines, where it would be turned into wheels and sent back to Australia for sale. He alleges his partner did not uphold his financial responsibility and Mr Jones ended up being responsible for the debts incurred.”

The report said Jones was contracted to a car manufacturer and television network, but with Channel 9 losing the grand prix television rights, his personal income would be about $50,000 for the next 12 months.

“Based on Mr Jones’s personal income, he would not be able to make compulsory contributions, should he become bankrupt”, said Mr Crowther, who recommended creditors accept the deed of arrangement.

Jones declined to comment.

Obviously one doesn’t know, from this account, how much of the AUD4million stuck to Haberfield or Cowley. Some of it, no doubt, and enough to finally cripple Jones financially, evidently. To me “his partner did not uphold his financial responsibility” does sound like an advance payment scam of some kind.

At AUD20,000 per month, the unfortunate Mr Jones might have made some sort of a dent in the ~AUD2Million net debt ten years later, and perhaps there’s been some genius lawyering, or a big upturn in his income. But I suppose he is still out there, slogging away. It is another very sad story, I’m afraid.

Andrew Haberfield, who drops off my radar completely, must still be out there as well. Did he get prosecuted for the Hope Foundation scam? Is he the same guy as the CEO of Super Series Rodeo, a Gold Coast company incorporated only last year? I don’t know. Perhaps some locals are knowledgeable enough, or curious enough, to dig down and enlighten us all.

Robert Cowley is still out there, too. More on him in our next.

By Richard Smith, an inept narrator.

Here is the latest instalment of a shaggy dog story that has so far taken us from Oxford to Mauritius and Cape Town, with a disconnected-looking excursion to Colombia tagged on.

This time, we are heading for Australia first, then Mauritius again, then to Bristol, UK, and returning to Australia. We’ll add an extra sprinkling of the exotic to the itinerary by paying a quick visit to Macedonia, too. One day perhaps I’ll do a Google Earth thingie, with pushpins for all the places, people and scams, so that you can see the whole sprawling picture, but there’s a lot of ground to cover first, so off we go…

R.P. Emery & Associates, PO Box 5197, South Murwillumbah NSW 2484, look exactly like suppliers of cheap (ish) legal documentation to Australians:

Since 1990 RP Emery & Associates have supplied the business community and individuals with professionally drafted, ready-made contract templates.

You can save thousands of dollars by creating reliable legal documents from your home or office computer.

Simply open the document template you wish to use, insert all relevant details in the appropriate spaces, and go to print.

It’s that Easy!

There’s a vast range of different templates that people might want: business sale documents, NDAs, loan agreements, rentals, and so on and on. There’s a bunch of testimonials from happy clients. It all looks rather dull.

At the bottom of the home page it says:

Copyright © R.P.Emery & Associates 2011 All Rights Reserved No portion of this web site may be reproduced in any way or form without express permission of the publisher.

Oops, I suppose the above excerpts count as extracts. But hang it, do you know, in an attack of wanton wickedness, I am going to reproduce several more portions of this web site, in the form of screen dumps, without express permission of the publisher. Have I taken leave of my senses?

This is a snip of R.P.Emery’s home page taken on the 4^th of March 2012:

I’m going to zoom in a bit on the embedded video, which shows, as it were, the public face of R. P. Emery (we’re going to see more of this chap):

Here he is again, same horrific shirt, same tie, same room, different stuff on the shelves, holding forth on commercial property lease agreements:

So why I am interested in this dreary, unidentified Australian lawyer at this dull web shop? And why am I so unperturbed by the prospect of violating R.P. Emery’s prohibition on reproducing anything from their site?

Well, the name of the chap in the videos is Bernie O’Brien, and when he’s not boring the world, with these videos, and making the world feel queasy, with his shirt, he’s running fair-sized international scams.

I don’t think R. P. Emery should be associating themselves with Bernie in any way whatsoever. So I think those videos will simply vanish, though I hope for another, more entertaining outcome, which I will say more about, if it happens: the ball’s in “R.P. Emery”’s court.

Let’s take a look at some of the fallout from one of Bernie’s scams, Discovery Beach.

Here’s a typically furious and typically misspelled, Ripoff Report:

Now for the sake of this report I will call myself Troy. This letter is aimed fair and square at Bernard Brien (BO) of Discovery Beach Australia.

…

I can only say at this point that I am another victim of these rip off merchants, everything that I am going to dot point (and much more) is verified in all of the current rip off reports on your site

1. They ask you to fill out a first stage assessment (FSA)

2. You then get a 30 to 40 page report (looks to be fairly generic) outlining problems that they have discovered in the (FSA). Part 2 of the (FSA) are recommendations on what needs to be done to address these problems. The (FSA) includes one paragraph on how interested they are in your project blaba, blaba!!

3. Then comes the trap!!! They then send you a Strategic Review Analysis (SRA) asking you for an amount of money usually between $20,000.00 and $30,000.00 which they claim will make the relationship work because they are supplying the bulk of the money to make the project ready for investment, they also say that providing that you follow the recommendations, the Discovery Beach Guarantee is that your project will receive funding and it will take 3 to 5 weeks to get the project investment ready

4. Now the bottom line hear is that (BO) wouldn’t know the first thing about how to run a business, let alone start one, or draft a business plan.

After reading the other reports on your site everybody has been Fu*** over using the same tactic, and as the old saying goes done like a dinner how many more people are falling for this, to (DBA) its like taking candy from a baby.

So Bernie pitches business planning mumbo-jumbo, with a hook: a would-be entrepreneur pays a little bit up front to use the business planning software, or whatever it is, sinks a lot of effort into filling in a questionnaire, gets a voluminous response, and then the sunk cost, effort and visible “results” pull the victim into the bigger scam.

Also at Ripoff Report we find a long and not 100% true 2007 sob story from Steven Pitcher, one of the Oxford scammers I posted about here, who, before fleeing to Mauritius to escape his creditors, was, in a splendidly ironic turn, scammed himself, by Bernie:

Relying on their promises, and following their advice to the letter, our existing business, and the new one, MUSOTOPIA, are in ruins, my beloved family are separated (over Christmas as well) and scattered around the world, and we are practically penniless as a DIRECT result of DBA’s inability to stick to their word.

Well, I don’t think it is Bernie’s fault that Pitcher’s Rock Star Lottery (that was his “existing business”: hah!) went belly-up, at all. Nevertheless, some of what Pitcher says about the O’Brien modus operandi is consistent with the other stories.

It seems that Pitcher tries to get his revenge by putting up a site www.bastardswhodontpay.com (now defunct, alas) and taking pops at Bernie there.

Bernie retaliates, he wants us to think, by writing a letter to an Honorary Consul in Mauritius (who happens to be another O’Brien, presumably only distantly related). The letter will no doubt vanish in due course, when Bernie wants to cover his traces a bit better. In it, Bernie complains that Pitcher is hiding from the UK authorities in Mauritius (true), defaming Bernie (that must have taken some effort) and demanding money with menaces from Bernie (perfectly likely: Bernie’s pinched some of it from Pitcher, and Pitcher wants it back). Bernie also claims to have contacted the Australian police and Interpol (relatively unlikely: the last thing Bernie wants is intense police attention).

Scammerfight!

Even if Bernie really did talk to the Consul in Mauritius, or the Australian police, I doubt whether they, or Interpol for that matter, take Bernie all that seriously now, for Bernie has more respectable victims, who really went public. A number of middle-aged would-be entrepreneurs in Australia fell for Discovery Beach, and they managed to get the Australian TV program “A Current Affair” interested enough to stage one of those cheesy doorstepping stunts where the Victims Confront The Scammer. That’s five minutes of Youtube video; it goes out of synch towards the end, but it’s still quite compelling viewing.

Bernie puts in a couple of appearances, looking somewhat less poised than in his R.P. Emery videos, but at least he’s wearing a different shirt…

The gist of it, if you didn’t want to view it, is that 25 people lost AUD3Mn (one Aussie dollar is roughly one US dollar) by handing over up-front fees to Bernie, for which they got in return a two-page business questionnaire each, and a bunch of empty promises, and no refunds. The ones who dived in deeper with Bernie ended up following worthless “detailed instructions” from him, and lost a lot more money.

It didn’t quite stop there either. Bernie franchised his scam overseas. There was a UK Discovery Beach, run by a guy in Bristol, one Christopher David Barrell. It’s the same sort of thing with the same sort of outcome (sorry about the number fluffs, by the confused victim; I daren’t correct them):

After completing the (sra) a strategic review proposal (srp) was sent to us as part of the sra. within the sra there is a considerable amount of information and within this document there is written a guarantee to fund the project that alan burrell, chairman of wisetrack pty limited investments has signed.

The signed guarantee gave us the confidence to hand over £12,000 (australian) $3,2000. this was supposed to be our contribution to the £50,000 needed to start our business on the road to publishing.

thirteen months had passed and we had not received any substantial information including the promised business plan or the promised funding, business leads, backing of ‘key’ people or personnel that is stated in the srp of the dba gaurantee.

Folk seem to be mighty confused about both the Discovery Beach scams. For instance, one chap was ripped off by Chris Barrell in the UK, and finds Bernie O’Brien quite, er, helpful:

I have been dealing with Chris Barrell since the summer of 2007. He was representing Discovery Beach in Australia and professed to be the Master License holder for this company in the UK.

He also introduced me to a very convincing person called Ali Pourtahari who confirmed he was the Master Licensee for Discovery Beach International. I now find that after paying some £15,400 in total to Mr Barrell, he has neither license or ability to perform the promise he made to us which was “Guarantee” funding for our business. Both Mr Barrell & Mr Pourtahari were mentioned in conversation when I spoke with the Australian branch with a Mr O’Brien, and he was candid with his words but hinted that both of these people were misrepresenting the company and were dismissed some time ago.

It now appears that either Mr Barrell or Mr Pourtahari has stolen my money, and whilst the Chairman of the Company has suggested if a pay another £5,000 to him he will deliver where Mr Barrell left off, I am beyond broke now and have no way of finding further funding.

I spoke with Mr Barrell a week before Christmas and he assured me that it was not him who had my money, but passed it to Mr Pourtihari. My feeling is someone is lying and Mr Pourtahari is refusing to call me back despite Mr Barrell assuring me he will forward my details.

I know now I have been conned out of my life savings, who conned me I’m not quite sure. Mr Barrell is the top of my list, with Mr Pourtahari a close second. Mr O’Brien appeared genuine, but not willing to try putting things right without funds first.

Good old feline Bernie, cautiously combining candour with innuendo, and fishing for another upfront fee at the end there, from someone who just wants their money back from the last scam, executed by Bernie’s reps in the UK. I hope the mark didn’t give Bernie even more money. But scam victims do sometimes fall for a follow-up “money recovery” scam, as Bernie knows; which is why he is fishing.

Tip to these very confused victims: Barrell and O’Brien are both crooks. As for Mr Ali Pourtahari, I would ignore his resumé and give him a wide berth, too.

That isn’t quite the end of Bernie. He seems to be quite adept at making himself look respectable. Here he is at a 2009 seminar at the Converga Green Economy Hub (page 2, 14:00). Bernie’s subject is “Making Your Green Idea a Success”. A success for whom, one naturally wonders. At that seminar, he is sharing a public platform with Anne Maree Huxley, CEO of the Aussie green sustainable industry body MOSS, who need a big loud wakeup call about Bernie.

Here is the last page of Bernie’s predictably banal seminar presentation (I will spare you the rest of it), with the names of some more people who could do with a big loud wakeup call.

All of which leads us to Bernie’s next vehicle, Green Planet Management. His LinkedIn profile proclaims him to be an analyst there (and we note that he owns at least three shirts):

Oh, I should have asked the Australian Bar Association to confirm that Bernie O’Brien really is a barrister. It just seems so unlikely.

From Ripoff Report again:

This letter is aimed fair and square at Bernard Brien (BO) of Discovery Beach Australia.

Now calling them selves Green Planet Management www.greenplanetmanagement.com.au

The web site above is just simply a copy of the Discovery Beach (DBA) web site with a few names changed to suite the new name, (DBA) web site I notice is now parked. The only real difference that I can see is that instead of charging $399.00 or 400.00 pounds, (depending upon which country you live in) they are now offering the first stage assessment soft wear for free (FSA) wow!!! what a deal.

From the sound of it, when Discovery Beach was rumbled, Bernie changed the name, but not the scam. Since www.greenplanetmanagement.com.au is no longer a live site either, I imagine the outcome for his clients was the same under the new name.

But it won’t necessarily only be Australian Greens nursing burnt fingers. It may be Macedonians too, and a very embarrassed British Business Group Macedonia, who, in late 2009, put would-be Macedonian entrepreneurs in touch with…Bernie O’Brien:

BBGM launches Investment for Innovation

The British Business Group launched “Investment for Innovation”, a software platform that will help SME’s, start-ups and Entrepreneurs to analyze an idea, its capacity to succeed in a market place and also prepare it in a suitable format for industry partners and venture capital groups and other potential financial investors.

“The platform aims to provide Macedonian entrepreneurs with a unique opportunity to  take their ideas to market confidently and correctly, and by doing so turning their business into a very attractive asset for British or other International companies” said the BBG’s Chairman, Ray Power.

IFI (Investment for Innovation) consists of an assessment system for ideas and business models that will act as a filter to identify those projects with the most potential and then proceed in introducing those ideas to venture capital firms or institutional investors.

Furthermore, IFI gives companies or entrepreneurs a formal channel through which to submit business plans to a network of investors that have specifically partnered with the BBG to receive and review investment opportunities.

The benefit to investment groups and private equity firms is that when using the software or our manual filtering process, a supply of quality proposals are presented ready for review and for initial due diligence.

Investment for Innovation – is being provided in association with Green Planet Management, an Australian group which has used the software and investment process for over ten years.

For more information about IFI please contact us at via our website:  www.bbgm.co.uk

IFI is presumably pronounced “iffy”.

I can’t imagine it went terribly well. The BBGM has been silent about IFI ever since they announced it.

There are plenty of loose ends; but for me that’s almost it with Bernie. He puts in a fleeting appearance in my next, doing a favour for another con man. I’d love to know what he is up to now, two years after the most recent sightings. My thanks to NC commenter Lanny Poffo, who put me onto 4chan; I will take a proper look at it. Maybe that’s the place to find out how Bernie’s getting on.

Next time we start in Australia, and dart back to the UK again. It will be like a badly-conceived fairy tale: we will encounter a great racing driver, and a not-so-great one; a Baron who is not a Baron, an Earl who really is an Earl, a Princess from a country  that doesn’t exist any more, and a Prince, from another imperilled kingdom, who is not a giant lizard; and we will discover that Bradford isn’t necessarily a city in Yorkshire (or in Pennsylvania), or a town in Wiltshire, but can be one of two different villages in Shropshire, too.

After that, it may get more confusing.

By Richard Smith, proud scion of a 5,000-year-old line of soot-smeared metal bashers, (purportedly).

Note: an incomplete version of this post was born prematurely a few hours ago, and then, since blogging is more forgiving than obstetrics, hurriedly stuffed back into the womb by the flustered midwife. This is the fully developed version.

Robert Cowley, aka Earl Cowley, aka 2nd Baron Ardwhallan, aka Sir Robert Cowley, aka the Right Honorable Robert Cowley, is a faker, fantasist, social climber, fraudster and con man from Australia.

I suppose I could stop right there, but it wouldn’t be much of a biography, and Cowley has such a shadowy and fantastical pedigree that it would be a shame not to record some of it: the traces he leaves aren’t always durable, but they are always vivid while they last. Let’s set them in glass and stone as best we can. It might help someone, one day. This post will deal with Cowley’s fakery, fantasy, and social climbing; the next, with a sampling of his frauds and cons. So these posts will be a series within a series.

By way of contrast with Cowley, I shall now introduce the 7th Earl of Bradford, a discreetly entrepreneurial British aristocrat, who is reassuringly solid.

He owns a very British restaurant, Porters, which is proud of its Steak and Kidney pudding, and of other dishes too. It looks good value to me, especially for Covent Garden. I haven’t tried it, but I feel safe recommending it to overseas visitors wishing to sample British cuisine (yes, French scoffers, there is such a thing). Lord Bradford is also chairman of the small but reputable Internet Service Provider and web host, VIP Internet.

The very grand Bridgeman family estate, Weston Park, with its splendid country house, is now held in trust by The Weston Park Foundation, but the Earl maintains a strong connection with the old family place. The “Bradford” of his title is the Hundred of South Bradford in Shropshire, not the Hundred of North Bradford, also to be found in Shropshire, nor any of the other Bradfords of various kinds scattered round Britain. Just so that you know.

When he isn’t restauranteuring or Internet-hosting, Lord Bradford updates a web site, with a very specialist bent indeed: warnings about sales of fake titles, and about people who claim unreal titles.

The fake aristocrat and the genuine one are connected by none other than Bernie O’Brien, the fraudster and bully we wrote up in another post in this series.

A little while back, Lord Bradford received a threatening missive from Bernie. Here it is, reproduced by permission, natch:

…and overflowing indignantly and inelegantly onto a second page…

The letter was prompted by this post (second section, on Baron Ardwhallan).  Lord Bradford points out that Robert Cowley isn’t a proper Baron, leads two dodgy financial institutions with strange mongrel names, Eaglebanque and Investment Suisse, and hangs out with fraudsters.

Bernie, meanwhile, thinks Cowley’s proper appelation is Sir Robert Cowley, not Baron Ardwhallan, which pretty much substantiates Lord Bradford’s point in the very act of disputing it.

As you can see, the post is still there, eighteen months later. Evidently, Lord Bradford judged that Bernie’s threat was empty, and Lord Bradford was right. Oh, and, eighteen months ago, Bernie O’ Brien was still claiming to be a barrister. I still have my doubts about that…

For our first sighting of Robert Cowley himself, we have to go via the website of the deranged former British TV presenter David Icke, who has discovered that our gaffe-prone Prince Philip, Duke of Edinburgh, and other prominent persons you may recognize, are in reality bloodsucking giant lizards from outer space:

David Icke, the former sports presenter who once proclaimed himself to be the Son of God, has offered up more of his unusual wisdom, this time claiming that the Royal Family are “bloodsucking alien lizards”.

Mr Icke, 53, claims the Queen and the Duke of Edinburgh are shape-shifters who drink human blood to look like us.

And the father-of-three says a race of half-human, half-alien creatures has infiltrated all the world’s key power positions.

He claims the US president, George W Bush, and his father, the former president, George Bush, are both giant lizards who change into humans.

Mr Icke, a professional speaker who has published 16 books, believes that the alien hybrids were behind the “murders” of Princess Diana and John F Kennedy, as well as the terrorist attacks of 9/11.

Commenters on a recent NC post on 9/11 might want to add that idea to the mix.

As you would expect, Icke’s site is a truly great meeting place for kooks. In one of Icke’s forums, we find a poster, handle “soulja”, holding forth about the Teutonic Knights (if you must ask, it’s still all vaguely to do with lizards), and somehow Robert Cowley (neither a baron nor a knight this time, but an earl) puts in an appearance, along with a couple of other dubious titled types, Lord Hankins of Ravensburn and HSH Princess Maya. That’s Cowley on the right.

“Lord Hankins of Ravensburn” returns zero Google hits (apart from the ones at Naked Capitalism, Fake Titles and David Icke’s site) but Princess Maya does seem to be able to pass for royalty of a sort. She is pictured, (temporarily downgraded to Baroness) at the American Foundation of Savoy Orders’ 14th Annual Benefit Gala, as recently as December 2011 (halfway down the picture column on the right). Here she is again on the international committee of the annual Russian nobility ball. In short, Princess/Baroness Maya seems to be just as much at home with the exiled Romanoffs and Galitzines as with the lizard-mongers at the David Icke tinfoil hat site. I suppose that is the fabled self-assurance of the aristocrat.

It is all a bit bloody peculiar. I can’t even tell if these Romanoffs are “real” any more. I think I will leave it to Lord Bradford to puzzle out the Romanoff/de Haynau connection; he has the domain expertise.

At least the penultimate post in the Soulja series at Icke’s forum makes it obvious what the point of these posts really is. Soulja, reasoning that he’s found a site frequented by people who will believe absolutely anything (he’s made north of 1200 posts there), is selling titles (though he’s too discreet to mention the fee, and can’t spell honorary). Here is the pitch:

Full Honourary status of Lichtenberg will be granted to qualifying persons, who serve in the Corps Diplomatique and they will receive Lichtenberg photo identification documents and Credentials and attend a week long offshore Diplomatic Protocol Training Seminar.

Graduates receive warrant with Accréditation de l’Association Corps Diplomatique. Later at a time and place to be named, diplomatic graduates will be honoured by our Sovereign.

Chancellery Office
23 Berkeley Square London

There is little need for specifics when we say, many unique benefits flow to recipients of appointments and also titles, which transverse the Political, Business and Social arenas.

The Lichtenberg Foundation offices at World Trade Centre – 1215 Geneva
Geneva Airport – Switzerland

Remember the Lichtenberg Foundation: you will see that name again. It is a kind of Cowley fingerprint. It makes me suspect that soulja and Cowley are one and the same, though I can’t prove it.

Next, we will track down more of Cowley’s traces, at EagleBanque and Investment Suisse. That will involve just about every anglophone location you can think of, worldwide, and a few more besides.

UPDATE 7th March: sorted out my geography of Shropshire.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as “Australia”. For convenience I will refer to the country by this older name. We will now turn to the outlook.

A Fork in the Economic Road …

The commodity boom has created a “two track” economy – as your Excellency know economists prominent in the media love glib “sound bites”. The mining and commodity boom benefits a small part of the economy whilst simultaneously creating problems for other parts.

The mining and energy sector account for less than 10% of the Australian economy. This is smaller than the Australian finance sector or manufacturing industry.

Mining and mining-related sectors, such as construction, manufacturing and services industries which benefit from mining activity, make up about 20% GDP. These sectors will contribute approximately two-thirds of the projected 4% GDP in 2011/12. The remaining 80% of economy will contribute one-third of growth.

Mining employs 1.5% of the workforce reflecting its capital intensive nature. Unfortunately, a portion of the equipment needed is imported adding to the current account problem, especially in the short run. A combination of high domestic costs and the strong Australian dollar means that a significant portion of project related work is now done offshore.

The revenue earned and the overall contribution to national income does boost the economy and creates employment. But dividends and interest payments to overseas investors reduce the amount of earnings that stays in Australia.

The concentration of mining activity in Western Australia and Queensland also creates imbalances within the domestic economy. Skill shortages in mining means rising salaries, attracting workers from other industries and placing pressure on general wage levels. It also exaggerates property price increases in some areas. This creates inflationary pressure that forces the Reserve Bank of Australia to raise interest rates.

The rising demand for Australia’s mineral exports also pushed up the value of the Australian dollar. Since deregulation in 1983, one Australia dollar has purchased, on average, around 77 US cents. The commodity boom and Australia’s high interest rates relative to the rest of the world increased the value to around 95 to 100 US cents, peaking at around 110 US cents.

The high Australian dollar places exporters at a cost disadvantage and also makes it difficult to compete with cheaper imports. Affected sectors include key Australian export industries that are significant employers such as education services, tourism and manufacturing. Australia may lose up to 170,000 manufacturing jobs over the next 10 years, almost double lost jobs in the past decade.

Unhappy Homes…

The domestic economy remains lack lustre. Consumers are affected by significant debt levels and weak wage growth. Public spending has fallen reflecting pressure to return the budget to surplus. Business investment has been weak, reflecting sluggish demand.

Debt levels remain high. Between 1991 and 2011, household debt rose from around 49% to 156% of disposable income. In 1989, when mortgage rates were 17%, the ratio of interest payments to disposable income was 9%. Currently, despite the fact that mortgage rates are around 7.5%, the ratio has increased to around 12%. As households increase savings and reduce debt, consumption is lower contributing to slower growth.

Slow growth in credit, reflecting households reducing debt and problem in the banking sector, also constrains growth. Employment in manufacturing, retail and financial services is weakening, with major employers announcing layoffs.

There are other unresolved problems. Housing prices remain high based on traditional measures such as affordability and rental returns.

According to the latest Economist survey (published on 26 November 2011), Australian house prices were overvalued by 53% based on rents and 38% measured against income levels relative to long run averages. According to The Economist, Australian home prices are overvalued by at least 25% based on the average of these two measures. The level of overvaluation is greater than in America at the peak of its housing bubble.

As your Excellency personally experienced during his visit to Australia, no subject excites greater passion among the locals than house prices. This is a staple of conversation and people excitedly compare the size of their mortgages and the value of their accommodation. There is heated disagreement between those who believe that house prices will not fall and other who forecast substantial price falls.

The real issue is over investment in housing stock, which produces low or nil return. Encouraged by complex subsidies, large amounts of capital are locked up in housing, unavailable for more productive wealth creating activities such as new industries.

In international rankings, Australia regularly performs poorly in competitiveness, productivity and innovation. This is inconsistent with the national character, which prides over achievement in competitive sports. Australia believes it can “punch above its weight”.

In a recent paper entitled “Productivity – The Lost Decade”, economist Saul Eslake found that Australia’s productivity growth during the 2000s was 0.50% below that of the 1990s, when it was broadly comparable to the OECD average. Between the mid 1990s and the mid 2000s, annual labour productivity declined from 2.8% to 0.9% per annum. Over a similar periods, broader measures of productivity that incorporate capital as well as labour fell from 1.6% to near zero.

The GE Global Innovation Barometer ranked Australia 16th out of 30 countries, well behind the leaders like the US and Japan. While 18% of local business leader, perhaps blinded by patriotism, nominated Australia, only 2% of global senior business executives citing the country as an innovation champion.

The GFC also significantly reduced the wealth of individuals, especially retirees. The value of their investments declined. At the same time, income and returns from investments also declined. The “wealth effect” limits consumption but also encourages those planning for retirement to increase their savings.

These problems mean that Australia’s non-mining sector is forecast to grow at a modest 1% per annum, compared to the mining sector which is forecast to grow at 5%.

Where are We Now…

Your excellency, the country is a fest of complacency. Locals are convinced that there is no end in sight for the mining boom driven by China’s growth. They believe that they are protected against the problems in Europe and elsewhere. Anyone who points out the risks is dismissed as a pessimist and doomsayer.

Despite the recovery, many parts of the economy, other than the buoyant mining sector, remain subdued. The stock market, although not an accurate measure of economic health, remains over 30% below its levels before the crisis. Interest rates for 3 and 10 year government bonds have fallen sharply to record lows, reflecting increased pessimism amongst investors about economic prospects.

Australia remains vulnerable. A slowdown in Chinese growth and fall in commodity prices and volumes would affect the economy adversely. Australian history suggests that mining booms are finite and end suddenly causing significant disruption.

Problems in sovereign debt and attendant pressures on banking system may decrease available funding and increase borrowing costs for Australian banks and companies. Overvalued house prices and high household debt increases vulnerability to an economic slowdown, with an accompanying rise in unemployment or to higher mortgage rates. A credit crunch or recession could cause house prices to fall worsening domestic conditions, which would in turn affect domestic banks.

The perfect storm for Australia would be the coincidence of those events.

Australia has some flexibility. Public debt around A$250 billion is a modest 22% of GDP providing flexibility to stimulate the economic. But this capacity can be over estimated. Prior to the GFC, Ireland’s debt levels were modest around 25% of GDP but the need to bailout troubled banks and the collapse of the real estate market led to debt levels increasing rapidly.

Australian interest rates are relatively high (official rates are 4.25%), providing flexibility to cut borrowing costs to buffer any shock. The currency is flexible and a fall in value of the Australian dollar would help cushion any weakness, as was the case in 1997/1998 Asian crisis and again in the GFC.

Your Excellency will also be aware that Australia Treasurer Wayne Swan was recently anointed as the world’s best Finance Minister. His skills may assist in navigating through any crisis, should such an event occur. But it is worth noting that a previous Australian Treasurer received similar accolades in 1984, only to subsequently preside over a deep recession, which “the country had to have”.

Your Excellency has requested my recommendations for whether we should launch our bid for Australia, to be renamed the “Great Southern Province of China”. I believe that we should await developments. We should be able to acquire Australia at a cheaper price in the not too distant future.

Yours truly

The Chinese Envoy

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Your Excellency, I am pleased to present the requested report on the economic outlook for the Great Southern Province of China, currently referred to by the local population as “Australia”. For convenience I will refer to the country by this older name.

Deep dependence on our great nation means Australia’s future is inextricably linked to China. Given that the white European colonisers historically feared the “yellow peril”, the irony of the situation will be not lost on the Politburo. Despite recent engagement with us and the rest of Asia, Australia’s focus seems confused. The country’s head of state remains an octogenarian British Queen. Australia also believes its security is guaranteed by the United States of America with whom it has extensive defence links.

The locals continue to believe in both in its sovereignty and also its bright economic prospects.

Escaping Acronyms…

The popular narrative is that Australia escaped the GFC (global financial crisis – the locals are acronymic) through their own planning.

The country was certainly in a better position to cope with the problems. The Federal government did not have much debt. However, some State governments have significant borrowing. Governments also systematically shifted some of their debt into public private partnerships (“PPP”). Because of the strategic nature of this infrastructure, these projects de facto enjoy the indirect support of governments. Private household debt is also high.

At the start of the crisis, Australian interest rates were relatively high, providing greater flexibility.

But Australia did not escape the crisis unscathed. One major bank lost nearly a billion Aussies (colloquial term for the Australian dollar, the local version of the Renminbi). Investors, including a number of charities and local councils, suffered significant losses from investments in various financial products. A number of highly leveraged infrastructure and commercial real-estate investors failed.

Local banks escaped the problems of their overseas counterparts. The near death experiences in the recession of the early 1990s encouraged them to stay home eschewing overseas adventures and complex financial structures. That said, another year or so, they would not have been so lucky.

The local banking regulator, APRA (Australian Prudential Regulation Authority), and politicians take credit for the banks being relatively unaffected. This is curious given that banking regulations are largely uniform around the world. One can only assume that Australia has superior regulators and politicians to the rest of the world – an example of “Australian exceptionalism”.

In reality, Australia’s swift recovery was driven by large cuts in interest rates, government guarantees for banks, government stimulus and a commodity boom.

The central bank reduced interest rates (from 7.25% per annum to 3.00% per annum). The fall of 4.25% per annum translates into a fall in monthly mortgage repayments of nearly 30 % or around $7,000 per year on a 20-year mortgage of $250,000. A government guarantee on bank deposits and borrowing ensured that financial institutions were insulated from many of the problems.

Government spending minimised the effects on the real economy. Cleverly directed cash transfers to lower income households rapidly stimulated the economy. As part of the ESP (Economic Stimulus Package), government spending on education, housing and infrastructure was also increased. Some of the spending was not well directed. Environmental initiatives, subsidies for home insulation to reduce energy consumption, have proved less than successful.

The long-term benefit of some spending is questionable. Your Excellency, the school across from my office has been refurbished with new gold signage and a brand new fence replacing the aluminium one that was perfectly serviceable. The economic return on this investment is unknown.

The main driver of the recovery has been a commodity boom. This is not a new phenomenon in Australian history. It can be traced back to the famous gold rush of the 19th century when many of our countrymen travelled to Australia in search of their fortunes.

Boom…

Former Prime Minister of Australia Paul Keating, a prominent Sino-phile, recently remarked that Australians were luckier than most races having been give an entire continent. He might have added that it was also remarkably rich in mineral wealth.

Australia has benefited from a substantial increase in demand for and prices for its mineral products. The country is enjoying its best terms of trade (measured as Price of Exports divided by Price of Imports, showing the quantity of imports that can be purchased theoretically from the sale of a fixed amount of exports) in 140 years. Australia’s terms of trade have improved by 42%, just since 2004.

The commodity boom is driven by a sharp increase in demand, supply constraints because of under-investment in mineral production and associated infrastructure and some unexpected effects of the GFC.

In the 1990s, as a result of persistently low prices, mining companies did not invest sufficiently in expanding production capacity or infrastructure, such as transport, refining or processing capacity. The increase in demand from purchasers, particularly emerging economies, quickly created bottlenecks and shortages. This led to sharply higher prices as well as improved volumes for many commodities.

The GFC also boosted investment in commodities. As traditional investments fared poorly (stocks, interest rates and property prices all fell), investors switched to hard assets, like commodities. The underlying logic was that these were real assets with genuine underlying uses rather than the fictions created through financial engineering.

Low interest rates also assisted demand and prices as it cost less than before to buy and hold commodities, which paid no return.

As central banks commenced printing money in an effort to restart growth, investment in commodities increased further as investors sought a hedge against the risk of inflation. Former Board member of the Reserve Bank of Australia, Professor Russell McKibbin suggested that perhaps as much as 40% of the improvement in Australia’s terms of trade was driven by US and European monetary expansion.

As your Excellency knows, one of China’s priorities is to preserve the value of its foreign exchange reserves, currently around US$3.2 trillion. The bulk of these funds are invested in US dollar, Euro and Yen denominated securities. To reduce the risk of losses as these securities lose value due to the actions of governments to devalue the currency against the Renminbi, we have executed your instruction to purchase and stockpile large amounts of strategic commodities.

Boomier…

The economists, who failed to forecast the rise in commodity prices or the GFC, now speak of a “super” boom lasting decades. The boom is more fragile than currently understood.

As growth in China and other emerging countries decelerates, demand for commodities is likely to slow. High prices have encouraged investment in expanding existing mines, building new mines and additional infrastructure as well as exploration. As new capacity and supply comes on stream, there will be pressure on prices.

At your Excellency’s suggestion, we have extensively studied the commodity purchasing strategies of Japan in the 1980s. Based on this analysis, we have actively cultivated new sources of supply of essential commodities. This will enable us to play suppliers off against each other to achieve more favourable prices in the long term. Westerners place great store in contracts, such as long term agreements to purchase minerals at agreed prices. In the Chinese way, these are, at best, statements of intention based on conditions existing at the time of agreement. If conditions change, then we will, like the Japanese, renegotiate the arrangements in our favour.

Australian mining entrepreneurs and politicians point to a massive pipeline of projects, which will underpin Australian prosperity. The Australian Mines and Metals Association estimate that there is A$427 billion of resources in train, including A$146 billion in Liquid Natural Gas alone. A$236 billion of projects are current under way with a further A$191 billion awaiting approval.

There is also A$770 billion of infrastructure spending required to renew and develop Australia’s economic and social infrastructure. This will compete with commodity projects for funding. Chairman of Infrastructure Australia Rod Eddington has warned that financing will not be available for many projects. Infrastructure Australia has identified a smaller list of priority project totalling A$86 billion.

Commodity projects depend on demand for the product and also on the ability to finance it. Deterioration in money market conditions and also problems in the banking system mean that the availability of funding is becoming more restricted and expensive. If previous commodity booms are a guide, then many of these projects may not eventuate.

Sinophilia…

Around 23 % of Australian exports now go to China. The real quantum is higher as some Australian exports to Asia are then re-exported to China.

China currently faces significant challenges. Our two major trading partner – Europe and America – face serious problem which will lead to a slow down in our own exports. Recent statistics, such as the volatile Purchasing Managers Index that measures manufacturing activity, suggest a sharp slowdown. In turn, this will affect our suppliers such as Australia by way of lower demand and also lower prices for commodities.

Unlike 2008, our capacity to respond to any slowdown is reduced. Then, we increased lending through our policy banks to boost demand. In 2009 and 2010, we were able to grow loans by around 30-40% of our GDP to drive growth. Unfortunately, party cadres have not used the money wisely in all cases, resulting in some unproductive investment and bad debts for the banks. The need to support our banks and cover their bad debts will restrict our ability to support the economy.

As your excellency is also aware, around US$ 800 billion or 25% of our US$3.2 trillion in foreign exchange reserves is invested in “risk free” European government bonds. Continued losses in these investments and on investments in US government bonds also further restrict our flexibility. Our economic growth will be slower then widely anticipated.

European Tsunamis…

Australians believe that physical distance from Europe and proximity to China and Asia affords protection from European debt problems.

Despite record terms of trade and high export volumes, Australia continues to run a current account deficit with the rest of the world of around 2-3% of GDP, around US$30-40 billion per year. This must be financed overseas. Sovereign debt problems and the resultant problems in the banking system will affect international money markets for some time to come. Australian borrowers will face reduced availability of funding and increased borrowing cost.

Before the crisis, Australian bank deposits totalled 50-60% of loans made. The difference was funded in wholesale markets, generally from institutional investors.

In 2007, deposits made up around 20% of bank borrowing down from 34% a decade earlier. Domestic wholesale borrowing and foreign wholesale borrowing were 53% and 27% of bank balance sheets. Following the GFC, increases in the cost of overseas funding and regulatory pressure, Australian banks significantly reduced their loan to deposit ratios, with deposits now around 70% of loans. They also reduced their dependence on international borrowings.

Nevertheless, Australian banks face significantly international re-financing pressures, needing around A$80 billion in 2012. Around A$35 billion are AAA rated government guaranteed bonds which will need to be financed without government support, unless the policy changes. In addition, the banks have a further A$28 billion worth of bonds that mature in the domestic markets

In the period before the GFC, Australian banks relied on securitisation to raise cheap funding from overseas. When these markets closed, Australian banks used debt guaranteed by the Federal Government to raise funds. With the guarantee now not available, Australian banks are increasingly using covered bonds to raise funds.

Covered bonds are secured over specified assets such as a pool of mortgages, giving investors priority over depositors. Regulators have limited the quantum of covered bonds permitted to a maximum of 8% of assets, limiting the ability of banks to use this form of financing.

To date, covered bonds have not proved a cheap source of finance for banks, as originally envisaged. Inaugural international issues by ANZ and Wespac have cost around 1.50% over inter-bank rates. In early 2012, the Commonwealth Bank issued at around 1.75% over interbank rates in the domestic markets. Given that the covered bonds enjoyed the highest rating of AAA, the funding cost for Australian banks for unsecured borrowings would be around 2.00-2.50% over inter-bank rates, a sharp increase over the last 6 months. This higher cost will be passed on to customers at some stage.

In testimony to a parliamentary committee, John Laker, the head of APRA, acknowledged the funding challenge. He hoped that improvements in market conditions would allow the Australian banks to access the overseas funding required.

Money Too Tight To Mention …

Facing reduced availability and higher cost of funding, Australian banks may reduce loan volumes and increase rates to customers.

The problems of international banks, especially European banks, previously active in financing local businesses, will compound the problem. These banks are required to increase capital to cover losses, including those on their sovereign bond investment. As they can’t or do not want to issue equity at deeply discounted prices and the limited investor appetite for such issues, the banks may sell assets or reduce lending to raise the required capital. Estimates suggest that these banks could have to sell (up to) $2.5-3.0 trillion in assets, resulting in a sharp contraction in availability of credit.

Before the GFC, European banks provided around 35% of loans to Australian corporations. This has fallen to around 16% in 2011 and is likely to decline further as a result of losses on sovereign bond holdings, pressures on bank capital and increases in US$ funding costs. European banks are actively looking to sell all or a portion of their Australian loan portfolios to alleviate the pressures. They are also cutting back on new lending to Australia clients, focusing on their home markets in Europe.

The reduced participation reflects losses on sovereign bond holdings, pressures on bank capital and increases in US$ funding costs. European banks are actively looking to sell all or a portion of their Australian loan portfolios to alleviate the pressures. They are also cutting back on new lending to Australia clients, focusing on their home markets in Europe.

Given that Australian companies will need to re-finance around A$80 billion of maturing loans in 2012, these pressures are not welcome. The problems of European banks, active in commodity financing, may reduce the supply of credit to the sector by about 25-30%, which would impact Australia’s resources businesses.

The contraction of credit will also affect Australia indirectly. The withdrawal of European banks from Asia and other emerging markets is affecting the ability of companies to finance trade and investment projects. This affects Australian exports.

In 2007, European banks and US banks accounted for 30% and 10% of loan in Asia-Pacific. This has fallen by around half to 15-16% for European banks and 5-6% for US banks. The level of participation is likely to shrink further as a result of the problems of these banks. Troubled French banks account for about 11% of maturing loans in Asia Pacific. It is unlikely that these banks will maintain their level of commitment. Asia-Pacific banks have taken up the slack but are not sizeable enough to fill the gap completely.

Australian companies overseas earnings also face significant pressure due to economic weakness in Europe and its affect on the other markets. A proportion of Australian retirement savings are invested overseas. These will also be affected by the problems in Europe and internationally.

The European crisis has affected Australian public finances. Falls in income and capital gains have reduced tax revenue. The government is cutting expenditure and tightening taxes to offset the reduction in revenue. Falls in income on retirement savings, reduced business investment and general loss of confidence is likely to adversely affect the domestic economy. Australia may not escape the possible European tsunami.

By Rumplestatskin, a professional economist with a broad range of interests and a diverse background in property development, environmental economics research and economic regulation. Cross posted from MacroBusiness.

What few seem to appreciate, either inside or outside of Japan, is just how strong the resulting Japanese recovery from 2002-2008 was. It was the longest unbroken recovery of Japan’s postwar history, and, while not as strong as pre-bubble Japanese performance, was in fact stronger than the growth in comparable economies even when fuelled by their own bubbles.

How on Earth did Japan manage that with their ageing population and zero population growth? Indeed, Japan outperformed Australia in productivity growth since 2000 and very nearly kept pace with real GDP per capita growth.

Australia’s average annual real growth in GDP per capita since 2000 is 1.28%. While I can’t find a direct measure from the Japanese Statistical agency, using the World Bank data collection I can make a comparison of real GDP growth per capita of Australia and Japan using a common methodology. Using these statistics I find that Australia had a mean annual growth in real GDP per person since 2000 of 1.8% while Japan’s was 1.4%.

Australia’s economic performance is terms of productivity growth looks pitiful in comparison to Japan. Average annual Total Factor Productivity growth since 2000 was a shy 0.47% (including a productivity recession in 2004-05) while Japan recorded a strong 1.77% over the same period (data from OECD here).

Of course there is always unemployment to consider.  The graph below shows that on this measure, Australia is also behind Japan (having been in front for just the period 2007-2008).  Some longitudinal data is here.

Recent research also suggests that Japan’s economic track record was unfairly blemished by asset price deflation followed by short recessions in the 1990s (1993, 1997 and 1998). The graph below (from here - including 20yr data set), shows Japan’s solid performance over the past decade, with their longest boom since WWII occurring from 2002-2008.

It appears that turning Japanese is not the tragedy it is made out to be by popular economic commentators. Here’s just one example of the popular perception-

As it turned out, Japanese investors lost nominal wealth equal to three entire years’ GDP. And the economy today hasn’t grown in 17 years or created a single new job.

Nor has the debt been reduced. Instead of permitting the private sector to destroy and pay off its debt, the public sector fought against it…borrowing heavily to try to bring about a recovery. Result: no recovery…and almost exactly the same amount of debt. But while the private sector paid off its debt, the public sector picked up the borrowing. Now it’s the government that owes money all over town.

Detractors cite the massive and growing public debt in Japan as a problem.  But if the debt is denominated in Yen, and interest rates are set near zero, the burden from the debt is minimal. In fact, Modern Monetary theorists might claim public debt in ones own currency is never a burden because government can enact future policys to pay down debt with freshly printed money. I’ll leave that particulars of this option to a future MMT debate.

The above graph confirms that Japanese government debt has replaced a substantial portion of private debt since the early 1990s. In my view this is a justified effort to keep the value of the yen stable by maintaining money in circulation – an approach that could be adopted in Australia in the coming decade, with government debt replacing household debt for the same reason.

One must keep in mind that it is probably not the intention of the Japanese government to ever pay off this debt. I am sure they are happy to continue to progress with a high savings rate, high productivity, high GDP, net exports and almost every other fundamental ingredient for economic success.  Turning Japanese appears to be about fundamental economic prosperity cradled in an unfamiliar monetary framework.

Tips, suggestions, comments and requests to rumplestatskin@gmail.com + follow me on Twitter @rumplestatskin

A quick tutorial from Steve Keen at OccupySydney, via @Ian_Fraser.

Yves here. It’s pretty cool to see an Occupy video from a location I recognize.

By Richard Smith

Our Australian readers may already be familiar with the story of Firepower International. There’s a book out about it, by Gerard Ryle, an investigative reporter at the Sydney Morning Herald; it’s called Firepower: The Most Spectacular Fraud in Australian History. Here’s the blurb, with typos fixed:

A magic pill that cuts fuel consumption and reduces emissions……that was the miracle promised by Tim Johnston’s company, Firepower. Everyone believed him; prime ministers and presidents, doctors and diplomats, business leaders and sporting heroes – even ASIC the corporate watchdog – went along with the myth. Millions of shares were sold to investors, and by 2007, Firepower had become the biggest sporting sponsor in the country. But it was all a sham. In this compelling account, Gerard Ryle demolishes the fairytale, exposing a wobbly financial pyramid and the greatest fraud ever committed in Australia.

You can read a bit more about Firepower at Wikipedia. The amount of money that went for a walk is, by the standards of jaded NC readers at any rate, peanuts, at just AUD100Mn, mostly extracted from Australian private investors. What’s more impressive is the level of official capture that Firepower pulled off: right up to the Australian Prime Minister, John Howard. Oops. Subsidies, grants and, just as handy for your share-kiting scheme, celebrity tie-ups flowed. Yes, that really is the Russell Crowe. Oops again.

Naturally, the Firepower Pill didn’t work:

More recently Consumer Protection has been investigating claims made by Firepower about the Firepower Pill. The Commissioner said the investigation so far had raised some real concerns about the validity of claims made on the packaging of that Firepower made in support of the fuel saving and emission reducing properties of the Firepower Pill.

Product packaging claimed it ‘reduces emissions’, ‘saves on fuel’ and ‘improves fuel economy’.

“As a result of our approach to the company to have these claims substantiated the product has been withdrawn from outlets in Western Australia.

No fraud charges were brought against Tim Johnston, Firepower CEO, much to the disgust of commentators:

It is difficult to exaggerate the scale of the lies, the extent of the damage, the trail of destructive bastardry left behind by Timothy Francis Johnston, who lied to everyone, cheated everyone, and, as you read this, lives in luxury overseas because the Australian authorities are too stupid to charge him with fraud and thus be able to seek his extradition.

Two years later, various authorities are still picking over the mess; and there are still no fraud charges, though there is a private law suit.

So there you have it: a fraudulent Australian company peddling a bogus miracle product while garnering official Government support. And then it collapses, and there’s fallout all over the place.

The similarity with New Image International, last spotted at this blog landing an endorsement from Dr Wayne Mapp, New Zealand Minister of Science (hah), for its bogus colostrum miracle cure, might be enough, all by itself, to cause even the overconfident Dr Mapp a moment’s glimmer of concern.

But if not, there’s more…

Because, you see, New Image is also selling, via its Malaysian subsidiary, and with the help of the same sort of bullshit testimonials that we saw with its colostrum quack cure, a bogus miracle fuel economy enhancer called Power Pill Fe-3. And how do I know it’s bogus? Well, look what it is:

Claims for the Firepower Pill seem remarkably similar to websites around the world that market another product – a product called the Power Pill FE-3.

The Power Pill FE-3 is sold in 70 countries, the websites say, and makes the same claim – that it was tested in Singapore, Hong Kong, Germany and Northern Ireland. It too is said to improve fuel economy, save on maintenance, and be environmentally friendly.

The Power Pill FE-3 is sold by a multi-level marketing company, New Image International, which is listed on the New Zealand stock exchange and mainly deals in health products. Multi-level marketing has been unfairly compared with pyramid selling, but forms of it are used by heavyweights such as Amway and Avon.

New Image claims to have bought the formulation for its Power Pill FE-3 12 years ago from NASA. New Image said it contracts the manufacturing of the pills from a company in the US called US Lubricants, and the pills are packaged for different markets.

In Australia, for instance, the pills are sold as the Power Pill FE-3 through New Image’s Australian subsidiary, another Perth company called Omegatrend.

“Basically Firepower purchase from us,” said New Image’s company secretary, Bill Cunliffe. “The Firepower Pill or the Power Pill [are] one and the same thing. Exactly the same product.”

Five years after the Power Pill first caught the eye of Gerard Ryle, and three and a half years after the Western Australian Department of Commerce debunked the “miracle product” claims, and three years after Firepower went into liquidation, the New Zealand authorities are quite content for New Image to keep on hawking the same bogus fuel economy product. But only offshore: evidently there is less chance that they will have heard of Firepower up in Malaysia. Dumping products that are known to be bogus, on great big neighbouring economies, via multilevel marketing schemes, is certainly aggressively enterprising, but, in the longer term, it may not be the international trade development coup that the New Zealand government believes it to be.

After Firepower, the Sydney Morning Herald’s opinion guy had this to say:

Perhaps “inert” is the best word to describe the collective ineffectiveness of the Australian state and federal regulatory authorities which allowed Johnston to run rampant for the past 14 years, stealing at least $100 million in the process. Or bovine. Or lazy. Or complicit. Take your pick.

I wonder what epithets he’d choose for the New Zealand authorities, given the extra warning they have had, and ignored.

This really is going to get embarrassing.

My last pop at New Zealand’s regulatory set-up mentioned New Image International, the company that uses multi-level marketing techniques to sell Colostrum as a miracle cure. The New Image product pitch is a generic hoax, as explained last time out:

…major warning signs include:

Claims based on patient testimonials. Patients want to believe so much that a treatment is helping them that they can convince themselves that it has. They may even have experienced some recovery unrelated to the treatment. Unless there has been carefully evaluated clinical research it is very difficult to know what is a true effect of the treatment and what you can expect.

Multiple diseases treated with the same cells. Unless the diseases are related, such as all being diseases of the blood, different diseases, such as Parkinson’s disease and heart disease, would be expected to have very different treatments. Also, you want to be treated by a doctor that is a specialist in your disease.

Zooming in on the right hand bottom corner of New Image’s web site, we find both warning signs straight away: multiple diseases treated with colostrum, plus client testimonials. By way of unexpected bonus horror, they are most unfortunately juxtaposed with an endorsement from the New Zealand Science Minister:

And if you click on the image of Dr Wayne Mapp, you land here, and yes, that really is the NZ science minister endorsing New Image. So there he sits, prating away, just under a whole bunch of testimonials unscientifically ascribing all manner of different miracle cure powers to colostrum.

The Multiple Sclerosis ‘cure’ is a particularly nasty pitch. The UK’s Multiple Sclerosis society has this to say about complementary and alternative treatments (CAMs) for MS:

…an area that’s poorly researched, often because these therapies are rarely suited to traditional research techniques. There isn’t much evidence to show how effective or safe medicines are.

Many studies only include a few people, or aren’t conclusive. If a therapy is found definitively to work, it might no longer be known as complementary or alternative, and join mainstream medicine as a proven treatment.

However, many people who use CAMs say that they make them feel better, so it’s often a case of weighing up things like:

• cost – bearing in mind how you’ll feel if the therapy is very expensive and doesn’t make a difference
• how effective the treatment is (efficacy)
• is it likely to make you feel better
• safety – could it make your MS worse or interact with other medications

…
Watch out for products that make big promises, cost a lot, say they are scientifically proven or can ‘cure MS’. Paying for these treatments or therapies can be a waste of money and leave you disappointed, or perhaps even make things worse.

As mentioned in the last post on this subject, over in Oz, there’s a warning sign of a different kind: the Adult Stem Cell Foundation, which appears to be a scam, dressed up as a charity, that claims some sort of link to New Image. For some reason, it has two very similar web sites, this one, and this one. But goodness knows what true nature of the link is between the Adult Stem Cell Foundation and New Image. Are the Adult Stem Cell Foundation just recruiters for New Image? Do they have any relation at all? The Adult Stem Cell Foundation portrays New Image as one of its benefactors. Certainly, many sites pushing New Image products think the Adult Stem Cell Foundation is a pretty important reference for New Image:

http://www.thecolostrumshop.com/new-image-colostrum-stem-cell-enhancing-products.html
http://colostrumnewzealand.blogspot.com/2009/08/adult-stem-cells.html
http://colostrumforme.blogspot.com/2009/10/adult-stem-cell-foundation.html
http://www.colostrum-immunity.com/colostem.html
http://stem-cells-and-health.blogspot.com/
http://colostrumandstemcells.com/links_9.html

And then, we have this site, http://www.newimageaustralia.co.nz/Links.html, which looks as if it’s a New Image site, except that its livery and logo is all wrong, and anyway the proper New Image Australia has contact details that are actually in Australia.

And then, trim the “links” part off the spurious New Image site and you are redirected to http://www.colostrum-immunity.com/, which is in our list above, and has the same look’n'feel as the Adult Stem Cell Foundation‘s site: same designer (same client?).

Whole lotta spoofing going on!

The relationship between New Image and the Adult Stem Cell Foundation really needs to be clarified. Do New Image realise that the ASCF people are recruiting people to market New Image’s products, or at least, pretending to do so? Do New Image realise that the ASCF is leeching off New Image’s corporate image? Do New Image realise that the ASCF is a fraud? Do New Image care?

And if they do realise it, and care, what are they, and the NZ authorities, going to do about it, exactly? This was how the the NZ Herald’s reported Commerce Minister Simon Power’s response to the outbreak of overseas financial fraud that exploited  New Zealand’s lax and outdated company law: “NZ unable to help international agencies combat fraud: Simon Power“. I wonder if NZ will suddenly rediscover that ability, if it turns out that the boot is on the other foot, and they are depending on Oz to combat fraudulent misuse of New Image’s marketing.

And of course if the NZ authorities were to intervene, they would find themselves in the magnificently incoherent position of defending a supposedly legitimate local peddler of hoax health products (New Image) from a fraudulent overseas peddler of hoax health products (the ASCF).

Which explains why you don’t want your Science Minister running around puffing fake cures, and why a spot of international fraud-fighting cooperation is a good idea. You can save all sorts of embarrassment.

By Richard Smith

To start in a surprising but appropriate place, here are four video segments about stem cell heath scams from CBS, last year. If you don’t have time for 20 minutes of video, then at least look at this (just over a minute), which should give the basic idea.

These scams are loathsome, preying on the old, the sick and the desperate.

Back in 2008, the UK’s New Scientist magazine had a helpful article about what it called “stem-cell scams”:

If you or a loved one is desperately ill and considering treatment with stem cells, here’s a document you definitely should read: a newly released guide (pdf) from the International Society for Stem Cell Research to help patients negotiate the minefield of clinics claiming to be able to cure all manner of ills.

Section 11 of that PDF (“What should I be cautious about if I am considering a stem cell therapy?”) gives a list of red flags:

This is not a comprehensive list but some major warning signs include:

Claims based on patient testimonials. Patients want to believe so much that a treatment is helping them that they can convince themselves that it has. They may even have experienced some recovery unrelated to the treatment. Unless there has been carefully evaluated clinical research it is very difficult to know what is a true effect of the treatment and what you can expect.

Multiple diseases treated with the same cells. Unless the diseases are related, such as all being diseases of the blood, different diseases, such as Parkinson’s disease and heart disease, would be expected to have very different treatments. Also, you want to be treated by a doctor that is a specialist in your disease.

The source of the cells or how the treatment will be done is not clearly documented. This should be clearly explained to you in a treatment consent form (see question 8). In addition, there should be a ‘protocol’ that outlines the treatment in detail to the medical practitioner. The protocol is the ‘operating manual’ for the procedure. While it may not be made available to you automatically, you should be able to request this. For a clinical trial or experimental treatment, protocols should have been reviewed for scientific merit by independent experts and approved by an ethics committee to ensure that the rights and well-being of the participants will be respected. Ask who has approved this protocol and when the approval expires.

Claims there is no risk. There is always risk involved with treatment. Information about the possible risks should be available from preclinical or earlier clinical research.

Now it’s time to jump to the Antipodes, where stem cell cure promotion is rife, and work through that list.

Claims based on client testimonials Let’s start with patient testimonials. Here is the rivetting story of Shauna MacDonald, via http://stemcellenhancingproducts.co.nz:

Shauna is a beautiful 53 year young mother of two from the Gold Coast in Australia.

Since 1992, the day her youngest daughter turned two, Shauna was diagnosed with a double whammy: a brain tumour and Hashimoto’s Disease.

After a complicated and dangerous operation to remove the tumour, Shauna recovered, only to be hit soon after with another autoimmune disease, Multiple Sclerosis.

For the last dozen or so years, Shauna has battled to stave off the devastating effects of MS.

By early 2009, the symptoms were at their worst…Shauna was in a wheelchair, living in what MS people call a ‘mental fog’ and her whole body was systematically shutting down.  Her eyesight had deteriorated to its lowest ever level, the whole right side of Shauna’s face had  shut down, her taste was gone and her throat was paralysed on one side.  She was severely unbalanced physically and the mental strain was showing its long-term effects.

Then came a simple phone that changed her life.

Oh, do tell…

Shauna was contacted by long-time friend Bruce Lahey, Honorary Director of the Adult Stem Cell Foundation who encouraged her to try stem cell enhancing products that the foundation had sourced.

Within four days, Shauna’s eyesight had stabilised and for the first time in 15 years Shauna was seeing in ‘single vision’ as opposed to seeing ‘double’. Her eyesight progressively improved to the point where her prescription glasses were now of no use and ‘fine print’ had come into focus.  It was nothing short of Miraculous!

Now seeing better and more clearly, Shauna’s world changed. She began to notice small things at first, then major changes followed. She seemed to be ‘switching back on’ and was ‘with it’ more of each day. Her speech improved drastically and her cognitive processes began to improve. Seeing and thinking more clearly led to walking without wobbling.

Shauna’s whole family has shared in the joy of having Shauna back with us! She is now walking everyday with her husband Neil and their dogs. (This confused the dogs…they were so used to her being in the wheelchair) She is cooking again and breaking out the sewing gear…both of which had been virtually eliminated from Shauna’s life because she had lost dexterity strength In her hands and poor eyesight.

To say we as a family are delighted is a gross understatement!

I should think it is. Shauna seems to crop up all over the place, by the way: written up by naff web newspapers in Queensland, and by a fluffhead “naturopath/journalist” in a New Zealand blog. It’s almost as if there was a bit of a PR campaign underway…

Anyway, Shauna’s story is definitely a testimonial.

Multiple diseases treated with the same cells. At Colostrum Immunity we find the harrowing story of Janelle, who seems to be bent on self destruction. But there’s no need to stop with inclusion body myopathy; in their testimonials section we find a remarkable list of sometimes misspelt afflictions and symptoms that have been cured or at least alleviated by stem cells:

• Parkinson’s symptoms
• fibromayalgia pain
• Chrons disease
• Irritable Bowel Syndrome
• Stomach problems
• Headaches
• Endometriosis
• Inflammation
• Multiple sclerosis
• and so on. That will do for ‘multiple diseases’, I think.

The source of the cells or how the treatment will be done is not clearly documented. These NZ sites have pretty much skipped that part: they just want you to order the “meds” from the sites! Here is Stem Cell Enhancing Products’ order form , and here is Colostrum Immunity’s (with an email address too).

Claims there is no risk. In fact, neither of these sites is claiming to be performing clinical trials at all. They are just flogging the pills! So neither site has anything whatsoever to say about risks.

This stinks. But there are a couple of leads to follow. Both Stem Cell Enhancing Products and Colostrum Immunity web sites carry the following text in their banners: “Our Products are endorsed by the Adult Stem Cell Foundation”. We have a name, Bruce Lahey, to follow up on, too. While we’re at it, let’s take a note of the “New Image” branding from that email address admin@newimageaustralia.co.nz and see if we spot it again.

Well the Adult Stem Cell Foundation, (web site), of Gold Coast, Queensland, isn’t exactly hiding away, and Bruce Lahey is its Executive Director. The Australian tax office seems to have fallen for all this baloney, and given them a tax break.

I haven’t checked whether Adult Stem Cell Foundation really is a registered charity in Queensland. I didn’t spot a ref number, and the Queensland Charities Register apparently requires you to know everything about a charity (including its charity ref number), before you can find any info out about it (ahem, info such as its charity ref number!). I assume, though, that if the Tax Office fell for it, the Charities registrar did too, and sooner. Or both registrations are fake, though I doubt it.

At any rate, this seems to be an Australian charity that operates as an endorser for New Zealand scams. Ugly. I think the Queensland Charities Register and the Australian tax authorities might have some explaining to do. And I’m sure the Australian Competition and Consumer Commission (ACCC), who run the SCAM Watch site over there, ought to be interested too.

Finally, let’s have a quick look for New Image. First we find this, which might give some idea of the intended scope of the operation. Their NZ contact page leads us to New Image International Limited at 19 Mahunga Drive, Mangere Bridge, PO Box 58 460 Botany, Manukau 2163, New Zealand. Looking up the address 19 Mahunga Drive at NZ Companies Register we find this lot. Amongst them, New Image Group seems to be the master, with its own web site and, get this, its own listing on the NZ exchange.

It’s a pity the NZ listing authorities didn’t read New Scientist before they let that one through.

There do seem to be some actual medical practitioners peddling this stuff, too, so the New Zealand and Australian medical regulators, if there are any, have a busy time to come.

You can get an idea of what the US drug regulator, the FDA, thinks of stem cell treatment peddlers on its home turf from this recent investigation (as you will see, the detail of the ‘treatments’ is even worse than what is going on in NZ, actually):

A Las Vegas man who purports to be a retired physician and allegedly caused over 100 chronically ill patients to undergo experimental stem cell implant procedures and investors to pay him large amounts of money, has been indicted on federal mail and wire fraud charges, announced Daniel G. Bogden, United States Attorney for the District of Nevada
…
According to the Indictment, from about January 2005 to the present, Sapse allegedly devised a scheme to defraud patients and investors by claiming to have developed a novel medical procedure involving “stem cells” that would cure or improve certain severe, incurable diseases, such as multiple sclerosis and cerebral palsy. Sapse purports to be a retired foreign physician, but Sapse has never been licensed by the State of Nevada, or any other state, to practice medicine. Sapse formed Stem Cell Pharma Inc., a Nevada corporation, in May 2005 allegedly to create the false impression that he operated a legitimate pharmaceutical company. Sapse also controlled several websites and issued dozens of “press releases,” which promoted a novel procedure that Sapse claimed to have developed to extract stem cells from human placentas. By misrepresenting his credentials, the nature of his treatment, the source of his “stem cells,” and the adverse effects suffered by previous patients, Sapse convinced chronically ill patients to undergo experimental implant procedures and convinced investors to pay him large amounts of money without knowing the short- or long-term effects of the implant procedure he was promoting.

As we see, New Zealand’s extra twist on this is that in NZ you don’t even have to pretend to be a doctor…

In the same way that NZ company incorporation laws facilitate tax fraud in Russia, illegal arms deals, and $400Bn moneylaundering by Wachovia, New Zealand’s business and medical regulation seems to permit end-runs of the FDA’s protections against fraudulent treatment.

Or perhaps the NZ authorities are just waking from a long sleep and starting to catch up. “NZ unable to help international agencies combat fraud”, says the headline on a recent NZ Herald piece on financial scams. That sounds gormless: sort your laws out so you can help, then.

The NZ authorities should sort the quack cures out too, otherwise one might as well add the FDA to the already long list of overseas regulators and agencies that have cause to get mighty irritated with New Zealand’s regulatory environment.

As I mentioned in a Labor Day post, I grew up in an America where manufacturing was still the backbone of the economy. I may be more aware of that than most in my age group by virtue of spending much of my childhood in small towns where the local paper mill was the biggest employer. Similarly, when I went to business school, many of my classmates had worked for major manufacturing firms, and the ones who had been in finance (for the most part, two year credit officer programs at major banks) weren’t seen as having better backgrounds than their classmates.

While as other economies developed, the US share of global production was bound to decline, I’m disturbed by the assumption that labor costs are the sole determinant of success. My contacts is that it is an article of faith in Washington is that the US can be competitive only in finance (and presumably in commodities businesses like agriculture). This story line is terribly convenient, since it gives diseased, greedy, and incompetent American managers and policymakers a free pass.

The reason that the attitudes of policymakers matter is that, contrary to popular belief, we do not live in a mythical world of “free trade” but one of managed trade. Other advanced economies have either a formal or informal trade/economic strategy and seem to do better with it than we do? Australia, for instance, has had one of the best growth stories in the new millennium, and that was true even before it got an extra boost from the commodities boom. It also has a more clearly articulated competitive priorities than the US does. For instance, Australia’s Commonwealth Scientific and Industrial Research Organisation funds applied research in ten areas, such as Climate Adaptation, Energy, Preventative Health, and Sustainable Agriculture. It’s hard to say definitively how much of a difference these efforts make, but I’d hazard that they are meaningful. Australia’s position in global wine production has been won on its wine technology, where it is a world leader, and not its terrior.

Another example comes today in a story in the New York Times by Louis Uchitelle “Is Manufacturing Falling Off the Radar?” I have to say, it’s late to be asking this question. The story is framed around the Veneer Corporation, a company that makes industrial machinery. Verneer would prefer to manufacture in the US, but its owners have had to move some of their production to China. The reason? Not cheaper labor, but government subsidies (and formal or informal local content requirements):

Vermeer earns nearly one-third of its annual revenue from exports — counting on the United States government for trade agreements, favorable currency arrangements and even white-knuckle diplomacy to make exports happen. In China, that wasn’t enough. For several years, it had been running into competition from Chinese manufacturers of horizontal drills, supported by their government in the form of free land, tax breaks, cheap credit and other subsidies. With its share of the market falling precipitously, Vermeer in 2008 opened a plant in Beijing, taking a Chinese partner and drawing help for the venture from the Chinese…

A tipping point may already have been reached. Manufacturing’s contribution to gross domestic product — roughly equivalent to national income — has declined to just 11.7 percent last year from as much as 28 percent in the 1950s…

It isn’t that fewer autos or plastics or steel products or electronics are coming out of American factories… But other sectors of the economy have grown faster in recent decades, and that dynamic has reduced manufacturing’s share.

In particular, the finance, insurance and real estate sectors — driven especially by investment banking and home sales — rose from less than 12 percent of G.D.P. in the mid-1950s to more than 20 percent before the onset of the financial crisis, and even now remain nearly that high. In China, in sharp contrast, manufacturing’s share of national output is more than 25 percent. While the United States has a far larger economy — $14 trillion in G.D.P. versus China’s $6 trillion — it has less factory production…

One reason may be that the nation’s political leaders don’t see manufacturing as a problem. Put another way, they don’t necessarily regard making an engine, a computer or even a pair of scissors as having as much value as investment banking or retailing or a useful Web site.

“You have a culture within the elites of both political parties that says manufacturing does not matter, and industrial policy will do more harm than good,” says Ronil Hira, an assistant professor of public policy at the Rochester Institute of Technology.

Why do those at the top of the food chain not like manufacturing? Let us count the reasons. It’s physical. Plants are located where land is cheap. That usually means in the boonies. Powerful people do not hang out in the boonies. Production facilities are noisy, and often dirty and dangerous (my father knew people who were killed or had limbs ripped off in paper mills). Most of the employees are blue collar workers, while to get in the door at McKinsey, you had to be smart and well educated (even the secretarial jobs required high caliber types).

Some readers may react viscerally to the idea of having what amounts to industrial policy. Wake up and smell the coffee, we have it now, by default. As we have discussed, the financial services industry is so heavily subsidized as to not be credibly called private enterprise, save for its governance and compensation structures. Arms merchants benefit not only from government funded research and development, but also from the very long product lives assured by government contracts. Look at the subsidies big Pharma enjoys (and consider: the NIH is the biggest but far from the only source of government R&D dollars. The other big players are National Science Foundation, the National Aeronautics and Space Administration, the Environmental Protection Agency, the Veterans Administration, and other units in the Departments of Energy, Commerce, Defense, and Health and Human Services). While the chart is a tad dated, the basic picture has not changed since then:

The US has hesitated to push back within the WTO framework. It filed cases against China in certain areas (such as tires) only to have China file tit for tat cases against the US (such as poultry). There was a careful effort to keep the dollar amounts at issue in rough correspondence. The Department of Commerce at first seemed interested in, then declined to file cases against Chinese and Indonesian coated paper manufacturers (the particulars were different in each country, but the program was the same: large scale subsidies). Before Commerce made its decision, some source speculated that Obama would turn his back on the unions who were backing this suit rather than ruffle Wen Jiabao, who he was due to see at an upcoming G20 meeting.

There are no easy solutions to over 20 years of abandoning manufacturing to pursue a “knowledge economy” when there was no reason to treat this as an either/or decision. But misdiagnosis, via blaming the foot soldiers for the failings of the generals, is certain to keep the US from coming up with better courses of action.

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

I have been reliably informed by Houses & Holes that we are “all going to die”, and rather sooner than we all imagined. Something to do with the economic meltdown in Europe and America, I believe. While I have no reason to doubt such potent insight — after all, death is the best one way bet available — I think it could do with a little refining. What is dying is the industrial era in the developed world, a trend that is obscured by the fact that the developing world is industrialising at an accelerating pace. Australia is caught in the middle. It provides the raw materials to rapidly industrialising nations, but is itself entering a post-industrial era. So the nation both is, and is not, in a mess, buffeted by contrary forces.

Over the last 15-20 years we have witnessed many symptoms of this death in developed nations. There was the death of Japanese mercantilism, which began on the dot of the 1990s and has worsened ever since. It is only because Japan is hermetically sealed, owes all its money to itself, that it has not spread further.

The dot.com boom, which was largely about monetising existing forms of commerce or creating transactions from what had previously been non-economic behaviour (social networking, for instance) rose and fell. Then we have had the mother of all death throes in the bizarre financialisation of Western economies, a debt driven exercise in making money out of air or algorithms. The latest iteration is high frequency trading, and, like derivatives such as CDOs and CDSs it, too, shall fail. To think it is alright to make finance into an infinite regress is so irresponsible it can only be because there are no other, normal ways of creating wealth. A death throe, in other words.

The same applies to Europe’s stagnation and hopelessly high unemployment. It is a society that has run out of ideas. Meanwhile, America seems to have only one idea: reward the fabulously wealthy at the expense of the middle class. In other words, fight over the deck chairs as the Titanic dies.

This is why “politics” is starting to assume centre stage in investment analysis. For some reason, governments, which have been demonised as useless for a quarter of a century, are now expected to fix things. They will not, because the problem is about a lack of creating the new, something governments have little or no influence over. About four fifths of so called “new products” are refinements of old products. Tyler Cowan is calling it the “great stagnation“. Yes, there is growth in areas like health care, but that hardly parallels the invention of the car, or fridges or any of the other big changes of the first half of the twentieth century. Most things that are new are just refinements – a mobile phone is just a phone made mobile, a microwave oven is just a quicker oven — or an enablement of something old: the digital revolution is mostly an enabler of existing, non digital forms of commerce or functions.

The most telling sign of death is the loss of a cost of capital in the developed world, which kills investment. American companies in particular are sitting on piles of cash, but they do not want to invest because they do not see the growth in developed markets (especially as the middle classes are being eviscerated). They can see hope in the emerging markets, but the middle classes are still emerging there.

It all adds up to gloom. Or does it? I do not believe so. Growth, it must be remembered, is transactions, not necessarily consumption of resources (something the Greens, with their Arcadian dreams do not understand). There is no doubt at all that what needs to be the defining characteristic of post-industrial society is a reduction of both the consumption of finite resources and a reduction of pollution. This can, and should, lead to initiatives as profound as the invention of the mass produced automobile or the aeroplane. Which in turn will lead to new growth.

There are many potential technologies; there is no lack of invention. But there is a lack of capital, because capital mostly prefers the industrial and the familiar. Capital is losing all those certainties. The catch is that the changes need to be system wide, and that is where governments will really matter. Given that governments have concentrated on getting elected by creating fear, shifting to showing vision will be an enormous challenge. But in the end, investing in the post-industrial world is the only way to go. As Michael Spence pointed out in the Financial Review this week, what is happening is the end of a cycle that is about a century old:

In the 100-year view of Nobel laureate economist Michael Spence, the current global economic woes are linked to the slow and painful adaptation of the developed world to the growing economic clout of China, India, Brazil and other developing economies.

Spence says it has not yet been fully recognised that the economic malaise is not just a cyclical downturn caused by excess debt, over-consumption, low interest rates and lax regulation, but part of a long-term structural change brought about by globalisation and technology, which are shifting the comparative advantage in a range of industries and services towards the developing world.

Europe, the US and other advanced economies must make long-term reforms to labour markets and boost productivity as well as encourage public and private sector investment in infrastructure, education, skills and training to remove growth constraints. Short-term fixes, such as Europe’s bailout packages and the US Federal Reserve’s promises of low interest rates for longer, can do little more than “kick the can down the road”, he says.

As chairman of the World Bank Commission on Growth and Development since 2006, Spence is uniquely informed on the subject of growth. In his new book The Next Convergence, he judges that it will take until mid-century for developing economies, which represent 60 per cent of the world’s population, to reach advanced status.

Further growth of developing economies could bring about more unemployment in developed economies unless they restructure, he says, citing Germany as a model between 2000 and 2005 when it loosened labour markets, committed to high-value manufacturing and accepted the trade-off between high income and employment. The weakness in global economic and political leadership in the developed world is “a real puzzle”.

In the US “people want things they aren’t prepared to pay for. There’s a fair amount of ideology – maybe people think those are real solutions when they are not”.

In contrast, Spence says, developing countries in general have “evolved a kind of pragmatic, persistent, problem-solving model. They’ve got some reasonable balance between government on the one hand and the private sector on the other”.

But, he says, we’ve entered a “high risk mode”. If the advanced countries can keep growing and avoid another recession, China and the developing world can keep expanding apace.

“But they can’t sustain enough demand to withstand a [US and European] downturn” he says. That would slow everyone, including China, Brazil, India and Australia.

Australia must remember “that natural resource wealth is volatile and impermanent”, Spence says. We should be investing “a fair amount” of the income from natural resources wealth abroad – thus mitigating the effects of the Dutch disease where a high exchange rate hollows out the rest of the economy.

Tolstoy said that happy families are all alike, and it may be true of businesses as well. But while Tolstoy no doubt had an an image of settled domesticity in mind, the 21st century corporate version of happiness is much less appealing.

I thought US-based readers would find this extract from a recent post in the Australian blog MacroBusiness terribly familiar. While America’s extortionate class par none is the too big to fail financial firms, in Australia they have enough of a tradition of regulation that the banks are merely coddled as opposed to completely spoiled (they also never had the opportunity to engage in the wreck-the-economy-for-fun-and-profit exercise we had here that put them firmly in control).

Down under, the cohort that is now at the top of the economic pecking order is the miners. Notice the similarities to behavior we’ve seen over and over again here. From MacroBusiness:

If there’s one thing that bugs me about the Australian economy and business it is rent-seeking. It is that practice of big businesses wielding political power for shareholder and personal gain. It is a doubly toxic pursuit because it not only means that Australians often have to pay extortionate prices for goods but it retards productivity for the economy overall, meaning we all get richer more slowly (except for the protected few).

But, as I have before, I’m going to make one exception to this frustration, for manufacturing.

As we know, manufacturing has been targeted for extermination by the macroeconomic high priests of the RBA and Treasury, to free up resources for the mining boom. To my mind, this is an unacceptable and unnecessary risk for the national economy involving an enormous punt on an untried and untested political and economic model in China. Just why we should allow our export mix to tip completely towards commodities is beyond me.

And so, today, I am going to offer some free advice to the Australian Industry Group, the manufacturers peak body and lobby about how to begin a rent-seeking campaign of their own.

First, however, we must diagnose the problem. And a couple of stories in The Australian do a good job of that this morning. Let’s contrast the rent-seeking maestros, Australian miners, with their manufacturing brethren. First, the miners:

With gold trading at new records, above $US1600 an ounce, and with new projects rushing to come into production, you’d expect to hear few complaints in the booming West Australian goldmining town of Kalgoorlie. But on the opening day of the Diggers & Dealers talkfest yesterday, it became quickly clear that hostility towards the Gillard government’s mining and carbon taxes would dominate discussion among more than 2200 delegates who flew in from around Australia and the world.

Diggers chairman Barry Eldridge set the tone within the first five minutes when he launched a blistering attack on the “extreme” and “superficial” policies of Labor and the Greens, during his opening address. Even Tony Abbott wasn’t spared, with Mr Eldridge predicting a future Coalition government would be unlikely to axe the mining tax, as promised, because it would be reluctant to forsake such a big revenue hit.

In his presentation, Integra Mining chief executive Chris Cairns paraphrased former Beatle Ringo Starr when he said: “Everything the Gillard government touches turns to crap.”

But the biggest talking point among delegates yesterday was the large neon sign outside Kalgoorlie’s historic Palace Hotel that reads: “Carbon tax. Mining tax. Useless Independents. Gillard & Co have to go — ASAP.” The scrolling sign just below the top balcony of the famed watering hole is the most watched in Kalgoorlie as it has long displayed in bright-red print the gold price that has determined the town’s fortunes for the past 120 years.

This is perfect execution. Here we have an industry sector enjoying the greatest boom conditions for 150 years, yet there is NO acknowledgement of the fact. Note the toxic blend of anti-government rhetoric, gutter slurs, universal righteousness, a strong sense of building conflict and division and, above all, a national media brand pumping it out with gusto.

I wonder if this type of posturing originates from a single source, like Roger Ailes, or whether it is an independent but parallel development of a pathology, say a variant of acquired situational narcissism, that is finding fertile ground all over the world now that neoliberal values are widely accepted by Western governments.

The truly influential used to whisper; the Rothschilds, who could topple governments, took great care not to play up their power. The contemporary fad of corporate tantrum-throwing reminds me of the way feline combattants hiss and spit and puff themselves up to look bigger and more intimidating than they are. But since I have an 11 pound Abyssinian who once chased two adult men out of an office, I have to acknowledge that aggressive bluffs are too often effective.

Even if you don’t get all the political and business references, I suspect you’ll appreciate this video.

Hat tip readers hum and Hubert:

Yves here. This long and informative post on the pending train wreck in the Australian financial system might seem to be too narrow a topic for most Naked Capitalism readers, but it makes for an important object lesson. Australia managed to come out of the global financial crisis largely unscathed because its banks did not swill down toxic assets from the US (chump quasi retail investors were another matter) and it benefitted from the commodities boom.

Nevertheless, one might think its bank regulators might see what happened abroad as a cautionary tale. Mortgage debt took center stage in the crisis, and Australia is in the throes of a serious housing bubble. Yet as this post describes, the regulators seem asleep at the switch as to one of its major drivers.

By Deep T., a senior banking insider who is fed up with his colleague’s reliance on public support. Cross posted from MacroBusiness.

Previously I have posted on how the major banks recycle capital in The Capital Rort. I want to extend that subject by showing how mortgage ‘rehypothecation’ in Australia has led to the massive expansion in liquidity available to Australian banks which is at the root of the mortgage affordability issues in Australia and has put Australia’s banking system on the unstoppable path to collapse or government bailout.

What is rehypothecation? From “hypothecate”- to pledge collateral. Rehypothecation is the reuse or pledging of collateral received from one transaction in an entirely unrelated transaction. For more on the definition try this interview with Gary Gorton, Yale University finance economist.

To understand how rehypothecation applies to the Australian mortgage markets, I’m going to start with where the money comes from to fund our oversized mortgages and why? But to warn you, what I’m about to describe is not pure rehypothecation because the mortgage collateral is not directly passed to the lender but it is used to prop up the bank’s balance sheet, the strength of which the lender relies on. So the ultimate effect can be the same as rehypothecation.

I have updated to Dec 2010 a previous graph I’ve used comparing residential loan, offshore borrowings and deposit growth:

The graph represents a clear view of how offshore borrowings have funded Australia’s growth in residential mortgages both in size and number. However, there seems to be a puzzling change of trend in the last few months with deposits increasing at a greater rate and offshore borrowings decreasing. Maybe it’s not so puzzling. The following is the RBA’s definition of Deposits and Non-Resident Liabilities:

‘Resident liabilities – deposits’ include: transaction and non-transaction deposit accounts; and certificates of deposit. From April 2002, this item includes both Australian dollar- and foreign currency-denominated (AUD equivalent) deposits. Prior to that date foreign currency-denominated (AUD equivalent) deposits are included in ‘resident liabilities – other liabilities’. Certificates of deposit relate to both residents and non-residents. ‘Non-resident liabilities – total’ refers to total liabilities on the Australian books of banks that are due to non-residents……

I have highlighted the relevant parts of the definition. I did a bit of a double take when I saw this. In simple terms, loans or liabilities from non-residents appear in both deposits and non-resident liabilities as defined by the RBA. I do not see this as any action that’s deliberately trying to deceive but rather a reflection of the poor information produced by the banks and reported to APRA. Does anyone really know how much non-residents have lent to Australian banks when non-residents in the deposit base are not identified?

My proposition based on the above graphs is that a considerable amount of what previously was properly defined non-resident liabilities have been transferred to deposits and that overall bank’s liabilities to non-residents continues its upward trend. This transfer is to the benefit of the offshore lenders but at Australia’s cost and risk. I have three reasons for my proposition.

Firstly, deposit rates are at all time high rates relative to the cash rate and bank bills. Please take a look at this site which gives a good summary of bank deposit rates across the board. With the CBA offering a 1 year deposit rate of 6.1%, would this tempt any non-resident investor? Maybe Bill Gross from PIMCO, the world’s largest fund manager, provides the definitive answer to that question when advising that investor’s portfolios perhaps should be:

…replaced with more attractive alternatives both from a risk and a reward standpoint. It is still possible to produce 4–5% returns from a conservatively positioned bond portfolio – you just have to do it with a different mix of global assets.

I think that’s one for the affirmative, Matilda.

Secondly, the increase in the strength of the A$ across most major currencies did not come about because of current account surpluses, we still have deficits. Global punters have been buying A$ and lending those A$s to Australia. Why they are doing this is not the point. The point is that if you buy A$s it must be used to buy assets or equities or as a loan or deposit. I’m betting on the later with the clear support of Mr Gross. For the moment anyway, I’m also sure that Mr Gross or any other possible investor does not care one iota that imposing this strength on the $A is slowly strangling Australia’s manufacturing, tourism and overseas student education sectors.

Thirdly and by no means the least of the reasons, is the credit risk of certificates of deposit. If an Australian ADI/Bank collapses, deposits are generally believed to rank ahead of other wholesale lending for repayment. That’s why deposit interest rates are considerably lower than other types of securities issued by banks. What the actual credit ranking is very complex? See for yourself.

Regardless, in an environment where in effect the Australian government has shown their willingness to step in and support our banks come what may, as a deposit holder in a major Australian bank, your risk is as good as the Commonwealth of Australia itself. Forget the Banking Act, the market believes that the Australian Government will not let any bank default on deposits but just may let defaults occur on wholesale funding. At over 6% for 12 months, I’m again betting that our Mr Gross thinks that’s great value “from a risk and a reward standpoint.”

In summary, because of deposit interest rates, FX strength of A$ and credit risk, offshore funds continue to pour into Australian banks but in a different and riskier form for Australians. Whilst I don’t have enough data, this is a provable proposition once data becomes available.

The last point on credit risk is what links me back to the continual rehypothication of Australian mortgages by the Aussie major banks. The offshore investors who are pouring money into Australia on an ever increasing basis do not want to worry about credit. It’s not their bailiwick. Absolute returns over the next year or so relative to the alternative global investment are what they are after. These money jockeys will plow funds into Aussie banks so long as relative returns continue and the perceived risk is not worth worrying about.

So for risk oversight they’re relying on APRA and for credit opinions on the rating agencies. I gotta tell you at this point my friends, I’m sure glad I’m not in either of those shoes. Relying on continual mortgage rehypothication to prop up the perceived credit risk and support capital levels (aka haircut) of the Australian banks is a very dangerous game.

It is a truism that any financial system that can continue to increase borrowings to meet liquidity requirements will not fail. The question is when or if the “continue” stops. My proposition for Australia is that it’s a “when” due to excessively aggressive mortgage rehypothication. Don’t get me wrong, like securitization, rehypothication is a valuable financial tool, so how did things get out of control?

In my post, “The Capital Rort”, I explained how the bankers were rorting the system to fill their fat wallets by reducing capital allocated to each mortgage as property values rise. Now we need to take that analysis to another level, to show how they’ve actually put Australia’s financial system on the relentless march to either collapse or further government rescue. But don’t be concerned about our friends the bankers as they’ll continue stuffing their wallets until this occurs and if offshore experience is anything to go by for sometime after that as well.

For information I’m going to refer to: the RBA publication, Australian Bank Capital and the Regulatory Framework by Adam Gorajek and Grant Turner.

Confirmation of the banks using internal models to determine capital for residential mortgages is given in words and numbers. The words:

Some banks, including the four largest, use an alternative Internal Ratings-based approach whereby risk weights are derived from their own estimates of each exposure’s probability of default and loss given default.

But also from Table 2 in the paper as it relates to residential mortgages:

Exposure Average Risk-weighted assets
risk-weight

$ billion Per cent $ billion Per cent of total

1,157 26 302 22

Under APRA’s Prudential Standard APS 112, the lowest standard risk weighting for mortgages is 35% for a standard mortgage with an LVR of 60% (Table 4). The above table produced by the RBA states that the average weighting across the whole ADI mortgage book is only 26%!

Clearly the internal risk models are gaining an incredible regulatory capital advantage for those banks that use them. With risk-weighted assets allocated capital at the rate of 8% the total amount of regulatory capital required against the total $1.157 Trillion mortgages on the banks books is only $24 billion a rate of a touch above 2%. Are you shocked?

Be shocked, but I have to admit that it’s not quite as bad that raw 2% figure indicates. We need to take account of mortgage insurance as approximately half (the riskiest half) of $1.157Trn of mortgages is covered by mortgage insurance.

Ok, so how much capital is behind the mortgage insurers? The vast majority of mortgage insurance is provided by just 2 companies ie Genworth and QBE LMI (formerly PMI). An analysis of the accounts should reveal the capital held against the risk of Australian mortgages. Well, be my quest. For Genworth and for QBE. I could not figure out from these published accounts, the very simple piece of information that is, how much capital is held against Australian mortgage risk?

At this point, and although I cannot produce public information to support my case, I need to use my knowledge of the capital position of the mortgage insurers. To the nearest percent, the collective capital base of Genworth Australia and QBE LMI against approximately $600bn of Australian mortgages is 1%.

So in simple terms the total amount of capital in Australia dedicated to the risk on $1.157 Trillion of mortgages is approximately $30bn. How did this occur and how is it being allowed to continue?

It occurred because APRA allows the capital requirements of banks and insurers to be adjusted down as the value of the collateral behind mortgages increase. For collateral, see house prices. But those organizations make more and more money by writing bigger and bigger mortgages. So APRA and regulation have created a system which incentivises the lenders and insurers to take more and more risk on the basis that bigger and more loans reduce the risk of the mortgage book.

This is absurd. But every participant has their snout in the trough, all the while publicly espousing the quality of Australian mortgages. When all they’ve done is expose every Australian to massive systemic risk. How can we believe that in a country which has the most unaffordable housing in the world also has one of the lowest mortgage risk? If it quacks like a duck…

However, no system is sustainable without a continual money supply which is where the rehypothecation of mortgages comes to the fore. By continually revaluing the mortgage collateral to support further borrowing without needing to provide significant amounts of extra capital (hair cut, in securities rehypothecation), provides the turbo charge to excessive lending and the relentless march to systemic failure or government rescue. But this is done by piling more and more risk on every Australian, not just homeowners, not just by using the artificially created equity that may accrue in a house but also the real equity, which provides the base that spins money flow through excessive rehypothecation. This has all occurred under APRA’s reign and encouragement, so much for reliance on public institutional oversight.

So when will the money wheel stop and the gangs take over the highways? I have a few ideas on that but it’s certain that it’s not never.