Cyclopedia Of Economics 3rd edition

There are many types of symbols. Money from investors, banks or financial organisations is one such kind of symbols.

A successful Business Plan (=a successful manipulation of symbols) is one which brings in its wake the receipt of credits (money, another kind of symbol). What are the rules of manipulating symbols? In our example, what are the properties of a successful Business Plan?

(1) That it is closely linked to reality. The symbol system must map out reality in an isomorphic manner. We must be able to identify reality the minute we see the symbols arranged.

If we react to a Business Plan with incredulity ("It is too good to be true" or "some of the assumptions are non realistic") - then this condition is not met and the Business Plan is a failure.

(2) That it rearranges old, familiar data into new, emergent, patterns.

The symbol manipulation must bring to the world some contribution to the sphere of knowledge (very much as a doctoral dissertation should).

When faced with a Business Plan, for instance, we must respond with a modicum of awe and fascination ("That's right! - I never thought of it" or "(arranged) This way it makes sense").

(3) That all the symbols are internally consistent. The demand of external consistency (compatibility with the real world, a realistic representation system) was stipulated above. This is a different one: all symbols must live in peace with one another, the system must be coherent.

In the example of the Business Plan:

Reactions such as: "This assumption / number/ projection defies or contradicts the other" indicate the lack of internal consistency and the certain failure to obtain money (=to manipulate the corresponding symbols).

(4) Another demand is transparency: all the information should be available at any given time. When the symbol system is opaque - when data are missing, or, worse, hidden - the manipulation will fail.

In our example: if the applicant refuses to denude himself, to expose his most intimate parts, his vulnerabilities as well as his strong points - then he is not likely to get financing. The accounting system in Macedonia - albeit gradually revised - is a prime example of concealment in a placewhere exposition should have prevailed.

(5) The fifth requirement is universality. Symbol systems are species of languages. The language should be understood by all - in an unambiguous manner. A common terminology, a dictionary, should be available to both manipulator and manipulated.

Clear signs of the failure of a Business Plan to manipulate would be remarks like: "Why is he using this strange method for calculation?", "Why did he fail to calculate the cost of financing?" and even: "What does this term mean and what does he mean by using it?"

(6) The symbol system must be comprehensive. It cannot exclude certain symbols arbitrarily. It cannot ignore the existence of competing meanings, double entendres, ambiguities. It must engulf all possible interpretations and absolutely ALL the symbols available to the system.

Let us return to the Business Plan:

A Business Plan must incorporate all the data available - and all the known techniques to process them. It can safely establish a hierarchy of priorities and of preferences - but it must present all the possibilities and only then make a selection while giving good reasons for doing so.

(7) The symbol system must have links to other, relevant, symbol systems. These links can be both formal and informal (implied, by way of mental association, or by way of explicit reference or incorporation).

Coming back to the Business Plan:

There is no point in devising a Business Plan which will ignore geopolitical macro-economic and marketing contexts. Is the region safe for investments?

What are the prevailing laws and regulations in the territory and how likely are they to be changed? What is the competition and how can it be neutralized or co - opted? These are all external variables, external symbol systems. Some of them are closely and formally linked to the business at hand (Laws, customs tariffs, taxes, for instance). Some are informally linked to it: substitute products, emerging technologies, ethical and environmental considerations. The Business Plan is supposed to resonate within the mind of the reader and to elicit the reaction: "How very true!!!"

(8) The symbol system must have a discernible hierarchy. There are - and have been - efforts to invent and to use non-hierarchical symbol systems. They all failed and resulted in the establishment of a formal, or an informal, hierarchy. The professional term is "Utility Functions". This is not a theoretical demand. Utility functions dictate most of the investment decisions in today's complex financial markets.

The author(s) of the Business Plan must clearly state what he wants and what he wants most, what is an absolute sine qua non and what would be nice to have. He must fix and detail his preferences, priorities, needs and requirements. If he were to attach equal weight to all the parts of the Business Plan, his message will confuse those who are trying to decode it and they will deny his application.

(9) The symbol system must be seen to serve a (useful) purpose and it must demonstrate an effort at being successful. It must, therefore, be direct, understandable, clear and it must contain lists of demands and wishes (all of them prioritized, as we have mentioned).

When a computer faces a few tasks simultaneously - it prioritizes them and allocates its resources in strict compliance with this list of priorities.

A computer is the physical embodiment of a symbol system - and so is a bank doling out credit. The same principles apply to the human organism.

All natural (and most human) systems are goal-oriented.

(10) The last - but by no means the least - requirement is that the symbol system must be interfaced with human beings. There is not much point in a having a computer without a screen, or a bank without clients, or a Business Plan without someone to review it. We must always - when manipulating symbol systems - bear in mind the "end user" and be "user friendly" to him. There is no such thing as a bank, a firm, or even a country. At the end of the line, there are humans, like me and you.

To manipulate them into providing credits, we must motivate them into doing so. We must appeal to their emotions and senses: our symbol system (=presentation, Business Plan) must be aesthetic, powerful, convincing, appealing, resonating, fascinating, interesting. All these are irrational (or, at least, non-cognitive) reactions.

We must appeal to their cognition. Our symbol system must be rational, logical, hierarchical, not far fetched, true, consistent, internally and externally. All this must lead to motor motivation: the hand that signs the check given to us should not shake.

THE PROBLEM, THEREFORE, IS NOT WHERE TO GO, NOT EVEN WHEN TO GO IN ORDER TO OBTAIN CREDITS.

THE ISSUE IS HOW TO COMMUNICATE (=to manipulate symbols) IN ORDER TO MOTIVATE.

Using this theory of the manipulation of symbols we can differentiate three kinds of financing organizations:

(1) Those who deal with non-quantifiable symbols. The World Bank, for one, when it evaluates business propositions, employs criteriawhich cannot be quantified (how does one quantify the contribution to regional stability or the increase in democracy and the improvement in human rights records?).

(2) Those who deal with semi-quantifiable symbols. Organizations such as the IFC or the EBRD employ sound - quantitative - business and financial criteria in their decision making processes. But were they totally business oriented, they would probably not have made many of the investments that they are making and in the geographical parts of the world that they are making them.

(3) And there are those classical financing organizations which deal exclusively with quantifiable, measurable variables. Most of us come across this type of financing institutions: commercial banks, private firms, etc.

Whatever the kind of financial institution, we must never forget:

We are dealing with humans who are influenced mostly by the manipulation of symbol systems. Abiding by the aforementioned rules would guarantee success in obtaining funding. Making the right decision on the national level - would catapult Macedonia into the 21st century without having first to re-visit the twentieth.

C

The upheavals in the world financial markets during the latter part of the 1990s were quelled by the immediate intervention of both international financial institutions (IFIs) such as the IMF and of domestic ones in the developed countries, such as the Federal Reserve in the USA. The danger seemed to have passed. But, subsequent tremors in South Korea, Brazil and Taiwan and mounting imbalances inside the USA (the "twin deficits") and in the international exchange rates system do not augur well. We may face yet another crisis of the same or a larger magnitude.

What are the lessons that we can derive from the last crisis to avoid the next?

The first lesson, it would seem, is that short term and long term capital flows are two disparate phenomena with not much in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile.

It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) – and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries – it can be destructive in less liquid, immature economies or in economies in transition.

The two phenomena should be accorded a different treatment. While long term capital flows should be completely liberalized, encouraged and welcomed – the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally-oriented capital controls (as Chile has implemented) is one possibility.

The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long term financial players. But it is clear that an important and integral part of the new International Financial Architecture must be the control of speculative money in pursuit of ever higher yields. There is nothing inherently wrong with high yields – but some capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.

The second lesson is the important role that central banks and other financial authorities play in the precipitation of financial crises – or in their prolongation. Financial bubbles and asset price inflation are the result of euphoric and irrational exuberance – said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr. Greenspan and who can dispute this?

But the question that had hitherto been delicately side-stepped was: who is responsible for financial bubbles? Expansive monetary policies, well timed signals in the interest rates markets, liquidity injections, currency interventions, international salvage operations – are all coordinated by central banks and by other central or international institutions.

Official inaction is as conducive to the inflation of financial bubbles as is official action. By refusing to restructure the banking system, to regulate and transparently trade derivatives and other complex financial instruments, to introduce appropriate bankruptcy procedures, corporate transparency and good corporate governance, by engaging in protectionism and isolationism, by avoiding the implementation of anti competition legislation – many countries have fostered the vacuum within which financial crises erupt.

The third lesson is that international financial institutions can be of some help – when not driven by political or geopolitical considerations and when not married to a dogma. Unfortunately, these are the rare cases. Most IFIs – notably the IMF and, to a lesser extent, the World Bank – are both politicized and doctrinaire.

It is only lately and following the recent mega-crisis in Asia, that IFIs began to "reinvent" themselves, their doctrines and their recipes. This added conceptual and theoretical flexibility led to improved results. It is always better to tailor a solution to the needs of the client. Perhaps this should be the biggest evolutionary step:

That IFIs will cease to regard the countries and governments within their remit as inefficient and corrupt beggars, in constant need of financial infusions. Rather they should regard these countries as clients, customers in need of service. After all, this, exactly, is the essence of the free market – and it is from IFIs that such countries should learn its ways.

In broad outline, there are two types of emerging solutions. One type is market oriented – and the other, interventionist. The first type calls for free markets, specially designed financial instruments (see the example of the Brady bonds) and a global "laissez faire" environment to solve the issue of financial crises. The second approach regards the free markets as the source of the problem, rather than its solution. It calls for domestic and where necessary international intervention and assistance in resolving financial crises.

Both approaches have their merits and both should be applied in varying combinations on a case by case basis.

Indeed, this is the greatest lesson of all:

There are no magic bullets, perfect solutions, right ways and only recipes. This is a a trial and error process and in war one should not limit one's arsenal. Let us employ all the weapons at our disposal to achieve the best results for everyone involved.

Casino

154,000,000. This is the number of Americans who visited the gambling institutions in the USA in 1995. Another 177,000,000 participated in other forms of gambling: car races, horse races, other sports tournaments. They have spent well over 44 BILLION USD on gambling. On average, they lost 20% of the money that they invested - and this, approximately, is the profit of this industry in the US. The industry's annual growth rate is 11% which is an excellent figure for an industry which commenced its operations in 1940 in a desert in the State of Nevada. Wall Street likes casinos and shares of gambling related companies skyrocketed and yielded much more than the Dow Jones Average Index. Hotels chains - such as Hilton and ITT - are competing fiercely to purchase casinos.

Casinos do not like to call themselves "Gambling Outfits" (which is really what they are). The politically correct name today is: "Gaming and Leisure establishments".

The reason is that gambling has a lot of what we, economists, like to call "negative externalities". Put in less delicate terms: casinos exact a heavy social and economic price from the countries in which they operate.

Lately the Government of Macedonia has decided to liberalize gaming. Anyone with 500,000 DM will be allowed to establish and operate a casino. Certain gambling - hitherto monopolized by the Macedonian Lottery - will be open to other, private operators.

I am not privy to the considerations behind these decisions. Yet, it is a safe bet to assume that the same political and economic motivating force is in operation here as it was in the USA: money. Gambling is considered the easy way out. Gamblers will come from all over, leave their money with the casino and go home. The local and national governments will tax the casinos heavily and a perpetuum mobile will be created, virtually providing money at no cost.

But there is one law in economy which is indisputable and unbreachable: THERE IS NO FREE LUNCH AND THERE IS NO SUCH THING AS MONEY WITHOUT ITS PRICE TO PAY.

In warmly embracing the casino culture, Macedonia maybe committing a grave error.

Let us try and understand why:

(1) To be a success, a casino must be geographically isolated and almost a monopoly. The most successful casinos in human history were established by the American mob (=Mafia) in a desert (in Las Vegas). There were no other casinos available. Gamblers who came all the way to the desert - had to stay a few days. This encouraged the construction of hotels, restaurants and other tourist attractions and diversions. This also increased the revenues of the casinos considerably.

Macedonia is surrounded by neighbours with a rich and well developed casino culture. Greece, Bulgaria and Turkey are casino superpowers. Casinos also exist in Slovenia, Croatia, Hungary and Romania. So, Macedonia will be competing headlong with powerful gambling realities. The situation would have been different if Macedonia were to attract affluent tourism. But tourism in Macedonia has all but collapsed. Its tourist-related infrastructure has dwindled and it cannot support an influx of tourists. In Skopje, the cultural and economic hub of Macedonia, a city of 600,000 inhabitants - there are only two class "A" hotels (which really compare to 4 star hotels in the West). Until such an infrastructure is re-instated and tourist attractions - natural and artificial - are maintained - tourists will not flock into Macedonia.

Thus, a casino in Macedonia will be fed by the gambling of LOCAL CITIZENS and one-day (or one night) tourists. This is the wrong way to operate a casino. A casino cannot look forward to an economically viable future based on these types of clients. Moreover, a casino which will take the local citizens (anyhow scarce) money will wreak havoc on the social fabric of Macedonia. It will not be very different from the impact exerted by the collapse of the various pyramid schemes (in Albania) and Stedilnicas (in Macedonia). Gambling is equivalent to mild drugs: some people get addicted. The social cost is an important factor.

One way to avoid these unfortunate consequences is to prohibit Macedonians from gambling in the casinos in Macedonia. But this will ruin the economic justification for the establishment of such an institutions. Experience gathered in other countries also teaches us that the local citizens will find ways around this prohibition.

(2) Governments think about casinos as a way to create employment and to enlarge the tax base (=to generate additional taxes). These two assumptions are quite dubious, according to recent research.

When a casino is established, its owners and operators usually promise that they will invest money in the locality. They promise to renew decrepit city centres, to repave roads, to invest in infrastructure and to assist the establishment of restaurants and hotels. Some states in the USA have earmarked revenues from gambling to specific purposes. All the income generated by the New York State lottery goes to education and the construction of new schools. In Israel, the money earned by the state monopoly of Gambling is transferred to the Government's annual development budget and is invested in the construction of schools, community centres and clinics.

But even the gambling industry itself admits - in its annual Harra's Survey of the Gaming and Leisure Industries - that the investments in the economy, generated by casinos are far less than even the most modest expectations.

True, in the USA alone, casinos employ 367,000 people - a 24% increase over 1994.

But most of these jobs are menial. These are temporary jobs without job security and without a career plan or future. They are dead end jobs for desperate people.

Casinos also cause jobs to be cancelled. Older firms (old hotels, restaurants, service firms) are closed down and people get fired. The number quoted above also does not take into consideration the natural (not related to gambling) growth in employment in the USA as a whole. Taking all this into account, the claims that casinos create jobs looks more and more dubious. The more casinos established - the less business each of them is able to do. Some of them are making losses and are firing people, exacerbating a bad employment scene.

Casinos did invest in municipal infrastructure. Yet, they preferred decoration to grass roots, ornamental veneer type visible investments - rather than real improvement in things less glorious (such as the sewage system, for example). Cities with casinos enjoyed a brief renaissance which was followed by the collapse and degeneration of the city centre's scape.

(3) Casinos not only generate revenues. They also generate enormous direct (not to mention the indirect) costs. Criminal elements tend to gather around casinos and sometimes try to own them. Gambling addicts commit crimes in a desperate attempt to obtain funds. So, a lot of money has to be expended on an increase in the police force and on the additional work of other law enforcement agencies. There is also a sizeable increase in the costs of cleaning the street, sanitation and extra social services needed to cope with the break up of families and with gambling addictions.

Taking all this into consideration, it is not at all clear that casinos are a net benefit to the economy and it is almost certain that they are not a net benefactor of society as a whole.

(4) Casinos undoubtedly hurt the local economy when they take money from local citizens. A Macedonian with free income could use it to buy clothes, go to a restaurant or buy a computer. If he spends this money in a casino - other businesses suffer. Their turnover is reduced. They must fire employees. They also pay less taxes - which offsets the taxes that casinos pay. No one has ever calculated which is more: the taxes that casinos pay - or the taxes which businesses stop to pay because of reduced consumption by local citizens who spent all their money in a casino. Sometimes these businesses close down altogether. Anyone who visited Atlantic City or Gary, Indiana can testify to this. Atlantic City is a gambling capital - and, yet, it is was of the most trodden down cities of the USA.

Statistics show that casinos prefer to employ non-local people. They employ foreigners. If this is not possible, they will try to employ people from Bitola in Skopje - and vice versa. This is intended to prevent collusions and conspiracies between the staff and the gamblers. More than 60% of casino employees in the USA do not live in the city in which the casino is located. So, we cannot even say that a casino generates employment for the inhabitants of a city whose infrastructure it uses.

(5) There are some alarming statistics. Nevada has the highest suicide rate in the USA. It also has the highest accident rate (per mile driven). It has amongst the highest rates of crime and school drop out rates. Its economy is totally dependent on gambling. It is like a laboratory in which what happens to a gambling state can be tested and measured - and the results are far from encouraging.

Moreover, 4% of the population are "pathological gamblers". Those who cannot stop and who will stop at nothing - crime included - to get the money that they need in order to gamble. 10% of the gamblers account for 80% of the money wagered in casinos. 40% of white collar crime (especially embezzlement and fraud) is rooted in gambling. Families, immediate social circles and colleagues in the workplace are gravely affected. The direct costs are enormous. One small town in Massachusetts (in the neighbourhood of a casino) had to increase its police budget by $400,000 per year. Think what the costs are for big cities with casinos in them!!!

Small countries are advised to think well before it commits itself to a casino.

Establishing a casino is as much a gamble as playing in one.

The government of Yugoslavia, usually strapped for cash, has agreed to purchase 29 percent of Telekom Srbija, of which it already owns 51 percent. It will pay the seller, Italia International, close to $200 million. The Greek telecom, OTE, owns the rest.

On Friday, the Serb privatization minister, Aleksandar Vlahovic, continued to spar in public with a Milosevic-era oligarch, Blagoljub Karic, over his share of Mobtel, Serbia's largest cellular phone operator. The company, announced the minister, will be privatized by tender and Karic's share will be diluted to 30 percent.

Such clashes signal rich pickings.

The mobile phone market is booming throughout central and eastern Europe. According to Baskerville's Global Mobile industry newsletter, annual subscriber growth in countries as rich as Russia and as impoverished as Albania exceeds 100 percent. Belarus is off the charts with 232 percent. Macedonia (82 percent), Ukraine (79 percent), Moldova (86 percent), Lithuania (84 percent) and Bulgaria (79 percent) are not far behind.

Growth rates are positively correlated with the level of penetration. More than four fifths of Slovenes and Czechs have access to a cellphone. Hence the lackadaisical annual increases of 14 and 37 percent respectively. But even these are impressive numbers by west European standards. Annual subscriber growth there is a meager 7 percent.

Penetration, in turn, is a function of the population's purchasing power and the state of the - often decrepit - fixed phone network. Thus, in Serbia, smarting from a decade of war and destitution, both the penetration and the growth rates are dismal, at c. 20 percent.

Russia alone accounts for one of every five subscribers in the region and one third of the overall market growth. According to the Jason & Partners consultancy, the number of mobile phone subscribers in Russia has more than doubled in 2002 to 17.8 million users. AC&M, another telecommunications consulting outfit, pegs the growth at 117-124 percent.

Mobile TeleSystems (MTS) services one third of all users, Vimpelcom more than one quarter and MegaFon about one sixth. But there is a host of much smaller companies nibbling at their heels. Advanced cellular networks - such as under the 2.5G protocol - are expected to take off.

Usage in Russia is still largely confined to metropolitan areas. While the country-wide penetration is c. 12 percent (more than double the 2001 figure) - Moscow's is an impressive 48 percent. St. Petersburg, Russia's second most important metropolis, is not far behind with 33 percent.

Still, as urban markets mature, the regions and provinces represent untapped opportunities. Vimpelcom, backed by Norway's Telenor, paid last month $26.5 million for Vostok-Zapad Telecom, a company whose sole assets are licenses covering the Urals. This was the operator's third such purchase this year. Earlier, it purchased Extel which covers the Baltic exclave of Kaliningrad and Orensot, another Urals licensee.

Vimpelcom is up against Uralsvyazinform, a Perm-based fixed-line and mobile-phone telecommunications operator in the Urals Federal District. According to Radio Free Europe/Radio Liberty and Prime-TASS, the former has increased its capacity last year by some 265,000 cellular-phone numbers.

But Vimpelcom is undeterred. According to Gazeta.ru, it has announced its expansion to Siberia (Karsnoyarski Krai) to compete head on with two indigenous incumbents, EniseiTelecom and SibChallenge. Vimpelcom's competitors are pursuing a similar strategy: MTS has recently purchased Kuban GSM, the country's fourth largest operator, mainly in its south.

Local initiatives have emerged where cellular phone services failed to transpire. RIA-Novosti recounted how 11 pensioners, the residents of a village in Novgorod Oblast have teamed up to invest in a community mobile phone to be kept by the medic. The fixed line network extended only to the nearest village.

The industry is bound to consolidate as new technologies, developing user expectations and exiting foreign investors - mainly Scandinavian, American and German telecoms - increase the pressure on profit margins. One of the major problems is collecting on consumer credit.

Vedomosti, the Russian business weekly, reported that Vimpelcom was forced to write off $16 million in non-performing credit last year. Close to 2 percent of its clients are more than 60 days in arrears. Vremya Novosti, another Russian paper, puts the accounts receivable at 15 percent of revenues in Vimpelcom, though only 5 percent at MTS.

The cellular phone market throughout central and eastern Europe is at least as exciting as it is in Russia.

As of Jan 1, Romania's fixed line telecommunications system, Romtelecom, majority owned by the Greek OTE, has lost its monopoly status. In the wake of this long awaited liberalization, more than 700 applications for operating licences have been filed with the Romanian authorities, many of them for both fixed and mobile numbers. Fixed line density is so low, mobile penetration, at 20 percent, so dismal, prices so inflated and service so inefficient - that new operators are bound to make a killing on their investment.

Past liberalizations in central European markets - Poland, the Czech Republic and Hungary - have not been auspicious. Prices rose, the erstwhile monopoly largely retained its position and competition remained muted. But Romania is different. Its liberalization is neither partial, nor hesitant. The process is not encumbered by red tape and political obstruction. Even so, mobile phones are likely to be the big winners as the fixed line infrastructure recovers glacially from decades of neglect.

Bulgaria's GSM operator, MobiTel is on the block, though a deal concluded with an Austrian consortium last year fell through. It is considering an initial public offering next year. Another GSM licensee, GloBul, attracted 330,000 subscribers in its first year of operation and covers 65 percent of the population. The country's first cellphone company, Mobikom, intends to branch into GSM and CDMA, following a recent reallocation of national radio frequencies.

Macedonia's second mobile operator, MTS, owned by the Greek OTE, was involved last year in bitter haggling with Mobimak (owned by Makedonski Telekom), the only incumbent, over its inter-connection price. The telecommunications administration threatened to cut off Mobimak but, finding itself on murky legal ground, refrained from doing so.

The British cellular phone company, Vodafone, has expressed interest in the past in Promonte, Montenegro's mobile outfit.

Mobile phone companies are going multinational. Russia's MTS owns a - much disputed - second license in Belarus. It has pledged, last November, to plough $60 million into a brand new network. MTS also acquired a majority stake in Ukrainian Mobile Communications (UMC), the country's second largest operator. The Russian behemoth is eyeing Bulgaria and Moldova as well.

Wireless telephony is a prime example of technological leapfrogging. Faced with crumbling fixed line networks, years on waiting lists, frequent interruptions of service and a venal bureaucracy, subscribers opt to go cellular. Last year, the aggregate duration of mobile phone calls in Croatia leapt by 50 percent. It nudged up by a mere 0.5 percent on wired lines.

New services, such as short messages (SMS) and textual information pages are booming. Romania's operator, Orange, has launched multimedia messaging. Macedonia introduced WAP, a protocol allowing cellphones to receive electronic data including e-mail messages and Web pages. The revenues from such value added offerings will shortly outweigh voice communications in the west. The east is attentive to such lessons.

Central Banks, Role in Crises of

I. The Credit Crunch of 2007-2009

The global credit crunch induced by the subprime mortgage crisis in the United States, in the second half of 2007, engendered a tectonic and paradigmatic shift in the way central banks perceive themselves and their role in the banking and financial systems.

On December 12, 2007, America's Federal Reserve, the Bank of England, the European Central Bank (ECB), the Bank of Canada and the Swiss National Bank, as well as Japan's and Sweden's central banks joined forces in a plan to ease the worldwide liquidity squeeze.

This collusion was a direct reaction to the fact that more conventional instruments have failed. Despite soaring spreads between the federal funds rate and the LIBOR (charged in interbank lending), banks barely touched money provided via the Fed's discount window. Repeated and steep cuts in interest rates and the establishment of reciprocal currency-swap lines fared no better.

The Fed then proceeded to establish a "Term Auction Facility (TAF)", doling out one-month loans to eligible banks. The Bank of England multiplied fivefold its regular term auctions for three months maturities. On December 18, the ECB lent 350 million euros to 390 banks at below market rates.

In March 2008, the Fed lent 29 billion USD to JP Morgan Chase to purchase the ailing broker-dealer Bear Stearns and hundreds of billions of dollars to investment banks through its discount window, hitherto reserved for commercial banks. The Fed agreed to accept as collateral securities tied to "prime" mortgages (by then in as much trouble as their subprime brethren).

The Fed doled the funds out through anonymous auctions, allowing borrowers to avoid the stigma attached to accepting money from a lender of last resort. Interest rates for most lines of credit, though, were set by the markets in (sometimes anonymous) auctions, rather than directly by the central banks, thus removing the central banks' ability to penalize financial institutions whose lax credit policies were, to use a mild understatement, negligent.

Moreover, central banks broadened their range of acceptable collateral to include prime mortgages and commercial paper. This shift completed their transformation from lenders of last resort. Central banks now became the equivalents of financial marketplaces, and akin to many retail banks. Fighting inflation - their erstwhile raison d'etre - has been relegated to the back burner in the face of looming risks of recession and protectionism. In September 2008, the Fed even borrowed money from the Treasury when its own resources were depleted.

As The Economist neatly summed it up (in an article titled "A dirty job, but Someone has to do it", dated December 13, 2007):

"(C)entral banks will now be more intricately involved in the unwinding of the credit mess. Since more banks have access to the liquidity auction, the central banks are implicitly subsidising weaker banks relative to stronger ones. By broadening the range of acceptable collateral, the central banks are taking more risks onto their balance sheets."

Regulatory upheaval is sure to follow. Investment banks are likely to be subjected to the same strictures, reserve requirements, and prohibitions that have applied to commercial banks since 1934. Supervisory agencies and functions will be consolidated and streamlined.

Ultimately, the state is the mother of all insurers, the master policy, the supreme underwriter. When markets fail, insurance firm recoil, and financial instruments disappoint - the government is called in to pick up the pieces, restore trust and order and, hopefully, retreat more gracefully than it was forced to enter.

The state would, therefore, do well to regulate all financial instruments: deposits, derivatives, contracts, loans, mortgages, and all other deeds that are exchanged or traded, whether publicly (in an exchange) or privately. Trading in a new financial instrument should be allowed only after it was submitted for review to the appropriate regulatory authority; a specific risk model was constructed; and reserve requirements were established and applied to all the players in the financial services industry, whether they are banks or other types of intermediaries.

Central banks are relatively new inventions. An American President (Andrew Jackson) even dispensed with his country's central bank in the nineteenth century because he did not think that it was very important. But things have changed since. Central banks today are the most important feature of the financial systems of the majority of countries.

Central banks are bizarre hybrids. Some of their functions are identical to those of regular, commercial banks. Other tasks are unique to the central bank. On certain functions it has an absolute legal monopoly.

Central banks take deposits from other banks and, in certain cases, from foreign governments which deposit their foreign exchange and gold reserves for safekeeping (for instance, with the Federal Reserve Bank of the USA).

The Central Bank invests the foreign exchange reserves of its country while trying to maintain an investment portfolio similar to the trade composition of its client: the state.

The Central bank also holds onto the gold reserves of the country. Most central banks have until recently tried to get rid of their gold, due to its ever declining prices. Since the gold is registered in their books in historical values, central banks have shown a handsome profit on this sideline of activity.

Central banks (especially the US Fed) also participate in important, international negotiations. If they do not do so directly, they exert influence behind the scenes. The German Bundesbank virtually dictated Germany's position in the give-and-take leading to the Maastricht treaty. It forced the hands of its co-signatories to agree to strict terms of accession into the euro single currency project. The Bundesbank demanded that a country's economy be totally stable (possessed of low debt ratios and low inflation) before it is accepted into the eurozone. It is an irony of history that Germany itself is no longer eligible under these criteria and would not have been accepted as a member in the very club whose rules it had assisted to formulate.

But all these constitute a secondary and marginal plank of a central banks activities.

The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does this by changing the interest rates that it charges on money that it lends to the banking system through its "discount windows".

Interest rates are supposed to influence the level of economic activity in the economy. This purported linkage has not been unequivocally substantiated by economic research. Also, there usually is a delay between the alteration of interest rates and the foreseen impact on the economy as "transmission mechanisms" set into gear.

This makes an assessment of interest rate policies difficult. Still, central banks use interest rates to fine tune the economy. Higher interest rates lead to lower economic activity and lower inflation. The reverse is also supposed to be true. Even shifts of a quarter of a percentage point are sufficient to send stock exchanges tumbling together with bond markets.

In 1994, a long term trend of increase in interest rates commenced in the USA, doubling them from 3 to 6 percent. Investors in the bond markets lost 1 trillion (that's 1000 billion!) US dollars within twelve months. Even today, currency traders all around the world dread the decisions of the Federal Reserve ("Fed") or the European Central Bank (ECB) and sit with their eyes glued to their trading screens on days in which announcements are expected.

Tinkering with interest rates is only the latest in a series of fads of macroeconomic management. Prior to this - and under the influence of the Chicago school of economics - central banks used to monitor and manipulate money supply aggregates. Simply put, they would sell bonds to the public (and, thus absorb liquidity), or buy them from the public (and, thus, inject liquidity). Additionally, they would restrict the amount of printed money and limit the government's ability to borrow.

Prior to the money supply craze, and for decades, there was a widespread belief in the effectiveness of manipulating exchange rates. This was especially true where exchange controls were still being implemented and currencies were not fully convertible. Britain removed its exchange controls only as late as 1979. The US dollar was pegged to a (gold) standard (and, thus not really freely convertible) as well into 1971. Free flows of currencies are a relatively new thing and their long absence reflects this deeply and widely held superstition of central banks.

Nowadays, exchange rates are considered to be a "soft" monetary instrument and are rarely used by central banks. The latter continue, though, to intervene in the trading of currencies in the international and domestic markets usually to no avail and while losing their credibility in the process. Ever since the ignominious failure in implementing the infamous Louver accord in 1985, currency intervention is considered to be a somewhat rusty relic of the old ways of thinking.

Central banks are heavily enmeshed in the very fabric of the commercial banking system. They perform certain indispensable services for the latter. In most countries, interbank payments pass through the central bank or through a clearing organ which is somehow linked or reports to the central bank. All major foreign exchange transactions are funneled through - and, in many countries, still must be approved by - the central bank. Central banks regulate banks, licence their owners, supervise their operations, and keenly monitor their liquidity. The central bank is the lender of last resort in cases of banking insolvency or illiquidity (aka a "run on the banks").

The frequent claims of central banks all over the world that they were surprised by this or that a banking crisis look, therefore, dubious at best. No central bank can say, with a straight face, that it was unaware of early warning flags, or that it possessed no access to all the data. Impending banking crises give out signals long before they erupt. These precursors ought to be detected by a reasonably managed central bank. Only major neglect could explain why a central bank is caught unprepared.

One sure sign is the number of times that a certain bank chooses to borrow from the central bank's discount windows. Another is if it offers interest rates which are way above the rates proffered by other financing institutions. There are many more tocsins and central banks should be adept at reading them.

This heavy involvement of central banks in the banking system is not limited to the collection and analysis of data. A central bank, by the very definition of its functions, sets the tone to all other banks in the economy. By altering its policies (for instance: by changing its reserve requirements), it can push banks into insolvency or create asset bubbles which are bound to burst.

If it were not for the easy and cheap money provided by the Bank of Japan in the eighties, the stock and real estate markets would not have inflated to the extent that they have. Subsequently, it was the same bank (under a different Governor) that tightened the reins of credit and pierced both bubble markets. The same mistake was repeated in 1992-3 in Israel - and with the same consequences. The pattern recurred in the USA with the Fed during the late 1990s and early 2000s.

This precisely is why central banks, in my view, should not supervise the banking system. When asked to supervise the banking system, central banks are really expected to criticize their own past performance, their policies, and their vigilance.

In most countries in the world, bank supervision is a heavy-weight department within the central bank. It samples the balance sheets and practices of banks periodically: it analyses their books thoroughly and imposes rules of conduct and sanctions where necessary.

Yet, the role of central banks in determining the health, behaviour and methods of operation of commercial banks is so paramount that it is highly undesirable for a central bank to supervise them. To reiterate, bank supervision carried out by a central bank means that the central bank has to criticize itself, its own policies and the way that they were enforced as well as objectively review the results of past supervision. Central banks are thus asked to cast themselves in the impossible role of self-sacrificial and impartial saints.

A new trend is to put the supervision of banks under a different "sponsor" and to construct a system of checks and balances, wherein the central bank, its policies and operations are indirectly criticized and reviewed by the supervision of banks. This is the case in Switzerland where the banking system is extremely well regulated and well supervised.

There are two types of central bank: the autonomous and the semi-autonomous.

The autonomous central bank is politically and financially independent. Its Governor is appointed for a period of time which is incommensurate with the terms in office of incumbent elected politicians, so that he is not subject to political pressures. The autonomous central bank's budget is not provided by the legislature or by the executive arm. It is self sustaining: it runs itself as a corporation would. Its profits are used in leaner years in which it loses money.

Prime examples of autonomous central banks are Germany's Bundesbank and the American Federal Reserve Bank.

The second type of central bank is the semi autonomous one. This is a central bank that depends on political parties and, especially, on the Ministry of Finance. Its budget is allocated to it by the Ministry or by the legislature.

The upper echelons of such a bank - the Governor and the Vice Governor - can be impeached by politicians. This is the case with the National (People's) Bank of Macedonia which has to report to Parliament. Such dependent banks fulfill the function of an economic advisor to the government. The Governor of the Bank of England advises the Chancellor of the Exchequer (in their famous weekly meetings, the minutes of which are published) about the desirable level of interest rates. The situation is somewhat better with the Bank of Israel which can play around with interest rates and foreign exchange rates - but is still not entirely freely.

III. The Case of Macedonia 1991-2006

The National Bank of Macedonia (NBM) is highly autonomous under the law regulating its structure and its activities. Its Governor is selected for a period of seven years and can be removed from office only when he is charged with criminal deeds. Still, it is very much subject to political interference. High ranking political figures freely admit to exerting pressures on the central bank (even as they insist that it is completely independent).

In Macedonia, until recently, when a new Law of the Central Bank was enacted, annual surpluses generated by the central bank were transferred to the national budget and could not be utilized by the bank for its own operations or for the staff training and re-skilling.

The NBM is young and most of its staff, though bright, are inexperienced. With the kind of wages that it pays it cannot attract the best available talents. The budgetary surpluses that it generates could have been used for this purpose and to hire world renowned consultants (from Switzerland, for instance) to help the bank overcome the experience gap.

So, in the past the bank had to do with charity received from USAID, the KNOW-HOW FUND and so on. Some of the help thus provided was good and relevant - other advice was, in my view, wrong for the local circumstances. Take bank supervision: it was modeled after the American and British experiences, whose bank supervisors are arguably the worst in the West (if we ignore the Japanese).

The bank also had to cope with extraordinarily difficult circumstances since its very inception. The 1993 banking crisis, the frozen currency accounts, the collapse of the savings houses (culminating in the TAT affair). Older, more experienced central banks would have folded under the pressure. Taking everything under consideration, the NBM has performed remarkably well.

The proof is in the stability of the local currency, the denar. Currency stability is widely thought to be the main function of a central bank. After the TAT affair, there was a moment or two of panic and then the street voted confidence in the management of the central bank, the denar-deutschmark rate reverted to where it was prior to the crisis.

Still, bank supervision needs to be overhauled and lessons need to be learnt. The political independence of the bank needs to be enhanced. The bank must decide what to do with TAT and with the other failing institutions. The issue of who can own banks is high on the agenda with the liquidation of Makedonska Banka, forced on it by the central bank in 2007.

Failing banks can be sold to other banks as portfolios of assets and liabilities. The Bank of England sold Barings Bank in 1995 to the ING Dutch Bank.

The central bank could - and has to - force the owners of failing financial institutions to increase their equity capital (by ploughing in their personal property, where necessary). This was successfully done (again, by the Bank of England) in the 1991 case of the BCCI scandal.

The State of Macedonia could decide to take over the obligations of the failed system and somehow pay back the depositors. Israel (1983), the USA (1985/7) and a dozen other countries have done so recently.

The central bank could increase the reserve requirements and the deposit insurance premiums.

But these are all artificial, ad hoc, solutions. Something more radical needs to be done:

A total restructuring of the banking system. Savings houses have to be abolished. The capital required to open a bank or a branch of a bank has to be lowered (to conform with world standards and with the size of the economy of Macedonia). Banks should be allowed to diversify their activities (as long as they are of a financial nature), to form joint venture with other providers of financial services (such as insurance companies), and to open a thick network of branches.

And bank supervision must be separated from the central bank, so that it could criticize the central bank and its policies, decisions and operations on a regular basis.

There are no reasons why Macedonia should not become a financial centre of the Balkans and there are many reasons why it should. But, ultimately, it all depends on the Macedonians themselves.

Invited by a grateful United States, the Czech Republic on Saturday sent a representative to meet with Iraqi opposition in Kurdish north Iraq. The country was one of the eight signatories on a letter, co-signed by Britain, Italy, Spain and the two other European Union central European candidate-members, Poland and Hungary, in support of US policy in the Gulf.

According to The Observer and the New York Times, American troops in Germany - and the billions of dollars in goods and services they consume locally - will be moved further east to the Czech Republic, Poland and the Baltic states. This shift may have come regardless of the German "betrayal". The Pentagon has long been contemplating the futility of stationing tens of thousands of soldiers in the world's most peaceful and pacifistic country.

The letter is a slap in the face of Germany, a member of the "Axis of Peace", together with France and Belgium and the champion of EU enlargement to the east. Its own economic difficulties aside, Germany is the region's largest foreign investor and trading partner. Why the curious rebuff by its ostensible protégés?

The Czech Republic encapsulates many of the economic and political trends in the erstwhile communist swathe of Europe.

The country's economic performance still appears impressive. Figures released yesterday reveal a surge of 6.6 percent in industrial production, to yield an annual increase of 4.8 percent. Retail sales, though way below expectations, were still up 2.7 percent last year. The Czech National Bank (CNB) upgraded its gross domestic product growth forecast on Jan 30 to 2.2-3.5 percent.

But the country is in the throes of a deflationary cycle. The producer price index was down 0.8 percent last year. Year on year, it decreased by 0.4 percent in January. Export prices are down 6.7 percent, though import prices fell by even more thus improving the country's terms of trade.

The Czech koruna is unhealthily overvalued against the euro thus jeopardizing any export-led recovery. The CNB was forced to intervene in the foreign exchange market and buy in excess of 2 billion euros last year - four times the amount it did in 2001. It also cut its interest rates last month to their nadir since independence. This did little to dent the country's burgeoning current account deficit, now at over 5 percent of GDP.

Unemployment in January broke through the psychologically crucial barrier of 10 percent of the workforce. More than 540,000 bread earners (in a country of 10 million inhabitants) are out of a job. In some regions every fifth laborer is laid off. There are more than 13 - and in the worst hit parts, more than 100 - applicants per every position open.

Additionally, the country is bracing itself for another bout of floods, more devastating than last year's and the ones in 1997. Each of the previous inundations caused in excess of $2 billion in damages. The government's budget is already strained to a breaking point with a projected deficit of 6.3 percent this year, stabilizing at between 4 and 6.6 percent in 2006. The situation hasn't been this dire since the toppling of communism in the Velvet Revolution of 1989.

Ironically, these bad tidings are mostly the inevitable outcomes of much delayed reforms, notably privatization. Four fifths of the country's economy is alleged to be in private hands - a rate similar to the free markets of Estonia, Slovakia and Hungary. In reality, though, the state still maintains intrusive involvement in many industrial assets. It is the reluctant unwinding of these holdings that leads to mass layoffs.

Yet, the long term outlook is indisputably bright.

The ministry of finance forecasts a rise in the country's GDP from 59 percent to 70 percent of the European Union's output in 2005 - comparable to Slovenia and far above Poland with a mere 40 percent. The Czech Republic is preparing itself to join the eurozone shortly after it becomes a member of the EU in May 2004.

Foreign investors are gung ho. The country is now the prime investment destination among the countries in transition. In a typical daily occurrence, bucking a global trend, Matsushita intends to expand its television factory in Plzen. Its investment of $8 million will enhance the plant's payroll by one tenth to 1900 workers. Siemens - a German multinational - is ploughing $50 million into its Czech unit. Siemens Elektromotory's 3000 employees export $130 million worth of electrical engines annually.

None of this would have been possible without Germany's vote of confidence and overwhelming economic presence in the Czech Republic. The deteriorating fortunes of the Czech economy are, indeed, intimately linked to the economic stagnation of its northern neighbor, as many an economist bemoan. But this only serves to prove that the former's recovery is dependent on the latter's resurrection.

Either way, to have so overtly and blatantly abandoned Germany in its time of need would surely prove to be a costly miscalculation. The Czechs - like other central and east European countries - mistook a transatlantic tiff for a geopolitical divorce and tried to implausibly capitalize on the yawning rift that opened between the erstwhile allies.

Yet, Germany is one of the largest trading partners of the United States. American firms sell $24 billion worth of goods annually there - compared to $600 million in Poland. Germany's economy is five to six times the aggregated output of the EU's central European new members plus Slovakia.

According to the New York Times, there are 1800 American firms on German soil, with combined sales of $583 billion and a workforce of 800,000 people. Due to its collapsing competitiveness and rigid labor laws, Germany's multinationals relocate many of their operations to central and east Europe, Asia and north and Latin America. Even with its current malaise, Germany invested in 2001 $43 billion abroad and attracted $32 billion in fresh foreign capital.

Indeed, supporting the United States was seen by the smaller countries of the EU as a neat way to counterbalance Germany's worrisome economic might and France's often self-delusional aspirations at helmsmanship. A string of unilateral dictates by the French-German duo to the rest of the EU - regarding farm subsidies and Europe's constitution, for instance - made EU veterans and newcomers alike edgy. Hence the deliberate public snub.

Still, grandstanding apart, the nations of central Europe know how ill-informed are recent claims in various American media that their region is bound to become the new European locomotive in lieu of an aging and self preoccupied Germany. The harsh truth is that there is no central European economy without Germany. And, at this stage, there is no east European economy, period.

Consider central Europe's most advanced post-communist economy.

One third of Hungary's GDP, one half of its industrial production, three quarters of industrial sales and nine tenths of its exports are generated by multinationals. Three quarters of the industrial sector is foreign-owned. One third of all foreign direct investment is German. France is the third largest investor. The situation is not much different in the Czech Republic where the overseas sales of the German-owned Skoda alone account for one tenth the country's exports.

The relationship between Germany and central Europe is mercantilistic. Germany leverages the region's cheap labor and abundant raw materials to manufacture and export its finished products. Central Europe conforms, therefore, to the definition of a colony and an economic hinterland. From a low base, growth there - driven by frenzied consumerism - is bound to outstrip the northern giant's for a long time to come. But Germans stands to benefit from such prosperity no less than the indigenous population.

Aware of this encroaching "economic imperialism", privatization deals with German firms are being voted down throughout the region. In November, the sale of a majority stake in Cesky Telecom to a consortium led by Deutsche Bank collapsed. In Poland, a plan to sell Stoen, Warsaw's power utility, to Germany's RWE was scrapped.

But these are temporary - and often reversible - setbacks. Germany and its colonies share other interests. As The Economist noted correctly recently:

"The Poles may differ with the French over security but they will be with them in the battle to preserve farm subsidies. The Czechs and Hungarians are less wary of military force than the Germans but sympathize with their approach to the EU's constitutional reform. In truth, there are no more fixed and reliable alliances in the EU. Countries will team up with each other, depending on issue and circumstances."

Thus, the partners, Germany and central Europe, scarred and embittered, will survive the one's haughty conduct and the other's backstabbing. That the countries of Europe currently react with accommodation to what, only six decades ago, would have triggered war among them, may be the greatest achievement of the Euro-Atlantic enterprise.

CFO (Chief Finance or Financial Officer)

Sometimes, I harbour a suspicion that Dante was a Financial Director. His famous work, "The Inferno", is an accurate description of the job.

The CFO (Chief Financial Officer) is fervently hated by the workers. He is thoroughly despised by other managers, mostly for scrutinizing their expense accounts. He is dreaded by the owners of the firm because his powers that often outweigh theirs. Shareholders hold him responsible in annual meetings. When the financial results are good – they are attributed to the talented Chief Executive Officer (CEO). When they are bad – the Financial Director gets blamed for not enforcing budgetary discipline. It is a no-win, thankless job. Very few make it to the top. Others retire, eroded and embittered.

The job of the Financial Director is composed of 10 elements. Here is a universal job description which is common throughout the West.

The Chief Financial Officeris subordinated to the Chief Executive Officer, answers to him and regularly reports to him.

The CFO is in charge of:

1. 
   The Finance Director;
   
2. 
   The Financing Department;
   
3. 
   The Accounting Department which answers to him and regularly reports to him.
   

In many developing countries this would be considered treason – but, in the West every function holder in the company can – and regularly is – summoned by the (active) Board. A grilling session then ensues: debriefing the officer and trying to spot contradictions between his testimony and others'. The structure of business firms in the USA reflects its political structure. The Board of Directors resembles Congress, the Management is the Executive (President and Administration), the shareholders are the people. The usual checks and balances are applied: the authorities are supposedly separated and the Board criticizes the Management.

The same procedures are applied: the Board can summon a worker to testify – the same way that the Senate holds hearings and cross-questions workers in the administration. Lately, however, the delineation became fuzzier with managers serving on the Board or, worse, colluding with it. Ironically, Europe, where such incestuous practices were common hitherto – is reforming itself with zeal (especially Britain and Germany).

Developing countries are still after the cosy, outdated European model. Boards of Directors are rubber stamps, devoid of any will to exercise their powers. They are staffed with cronies and friends and family members of the senior management and they do and decide what the General Managers tell them to do and to decide. General Managers – unchecked – get nvolved in colossal blunders (not to mention worse). The concept of corporate governance is alien to most firms in developing countries and companies are regarded by most general managers as milking cows – fast paths to personal enrichment.