As IF Times

link Britain rethinks China strategy after Copenhagen and Shaikh failure – Times Online

The lead paragraph of this piece summarizes nicely the naivete in which the West views China:

“…After the Copenhagen debacle this month and the execution of the first citizen of a European country by China since 1951, Britain is now reassessing how to handle China diplomatically.

In both cases the Foreign and Commonwealth Office appears to have considerably overestimated its leverage with the emerging superpower, convinced until it was too late that China was so desperate to avoid public criticism that it would yield to private pressure. A wholesale change of direction is ruled out but senior government figures admit to feeling shaken by the twin failures…”

As if. Let’s just take a breezy survey of who’s at the poker table. It can be argued that the wealth, power and influence of England as an empire has diminished significantly since the days when the Empire covered most of the globe. The halcyon days when Dukes and Earls commanded large plantations and expansive lands in far flung venues lives on only in dusty old adventure novels. The days when the threat of a squad of British soldiers dropping by to keep the natives in line are quaint bits of history.

Clearly on the other ascending horizon, China is now the dominant player in any game that they choose to play. Clearly in manufacturing since no western nation can compete at the cost advantages that China enjoys. Clearly in the financial space since they are rapidly becoming the largest holders of Western nations’ ballooning sovereign debt. Clearly militarily as China has built up their navy as well as other weapons armaments. Clearly in resources as they now compete for valuable commodities such as oil, minerals and precious metals. Perhaps most compelling is the sheer size of China’s population with a burgeoning youth eager for education and and the associated future benefits in fields of technology, engineering and science. It’s quite possible that soon, the graduating class of a given PhD level of math or engineering can equal the population of a small U.S. city.

Contrast that to the western societies where law degrees are seen as paths to success, leaving most engineering and science seats to the foreigners.

With the explosion of China’s influence onto the world stage again, it’s logical to expect that China will do what they see as expedient for China. Certainly in the realm of domestic issues and laws. While certainly harsh and swift by western standards, the Chinese have little trouble acting on policies decisively. Contrast this to the western leaders, especially recently who appear to be weak and vacillating over every major policy issue.

Politically, it’s going to take more than fear of few diplomatic tsk tsks to influence the Chinese. It’s very hard to bluff when the guy across the table has all the chips and all you have are a couple of reds and some drink stains.

link JPMorgan Assails U.K. Bonus Tax, Sparks Doubt on Canary Wharf – Bloomberg.com

The expected knee jerk fall out continues from the massive banking boo boo that cratered some big time institutions last year. Mr. Dimon, chair of JP Morgan complains that his firm did not take any money from the UK government and therefore should not be subject to a 50% tax on any bonuses that may be paid to their staff. In a very thinly veiled threat to the UK authorities, he hinted that the location of new headquarters in London could be in jeopardy since other European financial centers are more receptive to financial firms.

This is like watching two biker gangs going at it, there is no good guy and you hope they both lose.

Firstly, any time that governments slap a usurious tax on legitimate businesses is just plain misguided at best, socialistic at worst. It’s either pandering to the people or pandering to a philosophy.

However for Mr. Dimon to claim that JP Morgan did not receive money from the UK is totally disingenuous. At the time of the great banking meltdown last year, large and venerable institutions deemed too big to fail were given funds by governments in the U.S. and the U.K. in order to stay afloat and maintain liquidity. In our modern times, the fabric of the financial world consists of threads from players from all over the globe. One of the greatest risks is not an obvious one and that is, counterparty risk. If bank A has instruments guaranteed implicitly by assets or promises by bank B, any upset in the value of Bank B’s assets will negatively influence the assets of bank A. Put another way, if your house is insured by Allstate and Allstate collapses, your house is no longer insured.

This of course is where the governments came in, for while it was not known exactly the extent of the cross liabilities of all financial firms at the time, it was accepted that most every bank and financial firm in the world would be affected if liquidity and financial guarantees were not made. Purists would say, “let ’em fail”, but the fact is we really do not know the final consequence of such inaction. Regardless, that’s for another discussion.

The point is, JP Morgan quite possibly owes it’s relative health today to the survival of other large banks that still exist only because of funds doled out to them during the crash. In addition, because banks have been allowed to grow and take over most every aspect of our lives from simple banking, to mortgages, insurance, trading etc etc, the collapse of such behemoths can truly wreak havoc upon any economy as last year’s hiccup showed. In this light, governments are pressured, actually forced to guarantee the banks’ businesses. In effect, the government backstops all these ‘too big to fail’ institutions. If you’re too big to fail, there’s little risk in any of your business decisions.

Imagine if you controlled the spigots to the water supply in a region and you decided to spend lots of money to make jalapeno flavored water for export because apparently there was money to be made in it. It’s not going to matter if it fails or not, because people will always need water and will support your company regardless. You can’t lose.

The largest banks are in the same position. Banking is not that interesting. Only by taking chances on products or services can you create outsize returns for your shareholders, as it should be for any business. Right now, the risk reward curve is skewed so that in crummy years, even if they lose the house money, the executives still get paid handsomely whereas if the outsize bets pay off in any given year, they get paid like robber barons. What a gig! So for Mr. Dimon to complain that a 50% tax on bonuses is unfair speaks to how out of touch people are in the financial world.

Finally, we assume that a decision to locate offices in London confers some benefit to the shareholders of JP Morgan. If this were not the case, presumably they would have chosen to locate elsewhere in the first place. So we assume that the complaining is just bluffing. Of course, it’s easy to bluff when playing with the house money.