Water: Another Global Crises ?
http://www.english-online.at/economy/water/water-another-global-crisis.htm
Each human needs about 20 litres of water a day for the basics - washing, cooking and drinking.
But there are many places around the world, where people get five litres of water and less to live on.
The situation is worst in Africa, especially some communities of Eastern Africa.
Why do some places have so little water and how will the availability of water change in the future?
Across the world 1.6 b more people have access to clean drinking water than twenty years ago.
But population growth and climate change could alter this picture. In some regions water is
becoming very scarce, especially in places where consumption is already very high.
There are several rivers, for example, that don’t even reach the sea any more. The Yellow River in
China and the Murray-Darling in Australia are two examples. Mud and sand have to
be removed from the bottom of the rivers so that they don’t dry up. The Aral Sea in Central Asia
and Lake Chad in Africa have shrunk in size because the rivers that flow into them have dried up.
In Tanzania, streams are drying up because people are taking out more and more water
to irrigate crops.
According to an international committee on climate change the warmer it gets the more rainfall we
are going to have, simply because warmer air can hold more moisture. But the weather patterns are
probably going to shift, meaning more water in regions that don’t have that much rainfall today.
Southern Europe and Northern Africa, as well as parts of Australia and South America
will experience less
rainfall, whereas more
rain
may
fall
in India,
Bangladesh
and Burma. Monsoons in these areas may become heavier, meaning that the water may run off and
cannot be used.
With about 2.5 billion people more on our earth by the year 2050 we will need more drinking water
as well. Those people will need more food. Because farming uses up about 70% of all the
water supplies, water for cooking, washing and drinking will diminish.
Industrialized nations will be able to cope with the problem in a better way because they have the
money to do so. Western Australia and some Middle Eastern countries are building desalination
plants, expensive ways of getting clean water from the ocean.
Governments and societies will have to decide much more carefully what to do with water. Even in
the Amazon rainforest, where water should be plentiful a combination of human
settlement, deforestation and the drying of some streams have brought about a decline in the
water supply.
Glossary
•
basics = the things you need to live and survive
•
cope = deal
•
desalination plant = a factory that turns salt water from the ocean into drinking water
•
moisture = small bits of water that are in the air
•
run off =go away
•
shift = change
•
shrink- shrunk = to become smaller
Assassination
https://learnenglish.britishcouncil.org/en/magazine/assassination
1963: a US president is assassinated. Many years after, people could remember exactly where they
were when they heard the news. Few other moments in history affect us so much.
"My heart burnt within me with indignation and grief; we could think of nothing else. All night long
we had only snatches of sleep, waking up perpetually to the sense of a great shock and grief. Every
one is feeling the same. I never knew so universal a feeling."
The quote above was the reaction of Elizabeth Gaskell, an English writer, on hearing of the
shooting of US President Abraham Lincoln in 1865; but it could well describe the feelings of
millions on November 22nd 1963 when another US president fell victim to an assassin’s bullet. The
event so etched itself into the collective memory that years after people could remember exactly
where they were and what they were doing when they heard the news. There are few other types of
historical moment that affect so many people in quite this way.
When in Rome
Back in the days of the Roman Empire, being the top dog was just as risky a business and
assassination was an occupational hazard. If you take a look at the long list of emperors who met
their death at the hands of others, you wonder what made the job so attractive. In the period
between 284 and 41 BC, more than half of the 40 or so emperors came to a premature and violent
end while in office, often at the hands of the soldiers who were supposed to protect them - from
Heliogabalus down to Claudius and Julius Caesar, not forgetting Caligula this very week in AD 41.
Where it all began
The earliest known examples of assassination may be in Iran, where three Kings were done away
with after palace intrigue in the 5th century BC. The father of Alexander the Great, Phillip of
Macedon, received his coup de grâce in similar fashion a century later. The word itself is supposed
to derive from an 11th century religious sect in Iran called the Assassins or Hashishim, who saw it
as their duty to eliminate enemies in this way, their name coming possibly from their habit of eating
hashish.
Headcount
Throughout history, political or religious succession has often been a bloody affair. In virtually
every society, the phenomenon repeats itself. In the United States, four presidents have been
assassinated, most recently of course John F Kennedy on that day in Dallas, Texas in 1963. In
Russia three Tsars have perished in the same way. In Italy seven Popes, in Egypt, one President and
two Prime Ministers, in France three kings, including the last…or was that merely execution?
Little triggers
So what exactly constitutes an assassination? The word always implies the murder of someone
important, usually involved in politics. And the assassin is sometimes doing it for money, but more
often for a cause. The Anarchists of late 19th century Europe saw it as a legitimate political weapon
which would cause the downfall of the whole ruling hierarchy: President Carnot of France, the
Empress of Austria, and King Umberto I of Italy were all sacrificed to this philosophy, although the
edifice refused to crumble. Political extremists of the Far Left followed the same path in Italy and
Germany in the 1970s. At certain points in history, however, such acts can set off a far larger chain
of violence, as occurred after the slaying of the Archduke Franz Ferdinand of Austro-Hungary in
1914 or the Prime Minister of Rwanda in 1994.
Democratisation of death
The demise of absolute rulers in the 20th century hasn’t put an end to this type of selective killing.
Prime Minister was just as dangerous a position to occupy as king or emperor before it;
Afghanistan, Burundi, India, Israel, Japan, Jordan, Lebanon, Pakistan, Rumania, South Africa, and
Sri Lanka are among the nations that have had at least one PM assassinated at some point. A certain
ruler of the United Kingdom narrowly escaped death from a bomb meant for her in 1984.
Fair game?
Political activists are also seen as legitimate targets for assassination by those who disagree with
their views. Mohandas Gandhi, Martin Luther King and Chico Mendes immediately spring to mind.
More recently, it is powerful men in the world of business and law who have become prey to the
dedicated assassin. In Europe, since the 1980s, German industrialists, Greek ship owners, Spanish
bank directors and Italian judges have all been bumped off.
Hidden hands
Other states are sometimes involved in assassination by proxy: a prime example being SS leader
Heydrich in Czechoslovakia during WWII, killed by resistance fighters on the orders of the UK
government intelligence service. The involvement of foreign powers is suspected but still unproven
in other cases: Salvador Allende, Prime Minister of Chile and Samora Machel, President of
Mozambique, are but two; Belgium has now apologised for the part its intelligence services played
in the death in 1961 of Patrice Lumumba, PM of Congo.
Give us the tools…
And how has the assassin plied his trade? In ancient times, the knife was favoured for a quick end
and poisoning for a slower lingering death, while in modern times it is usually the gun, but not only.
The bomb, the plane crash, the ice-pick and the exploding cigar have all been employed. And as for
that infamous Russian personal lifestyle coach, Rasputin, poisoning, shooting, beating and
drowning were all apparently necessary before he finally gave up the ghost.
The ones that got away
Which brings me to the subject of assassinations that failed. Cuba’s Fidel Castro must hold the
record for the political leader who has survived the most attempts to get rid of him. He has
employed a food taster for decades as did Roman emperors of old. In England, one plot that failed
to kill the King James I and the entire parliament in 1605 is still commemorated to this day every
November with fireworks and bonfires to symbolise the explosives the conspirators tried to use.
Inexplicable
And what about those public figures who were targeted out of the blue? I have always thought it
rather bizarre that anyone would want to murder John Lennon or Andy Warhol, not to mention Olof
Palme, the Prime Minister, and recently Anna Lindh, the Foreign Minister, of Sweden, one of the
world’s most peaceful societies. It just goes to show you don’t have to be a tyrant or involved in a
power struggle to be the victim of a madman.
Conspiracy theories
One persistent feature of assassinations are the conspiracy theories that go with them - did the
marksman really act alone? Conspiracies are not difficult to construct. Ask yourself who would
have wanted the victim dead and then collect a few facts about the crime that don’t quite tally. Add
in the obvious point that high-ranking figures are often involved with the secret services and have
access to sensitive information that ordinary citizens are not allowed to see, and you have yourself a
very fertile mixture which can keep those with an active imagination busy for years .
By the content of their character
Whatever the true circumstances surrounding their death, many high profile figures live on long
after they are taken from us in so sudden and shocking a manner. I leave you with the portentous
words of Martin Luther King spoken on the night before he died. His life is now celebrated in the
USA by a public holiday on the third Monday of January every year.
Like anybody, I would like to live a long life. Longevity has its place. But I’m not concerned about
that now. I just want to do God's will. And he’s allowed me to go to the mountain. And I've looked
over, and I've seen the promised land! I may not get there with you, but I want you to know tonight
that we as a people will get to the promised land.
Glossary
• snatches: fragments
• to etch: to engrave
• the top dog: somebody in authority
• demise: death
• proxy: person acting for somebody else
• gave up the ghost: died
• out of the blue: unexpectedly
• tally: correspond
I asked Tinder for my data. It sent me 800 pages of my deepest,
darkest secrets.
(The Guardian- Tuesday 26 September 2017)
The dating app knows me better than I do, but these reams of intimate information are just the tip of
the iceberg. What if my data is hacked – or sold?
A July 2017 study revealed that Tinder users are excessively willing to disclose information
without realising it. (Photograph: Alamy)
At 9.24pm (and one second) on the night of Wednesday 18 December 2013, from the second
arrondissement of Paris, I wrote “Hello!” to my first ever Tinder match. Since that day I’ve fired up
the app 920 times and matched with 870 different people. I recall a few of them very well: the ones
who either became lovers, friends or terrible first dates. I’ve forgotten all the others. But Tinder has
not.
The dating app has 800 pages of information on me, and probably on you too if you are also one of
its 50 million users. In March I asked Tinder to grant me access to my personal data. Every
European citizen is allowed to do so under EU data protection law, yet very few actually do,
according to Tinder.
With the help of privacy activist Paul-Olivier Dehaye from personaldata.io and human rights lawyer
Ravi Naik, I emailed Tinder requesting my personal data and got back way more than I bargained
for.
Some 800 pages came back containing information such as my Facebook “likes”, my photos from
Instagram (even after I deleted the associated account), my education, the age-rank of men I was
interested in, how many times I connected, when and where every online conversation with every
single one of my matches happened … the list goes on.
“I am horrified but absolutely not surprised by this amount of data,” said Olivier Keyes, a data
scientist at the University of Washington. “Every app you use regularly on your phone owns the
same [kinds of information]. Facebook has thousands of pages about you!”
As I flicked through page after page of my data I felt guilty. I was amazed by how much
information I was voluntarily disclosing: from locations, interests and jobs, to pictures, music tastes
and what I liked to eat. But I quickly realised I wasn’t the only one. A July 2017 study revealed
Tinder users are excessively willing to disclose information without realising it.
“You are lured into giving away all this information,” says Luke Stark, a digital technology
sociologist at Dartmouth University. “Apps such as Tinder are taking advantage of a simple
emotional phenomenon; we can’t feel data. This is why seeing everything printed strikes you. We
are physical creatures. We need materiality.”
Reading through the 1,700 Tinder messages I’ve sent since 2013, I took a trip into my hopes, fears,
sexual preferences and deepest secrets. Tinder knows me so well. It knows the real, inglorious
version of me who copy-pasted the same joke to match 567, 568, and 569; who exchanged
compulsively with 16 different people simultaneously one New Year’s Day, and then ghosted 16 of
them.
“What you are describing is called secondary implicit disclosed information,” explains Alessandro
Acquisti, professor of information technology at Carnegie Mellon University. “Tinder knows much
more about you when studying your behaviour on the app. It knows how often you connect and at
which times; the percentage of white men, black men, Asian men you have matched; which kinds
of people are interested in you; which words you use the most; how much time people spend on
your picture before swiping you, and so on. Personal data is the fuel of the economy. Consumers’
data is being traded and transacted for the purpose of advertising.”
Tinder’s privacy policy clearly states your data may be used to deliver “targeted advertising”.
All that data, ripe for the picking
What will happen if this treasure trove of data gets hacked, is made public or simply bought by
another company? I can almost feel the shame I would experience. The thought that, before sending
me these 800 pages, someone at Tinder might have read them already makes me cringe.
Tinder’s privacy policy clearly states: “you should not expect that your personal information, chats,
or other communications will always remain secure”. As a few minutes with a perfectly clear
tutorial on GitHub called Tinder Scraper that can “collect information on users in order to draw
insights that may serve the public” shows, Tinder is only being honest.
In May, an algorithm was used to scrape 40,000 profile images from the platform in order to build
an AI to “genderise” faces. A few months earlier, 70,000 profiles from OkCupid (owned by
Tinder’s parent company Match Group) were made public by a Danish researcher some
commentators have labelled a “white supremacist”, who used the data to try to establish a link
between intelligence and religious beliefs. The data is still out there.
So why does Tinder need all that information on you? “To personalise the experience for each of
our users around the world,” according to a Tinder spokesperson. “Our matching tools are dynamic
and consider various factors when displaying potential matches in order to personalise the
experience for each of our users.”
Unfortunately when asked how those matches are personalised using my information, and which
kinds of profiles I will be shown as a result, Tinder was less than forthcoming.
“Our matching tools are a core part of our technology and intellectual property, and we are
ultimately unable to share information about our these proprietary tools,” the spokesperson said.
The trouble is these 800 pages of my most intimate data are actually just the tip of the iceberg.
“Your personal data affects who you see first on Tinder, yes,” says Dehaye. “But also what job
offers you have access to on LinkedIn, how much you will pay for insuring your car, which ad you
will see in the tube and if you can subscribe to a loan.
“We are leaning towards a more and more opaque society, towards an even more intangible world
where data collected about you will decide even larger facets of your life. Eventually, your whole
existence will be affected.”
Tinder is often compared to a bar full of singles, but it’s more like a bar full of single people chosen
for me while studying my behaviour, reading my diary and with new people constantly selected
based on my live reactions.
As a typical millennial constantly glued to my phone, my virtual life has fully merged with my real
life. There is no difference any more. Tinder is how I meet people, so this is my reality. It is a
reality that is constantly being shaped by others – but good luck trying to find out how.
Glossary
•
•
•
•
•
•
reams: a very large amount of something
to bargain for: expect to get
lured into: tempted to
to ghost: to move stealthily
treasure trove: collection of precious things
cringe: grimace, wince
London house prices FALL for first time in 8 years - as properties in the East
Midlands outstrip the entire country.
BY VICKY SHAW- MIRROR 08:59, 29 SEP 2017
For the first time since 2002, the East Midlands was the top-performing region for house price
growth, with values up by 5.1% year-on-year.
London house prices have recorded a year-on-year fall for the first time in eight years, according to
an index. London was the only UK region to see an annual price decline in the third quarter of
2017, with a 0.6% fall, Nationwide Building Society said.
It was the first time since the third quarter of 2009 that London house prices have fallen annually.
For the first time since 2002, the East Midlands was the top-performing region for house price
growth, with values up by 5.1% year-on-year.
Robert Gardner, Nationwide's chief economist, said: "House price growth rates across the UK have
converged in recent quarters. "Annual growth rates in the south of England have moderated towards
those prevailing in the rest of the country. "London has seen a particularly marked slowdown, with
prices falling in annual terms for the first time in eight years, albeit by a modest 0.6%.
"Consequently, London was the weakest-performing region for the first time since 2005."
Northern Ireland saw a softening in annual growth to 2.4%, from 3.8% the previous quarter, while
Wales saw a pick-up, from 1.4% the previous quarter to 2.6%.
Annual price growth in Scotland was similar to last quarter at 1.9%, slightly up from 1.7%
previously. Across the UK as a whole in September, annual house price growth remained steady at
2%.
Within England, house price growth in northern regions (including the Midlands, Yorkshire and
Humberside, North West and North East) exceeded that in southern England (including the South
West, South East London and East Anglia). Northern England saw a 3.2% year-on-year increase,
while in the South prices were up 1.9%.
Nationwide said that while price growth in the South has slowed, the gap in cash terms between
southern and northern England remains "exceptionally high" at £171,000 - a figure which has
doubled over the past decade.
Talking about the possibility of the Bank of England base rate increasing from its record low of
0.25%, Gardner continued: "Providing the economy does not weaken further, the impact of a small
rise in interest rates on UK households is likely to be modest. "This is partly because the proportion
of borrowers directly impacted will be smaller than in the past. In recent years the vast majority of
new mortgages have been extended on fixed interest rates. "The share of outstanding mortgages on
variable interest rates has fallen to its lowest level on record, at circa 40%, down from a peak of
70% in 2001.
If you own a home you could be losing out on an extra £143 a week - tax free. "Moreover, a 0.25%
increase in rates is likely to have a modest impact on most borrowers who are on variable rates. For
example, on the average mortgage, an increase of 0.25% would increase monthly payments by £15
to £665 (equivalent to £180 per year)."
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the report "brings fresh
evidence that the housing market still is in a weak patch".
Howard Archer, chief economic adviser at EY ITEM Club, said: "We retain the view that house
prices are likely to rise by 2.5% over 2017. A modest rise around 2% also looks likely in 2018."
Jeremy Leaf, a north London estate agent and a former residential chairman of the Royal Institution
of Chartered Surveyors (Rics), said buyers and sellers are still nervous about prospects for the
market.
!
!
Glossary
•
•
•
•
year-on-year: compared with the previous year
quarter: (business)= 3 months
albeit: although
RICS is the world's leading professional body for qualifications and standards in land,
property, infrastructure and construction.
Just dreaming: The two poles of contemporary political life
fullspate.digitalcounterrevolution.co.uk/
In the West, ideas about politics basically come down to a stark contrast between the dreamers who
look forward to a world of peace, love and social harmony, and those who see themselves as
realists, who accept that society is, and always will be, made up of individuals who are out for what
they can get. These two camps are well represented, on the one hand, by John Lennon, with his
song “Imagine”, and, on the other hand, by Adam Smith – a world famous realist – with his book
“The Wealth of Nations.”
In his song, Lennon admits:
“You may say I’m a dreamer,”
And then adds:
!"#$%&'(%)*$%$+,%*)-.%*),/%
&%+*0,%1*(,23.%.*#%45--%6*5)%#1%7%
8)2%$+,%4*9-2%45--%-5:,%31%*),/;!%
This is the big dream: unity, harmony and world peace. One of the biggest philosophers of the
Enlightenment (Kant, writing in German over 300 years ago) also thought that every rational person
shared the objective of world peace as something to struggle towards. Lots of people (but not
everyone) agreed. The tricky question was how to achieve that peace. Lennon had some ideas about
this. We had to scrap private property. No possessions,” he sang – and we had to stop getting so
worked up about religion, and start imagining a world with,
!<*%+,--%=,-*4%#17%%
8=*:,%#1%*)-.%1>./;!%
If you ignore property, religion, nationality, ethnicity, language, gender, sexual preference, musical
taste, hair colour and all the other things that identify us with certain groups and not with others, it’s
possible to say: “Hey, we’re all basically the same. We'’re all just people. Why don’t we just live in
peace?”
This is altruism. You forget about yourself and your little local faction, and you identify with
humanity itself.
Cynics will raise a question about Lennon'’s sincerity. Didn’'t his deeds contadict ever so slightly
the words of the song? It was his song, he wanted the copyright, and he signed a contract to make
sure he got his share of the profits from it. Does this matter? Perhaps not, but it does help to show –
(if help were needed) – that Lennon’'s dream is just a bit too far removed from reality. Of course,
we need dreams, and dreams are part of reality, but the dreams we need are those that lead us
towards something we can really achieve, otherwise we are “just dreamers.”
Before leaving the dream, it is worth remembering how important a very similar dream was for one
of the most powerful movements on the left wing of politics: communism. Marxists were aiming
for something similar to Lennon: universal harmony with no possessions (or at least no private
ownership of the means of production), no religion and no divisive nationalities or racial and sexual
prejudices. But whereas Lennon thought we could just drop everything and love each other, the
communists thought there would have to be a big fight before world peace could be achieved.
Question: who would fight for this ideal world? Answer: people who had nothing to gain from the
present world. Back in the nineteenth century the growing working class seemed to fit the bill.
Marxists looked closely at the economy and made some predictions: factories and mines were going
to get bigger, the bosses were going to get richer, wages were never going to rise, and millions and
millions of workers would still be working in appalling conditions for at least ten hours a day and
living in grotty little rented houses with outside toilets. Hence the slogan:
"“Workers of the world unite. You have nothing to lose but your chains.”"
For some reason, the nineteenth century social theorists failed to predict that the workers of the First
World, at least, would end up with their own houses (complete with indoor toilets, hot and cold
running water, central heating, air conditioning and double glazing), cars, satellite dishes, DVDs,
home computers, microwave ovens and TV dinners. As a consequence of this, lots of workers
started to think that all that stuff about chains was a lot of old hat and as they set about planning the
repayments of their various loans and credit deals, they quickly forgot the old rallies and the calls
for world unity.
The other side of the Western political spectrum is one that would like to think of itself as being the
most realistic. Instead of dreams and songs and slogans and people hugging each other in the
streets, we have a cold, hard, scientific look at everyday economic reality - at least that is what it
was supposed to be. Adam Smith was one of the first to develop a science of economic life, and
over 300 years later his ideas are still hugely influential.
According to Smith, no one does anything for purely altruistic reasons. There’s always some selfinterest there. At root, we are selfish creatures. Other people had seen this and had drawn some very
pessimistic conclusions. Smith was more optimistic and developed a theory about the way a market
economy that relied on private self-interest to drive economic development would be the best for
everyone in the long run.
A quotation from his book "The Wealth of Nations" (published in 1776):
"“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,
but from their regard to their own interest.”"
In other words, if individuals are free to start businesses and sell things, their interest in their
personal profit will motivate them to produce the goods that people want to buy. The promise of
profits inspires people to be creative and take initiatives, looking for new markets or looking for
more efficient and profitable ways of making goods that already exist. There is no need for huge,
expensive and often corrupt systems of central control to ensure that producers produce the type and
the quantity of things that consumers need. And there is no need for altruism. Selfishness works just
as well. Conclusion: the best way of achieving the public good is by giving free rein to private selfinterest.
Up to a point, Smith just has to be right about selfishness. Even altruistic guys like Lennon are
interested in themselves. Surely fame and fortune were at least part of the reason he set out to
become a popstar. And lots of altruistic people want to have their own house and their own car.
Lennon had his flat in New York, and they don’t come cheap. There’s something quite natural
about wanting to buy things like this and say they’re yours. People certainly seem more interested
in looking after their own things than in looking after things they can use but cannot call their own.
There is also a certain selfishness in everything we do. That’s to be expected, and there’s nothing
wrong with it. It is pure pie in the sky to expect mere mortals to pay no attention whatsoever to the
way they might be rewarded for the good things they do on earth. Even supposedly altruistic
Christians believe in the Day of Judgement when the Good will rise again and enjoy the fruits of the
New Jerusalem. It’s part of what it means for an action to make sense that there is something in it
for you.
However, there is a problem with Smith’s ideas, and it’s the same problem as the one with
Lennon’s dream. They are both abstractions. Smith gives pride of place to self-interest and
considers talk of benevolence as so much hot air, whereas Lennon wants pure altruism and seems to
put self-interest in the same category as the desire for world domination and Aryan supremacy.
Both of these abstract from a social reality that, at its best, combines both self-interest and altruism.
There is an element of self-interest in everything we do, but people who care about being civilised
and not slipping back into barbarism have broader horizons. The popularity of songs like Lennon’s
illustrates that many people want to work towards a world in which they can look around and say:
“This is good. This is the way it ought to be.” They are not just butchers, brewers and bakers
interested in selling as many goods as possible.
Take your own house, for example. Almost everyone wants to be able to own their own homes,
which could be utterly self-interested and Smithian. But people also want to live in a lovely
neighbourhood. That requires that people don’t just build what they want and do what they want
with their property. They have to accept planning controls and respect the environment, and
volunteer to help out in various neighbourhood projects. The strange thing is that people are willing
to do this. They want to do it. This is a small way in which people demonstrate that they can
combine self-interest with a concern for the public good.
People want to be able to have their own things and enjoy themselves. To that extent Smith is
justified, – but people concerned about civilisation also want to feel that while working to pay off
the mortgage they are also contributing to a social order that they can approve of. Call it a desire for
meaning. People want to feel good about what they are doing, and it is not enough to see the money
coming in and the bills being paid. Smith pays no attention to this, but it is a need as deep and as
legitimate as the self-interest he bases his theory on.
Glossary
•
•
•
•
•
to scrap: to abandon
fit the bill: be suitable for a particular purpose.
old hat: not new or interesting
giving free rein to: allowing an emotion or feeling to be expressed freely
pure pie in the sky: something that you hope will happen but is very unlikely to happen
Leverage and the financial crisis
fullspate.digitalcounterrevolution.co.uk/english.../leverage.html
In 2008 the world financial system came close to a complete meltdown. No one wants a repeat of
that terrible crash, but how can a repeat be avoided? In the first instance we need to understand
what brought us to the brink - what we were doing wrong during the good times that was
unwittingly leading us to the cliff edge.
Just what led to the meltdown?
Certainly there wasn't a single factor that was to blame. From the mid 1990s financial institutions
were putting more and more money into new kinds of very risky investments. Some of these
investments “ like credit default swaps” are very difficult to understand (the New York Times
called them "arcane" in one article) but the particular investments are a less important factor than
the technique called leverage that was (and is) used to make those investments. Arguably,
understanding what leverage is, is the key to understanding the meltdown.
So what is leverage? In essence, it just refers to the practice of borrowing money to make an
investment.
To see how it works and to see both how attractive it can seem and how extremely risky it is, lets
compare leverage with an old-fashioned investment.
Property Speculation :As It Used To Be
Say you have $20,000 to invest in property. You buy land worth $20,000. Over a period of time its
market value increases by 10%. You make $2,000. Not bad. And in the old days you might have
been happy with that.
Investing With Leverage
$2,000 is nice, but more would be better, wouldn't it? So why not leverage?
If you have $20,000 (and if the economy is ticking over quite nicely) you should be able to
persuade a financial institution to lend you a lot more. Let's say you are loaned 19 times your
original amount, making the total sum $400,000. Wow! so you invest $400,000 in property. The
value increases by 10%. You sell the property and count your profits and find that you have made
$40,000. Instead of the 10% profit you would have made with the old-fashioned technique, you
have made 200%!! Of course you have to pay interest on the money you borrowed, and that might
cut your profits in half, but 100% profit ($20,000) is still way, way better than 10% ($2,000).
When times are good there is no doubting the attractions of leverage, but when the bubble bursts
things can get very, very nasty.
In the old days, if you bought property worth $20,000 with your own money and land values
dropped by 10%, you could hold onto the property, shed a few tears about losing $2,000 and wait
for the good times to come back again.
What happens to the leveraged investment? Well, after the 10% drop in land values your $400,000
investment is now worth $360,000. The market looks bad and the people who loaned you the
money want it back. They loaned you $380,000 (19 times 20,000). You can get $360,000 by selling
the property, but you still owe another $20,000. Shit! You started with $20,000 not so long ago, and
now you owe $20,000. You haven't lost 10%, you've lost 200%!! Actually, it's even worse than that
because you also owe interest on the loan, which could be another $20,000, so you lose all your
money and owe $40,000 (meaning you made a loss of 300%). You start tearing your hair out. And
it's not only you who is tearing out hair. The financial institution is, too, because it isn't an old
fashioned bank. It is also leveraged up to the hilt. It has made lots and lots of other loans like yours,
all leveraged. In this way, a relatively small downturn in the market (and for the guy who buys stuff
with his own money, a 10% downturn is not such a big deal) can send a tidal wave through the
investment and finance business, leaving lots of companies bankrupt.
In the example here, the leverage ratio is 19 to one, which might seem like a senseless amount of
borrowing for normal people. However, before the bubble burst the ratios were even higher. The
mortgage giants in the U.S. Fannie May and Freddie Mac, which were closely linked to the
government and were supposedly run to stricter standards than normal, were leveraged close to
100:1. If you surf a little on the internet for investment agents, you'll find some that say it's okay to
be leveraged 200 to one (i.e. you have $20,000 and you borrow $4,000,000 to put into risky
investments!!).
So what is the lesson to be learnt from all this? As John Stepek put it in Money Week recently:
"The only way to stop future crises is to prevent the level of leverage in the system from reaching
the point where it becomes dangerous." Leverage ratios above a sensible limit need to be banned.
The problem is that it is easy to find support for a policy like this during a crisis, but while the
economy is on the up so many powerful voices will insist that such regulations put an unreasonable
brake on economic activity.
Glossary
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•
•
is thicking over: continues to work but makes little progress
up to the hilt: completely and without any limits
tidal wave: tsunami
