Air New Zealand: Sweatshop in the Sky

Big story out today about Air New Zealand and the rates they are paying their Chinese cabin crew. Shanghai based crew flying on the Shanghai-Auckland route, alongside NZ cabin crew, are being paid less than the NZ minimum wage.

This is nothing short of disgraceful and ANZ will get a deserved roasting in the media. Given that they are majority owned by the Government one can expect a serious review of policy.  But it raises some serious issues: where should the line be drawn?

What about staff working locally on the ground? I would say they are in a local designation and so should be paid local rates but the cabin staff are working in an international space and should be paid the same rates as their NZ based counterparts.

Whilst this issue seems clear cut and a PR fiasco for ANZ, how the international labour market works is not so clear. We send manufacturing offshore, an issue that rankles with many,  in order to take advantage of cheaper labour and other costs. So one could argue that ANZ should be employing as many Chinese cabin staff as possible as their labour is cheaper.

One could also take the argument that working for ANZ is a great opportunity even with the local rates of pay and as the local Chinese airline market expands, as it surely will do, then pay levels will rise as competition kicks in.

The internationalisation of labour is going to bring some interesting issues to the surface as well as unexpected consequences. Previously we have had huge barriers to the movement of labour but with the EU expanding and both China and India developing huge domestic markets, the door will be opened wider to a freer and more efficient labour market.

We’ve had the polish plumber in London so how about the Chinese electrician in New Zealand.

As Ben says “welcome to the global village”.

Fed bail out continues: Bear Stearns throws in the towel

Bear Stearns finally ran up the white flag today and was forced to seek funds from JP Morgan for 28 days. These loans have been underwritten by the Fed essentially preventing Bear Stearns going under.

This was the moment of truth for the Fed. They blinked.

Now they have underwritten the US banking system they will have no choice but to support any institution that experiences similar problems. On one hand this is a prudent move as the implications of a bank failure are very serious but the sad fact is that in order for the market to recover from this era of cheap and funny money is to allow failure to occur.

So the taxpayer can now expect to pick up the tab for this party. It will be interesting to see if this spreads outwards from the US as the credit markets simply disintegrate.

Expect more official action next week probably involving currencies as well.

Liquidity concerns: How safe is your money?

Yesterday the New Zealand arm of the Dutch giant, ING, suspended withdrawals from 2 of its funds affecting some 8000 investors. The 2 funds were invested mainly in credit securities and were down over 20%-25% over the last year.

So nothing new there except the suspension of withdrawals from the fund. Now we’ve seen this already in the banking sector when Northern Rock closed its doors to depositors. Last month Scottish Equitable told 129,000 investors that they could not access funds for at least a year. Its familiar and sad story.

What’s the world coming to when you savings or cash is not safe.  Well maybe we’ve got too comfortable with our present financial arrangements. Have you ever met a poor investment banker? Well probably not. The last 15 years has seen a phenomenal rise in the idea of money as an asset class itself. The ability of banks to create money via debt and ply the financial system with leverage has led to a new type of investing. The ability to create money out of nothing is how markets have grown to the size they are now. It’s not a zero sum game as long as the supply of money and leverage keeps increasing. No one embodies this more than Stephen Schwarzman of Blackstone. Just as George Soros and Michael Milken of previous years, he will be known as the man who made the most of the situation at the time.

What we are witnessing now is the de-leverage when all that new money goes poof! and people look around to see where the security or asset is and find it’s more of the same. Round and round it goes until it simply disappears (money is destroyed) or an asset is finally found to be sold, usually at an extremely low price.

So its pays to be sensible here. Check your savings and investments. Make sure you understand what type of access you have to them and under what terms.

Currency Intervention: Next on the Fed’s Agenda

With the Dow already 250 points off the recent bounce and the $ hitting new lows against the Yen, Sfr and Euro, the time has come for the Fed to look at the $. Today even the President was moved to make some comments about strong dollar policy and importing energy inflation through a weak dollar.

The problem the Fed has is that the $ could really collapse here. $Yen is current at 101.15, a 13 year low give or take. That was when I was actually quoting the currency pair myself. Actually it has been down at these levels a few times but briefly. For the Japanese this is not helpful at all with exporters penciling in 113 for 2008. But the psychological effect of the $ breaking 100 against the Yen and 1.00 against the Sfr may well bring some serious fallout. The $ may well be booted into oblivion by all those on currency pegs to the $ who are certainly wondering whether or not to abandon them.

The question is whether intervention would do any good. Well it might and that may be all that is needed. There isn’t any good news for the US right now but then again its been one way traffic for 6 months now and for most of the last few years for the $. Is there any good reason to see it lower other than a complete disengagement by the market of the $.

The knock on effect in all markets could send the whole US financial system over the edge. A quick 5% appreciation in the $ against the majors as well as Aus, Cad and Nz would certainly help take the edge off the current situation. It may not save the $ in the long run but it would buy some breathing space over the next few months.

Will they do it? Well if they don’t you’d better hold on to your hats as carry trades get unwound.

Man the Pumps: Central Banks run up the white flag

With rumours continuing to circle around main street financial institutions in trouble, the Fed along with other central banks piled in another $200bln worth of liquidity in a vain hope to stem the tide. It certainly worked sparking a massive rally in the US market which was looking very weak indeed.

I wrote 6 weeks ago that the Fed would have no option other than to underwrite the whole financial system. This is exactly what they are doing. The worrying aspect of this approach is that it leads the market to depend on continuing liquidity to provide confidence and prevent what would be happening without intervention, namely a full scale rout with several institutions going under.

This creates extreme moral hazard. Even though many financial institutions have clearly acted irresponsibly and in some cases in other ways, they will not be allowed to fail unless a “deal” is worked out where they will be “acquired” quietly for a nominal sum and so the system stays solidly in place and the illusion is maintained.

F.William Engdahl lays out his thoughts on the origins of this mess. It’s focus is the US over the last 100 years and is interesting to read though he makes some strong accusations about the actions of certain people.  The extent to which small cliques have organised and run the financial system is open to questions but there is no doubt that the US prevailed at Bretton Woods on the strength of pure self-interest.

So what now? Well I would say more of the same. But gravity is a powerful force and its hard to imagine these markets not falling further and more de-leveraging taking place in credit and carry trades. I’ll discuss shortly what a new global currency system might look like because the current one is about to explode.

Teenage Pregnancy: Incentives to avoid being knocked up

From the Rt Hon Balneus comes an interesting proposition to reduce teenage pregnancies: simply offer a cash incentive for not getting pregnant.

This came about from a post about population reduction being the answer to reducing carbon emissions. As i noted in my previous post population growth, especially in developing countries, is putting severe pressure on all resources.

China has been on to this well in advance with its one child per couple policy.  For developed countries teenage pregnancies have been a bit of a problem and something that has not been adequately addressed. This idea fits in neatly with the premise of the “Logic of Life” by Tim Harford.

Tim notes that people make complicated  calculations about potential trade offs every day whether its to have unprotected sex or park illegally. He argues cogently that we do respond to incentives and change behaviour when the pay offs look in our favour.

For example he notes research which showed juvenile crime lower or falling in US states where the age for adult criminality was lower than in states where it was higher. The reason was simple: the payoffs were worse for juvenile criminals in states where they would be tried in the adult system. Juveniles were simply responding to the market.

So for teenage pregnancies it is a similar story. Where welfare benefits are good for both mother and baby, there is no disincentive to get pregnant. So the payoffs for riskier behaviour are ok. That’s because as a society we value the rights of the baby and choose to provide for it regardless of how it arrived.

Now imagine we said to all teenage girls that for every year until a certain age (whether 18 or 21) they would receive $200 in a savings account for not getting pregnant. That would be an interesting idea to model.

Now I am sure there are many pros and cons to this but I like the idea of policymaking taking into account how people behave rather than what officials deem to be a good or right thing to do.