Friday, March 6, 2009

When “Cash” Is Not Actual Cash

One of my callers on the radio today had a curly question about his superannuation. As we all know, the value of our super has taken a massive hit as the sharemarket has lost around half of its value in the past year or so. As a significant proportion of our super is tied up in shares it has also suffered, although not as dramatically because of the spread of investments across a range of classes. Super funds also benefit from active management meaning that as conditions change, some of the money can be shifted away from poorly performing investments and into better ones. This is limited by the rules of the particular fund in question so that a fund which is marketed as a share fund must maintain a certain proportion of its investments in shares. That’s why most super funds also offer their customers the choice of a range of funds, and the ability to switch from one to another.

Being a sensible bloke, my caller has already instructed his super fund to switch his investment out of the sharemarket based fund and into the fund described as the “Cash Option” fund. The idea was that rather than being exposed to any further deterioration of the sharemarket, his money would be invested into interest bearing cash deposits. Even though interest rates are also falling at present, the point would be that the actual money invested would be held as cash and therefore would not lose any value. Quite simply, it is a defensive investment strategy which many people would find suitable for uncertain times.

Unfortunately, even after making this change into the “Cash Option” fund, my caller was told that the value of his superannuation investment was still falling, and he wanted to know why. The whole reason for choosing the “Cash Option” was to preserve the value of his investment, but that wasn’t happening. This situation illustrates a pitfall which has a direct connection to the very things which caused the financial crisis in the first place, and it is this: cash is not always actually cash.

In this case it turns out that only around 10% of the money is actually deposited in interest bearing bank accounts. The rest of it, approximately 90% of the money in the so called “Cash Option” fund, is invested in something called a cash enhanced fund. So it’s a fund investing in a fund. Well, what about the Cash Enhanced Fund? Surely that is invested in interest bearing accounts? Well, actually no. A big chunk of it has actually been splashed out on something called “Asset Backed Securities” which is a bit of paper representing a collection of mortgages secured by real assets. Is this starting to sound familiar?

Asset Backed Securities ought to be as safe as houses, but the problem is that they are only good so long as the underlying assets actually retain value. In the current financial climate that is no longer the case. In fact, the whole Global Financial Crisis was triggered by a form of Asset Backed Securities which had been constructed upon the foundation of dodgy mortgages, the so called sub-prime loans in the United States, and subsequently bundled, packaged and sold so many times over that they resembled the financial equivalents of Russian dolls. Underneath all the layers there is very little if any actual value.

Now, not all Asset Backed Securities are devoid of value, but the problem is that they are not actual cash. They are a tradable security, and as such their price can rise and fall, the same as shares do. Right now the value of Asset Backed Securities is taking a belting just like everything else. That’s why you can have your money invested in so called “cash” and still be going backwards. “Cash” isn’t always actually cash.

The good news is that some superannuation funds do offer investment options which are actually cash deposits. If your fund doesn’t, and you want to have the choice, you do have the right to move your super elsewhere to a fund which does. Every fund must provide a Product Disclosure Statement, and that statement must spell out exactly where your money is invested. If you don’t like what you read, you are entitled to take action. It is, of course, always a good idea to seek independent financial advice from a properly qualified professional, but it’s also wise to be as well informed as you can.

Thursday, March 5, 2009

Secret Searches Another Step Towards A Police State

While we all want to be able to feel safe in our community, and to feel that police have the powers and the resources that they need to keep us that way, it can be a mistake to allow police to have too much power to intrude into the lives of ordinary people. The New South Wales government has introduced legislation to give police the ability to conduct covert searches of suspects homes while withholding notification from the suspects for up to three years. It is intended to be used against serious criminals who commit offences which are punishable by at least seven years jail, and in particular is aimed at criminal gangs. When it is put like that it sounds as if it is easily justified in the name of clamping down on organized crime and keeping the community safe. Unfortunately, things are not as simple as that.

The new laws, if passed, will give police unprecedented powers, subject to a warrant issued by the Supreme Court. These are powers even more extensive than those provided to Federal Police by Commonwealth national security and anti terrorism laws. This is a step which is not to be taken lightly. The Premier has said, “If you are a serious criminal in NSW you should not sleep easy. These laws will enable our police force to inspect your home without you knowing.” But that is the problem. Take away the preface and the message is clear. Police can enter your home when you are not there and they don’t even have to tell you they have been there.

Obviously, the government will tell us that this measure is for our own safety and security and many of us might even believe them. We will be told that we can trust the police to exercise their powers responsibly, and that the innocent have nothing to fear. The problem with that argument is quite simple. If they already have the proof that you are not innocent, why do they need to secretly search your house? If a trail of evidence leads erroneously to your door, being innocent won’t protect you from being secretly searched, and having your privacy breached. While it is important that a Supreme Court Warrant is required and it will provide some protection against inappropriate searches, it won’t stop all mistakes, and it may not prevent abuses.

No matter how sincere our government is about targeting the guilty, no matter how principled and well intentioned our police might be in exercising these powers, it is the system itself which creates the framework within which abuses of power can develop over time. It’s all very well to say that we can trust the police and officials we have now, but what if at some time in the future less scrupulous people find themselves in these positions of power. What would prevent them from circumventing the ever diminishing checks and balances and turning the system to their own ends?

We know from past experience that this is what happens. When law enforcement agencies are allowed greater and greater powers, they gradually become laws unto themselves. We know from past experience that while the strong measures can have success in combating organized crime, that success can subsequently evolve into control of crime, so that a kind of uneasy co-existence develops. Where abuses of power gradually become normal, it’s only a matter of time until those who are good cops find themselves increasingly alienated and ultimately outside the loop. We know from past experience that giving police more power, simply makes the police more powerful. It doesn’t necessarily make them better police. That’s why it is the system itself which must provide protection from abuses of power, not just the integrity of those who have the power.

And as for targeting serious criminals, the opposition has pointed out that anyone who is a serious criminal will simply take additional precautions to thwart any attempts to search their premises. Simply introducing more aggressive laws is unlikely to bother anyone who disregards the law in the first place. But those who are peaceful law abiding people are the ones who are being conned into giving up their rights to privacy, freedom of movement and freedom of speech by the incremental introduction of increasingly draconian laws which could pave the way towards a police state.

Wednesday, March 4, 2009

Not The End Of Cricket As We Know It

The terrorist attack in Lahore which saw half a dozen Sri Lankan cricketers wounded, and eight other people dead has been seen as changing everything for international cricket, at least for the foreseeable future. It’s true, this event marks a turning point in how terrorism operates and as a result also changes how we respond to it. Until now, fears for the safety of touring sports people related to the risk of being inadvertently caught up in extraneous events. Now the risk has become a matter of being seen as a direct target.

Of course, tensions between Pakistan and India are nothing new, and instability in the sub-continent has always provided cause for some level of concern. But the great thing about sport generally and cricket especially is that it has played a significant role in promoting tolerance and harmony even among people who otherwise might distrust each other. It’s and important role and one whose loss would be enormous if it cannot continue. But that is exactly the point at which we have now arrived.

Some people might be tempted to start spouting some sort of gung ho nonsense that cancelling tours only allows the terrorists to win, but that is simplistic lunacy. Cricketers are not fighting a war against terrorists. They are playing sport and promoting goodwill. When people start firing machine guns and launching rocket propelled grenades it’s not the function of cricketers to place themselves in harm’s way. Whether we like it or not, the circumstances are now too dangerous to send cricketers, or any sports people for that matter, to Pakistan, and grave questions hang over the wisdom of travelling to Dubai or to India. In fact, any tour to any part of the world where there is political unrest must now be seen in a different light.

The much bigger issue is that of terrorism itself, and this event also has an impact on how we should see the so called “War On Terror”, and how it is conducted. Pakistan is at risk of disintegrating, and while the military obviously retain control of the nuclear arsenal they are also at risk of splintering. The potential exists for what is now a serious situation to become one which is grave or perhaps even a lost cause. Pakistan’s alliance with the United States hangs by a thread which could be broken if their government collapses.

The challenge for the Western World is to refocus the campaign against terrorism away from the failed military occupation of Iraq and return to the first order of business which is to deal with the proponents of terrorism as criminals rather than legitimizing them as warriors. The West must work towards alienating fundamentalists from their own supporters by both fostering prosperity among disadvantaged and disenfranchised people and at the same time forcing the extremists to recognized as enemies of peaceful civilization rather than perceived as enemies of oppression.

That’s a monumental task, one which is much more complex and challenging than mounting a military campaign, but which is essential for defeating the ideologies behind terrorism. It’s also an ambition which is promoted by international sport. We can thank the success of cricket for promoting bonds of friendship between ourselves and the people of places such as Pakistan, India, and Sri Lanka. It is a pursuit which provides for people from widely disparate cultures to have common points of reference and to promote peace and harmony from a grass roots level. It is something which can unite people in a way that overcomes the things which divide them. Because of the success of international sport, there is an opportunity for some of that goodwill to be brought to the efforts to combat extremism. That’s why someone like Imran Khan can have so much support from not only his own country, but from all around the world, improving his chances of bringing about a change for the better. If it wasn’t for cricket, we probably wouldn’t know and we wouldn’t care.

That’s why international sport is so important, and is so much more significant than simply playing a game.

Tuesday, March 3, 2009

Child Rape Sentence Cannot Be Justified

The perception that judges are handing out lenient sentences has been given further impetus by the decision to give a suspended two year sentence to a man convicted of raping a four your old girl. At this point, very few details have been made public, other than the sentence and the fact that the 24 year old man pled guilty to the charge in relation to an event in South Grafton on 22 November, 2007. He had broken into the girl’s grandmother’s house, and assaulted her as she was sleeping.

A suspended sentence would normally by imposed where there are some sort of mitigating circumstances in cases of lesser severity. The problem of course is that it is impossible to imagine any sort of mitigating circumstances which would lessen the seriousness of a crime so revoltingly outrageous as raping a four year old. Even if there is some question of the perpetrator possibly having some sort of mental impairment diminishing his responsibility, surely his behavior would require his separation from the community.

The maximum penalty for the charge is 25 years in jail. Instead, after 14 months in remand, he has been allowed to walk free. One can only imagine the horror of the girl’s family, or the fear that might pervade other families in the community who could justifiably ask “what if he comes after my daughter?” If there is a justification for such a light sentence I have yet to hear it.

Both the Attorney General and the Shadow Attorney General have called upon the Director of Public Prosecutions to examine the merits of an appeal. The D. P. P. has yet to see the transcript of the judgment, so it remains to be seen what the reaction will be from that department. But it would appear that this judgment is so far out of line with community expectations that action must be taken.

Either there is a legitimate legal explanation for the lenient sentence, or the judge got it wrong. If the former is the case, it would call into question whether or not the law is adequate, given the seriousness of the crime. On the other hand, if the judge got it wrong, an appeal must be launched so that the court has the opportunity to correct the error. The question would also be prompted as to whether the judge may have erred in any other cases. If there is any other explanation, it is unlikely to satisfy the concerns of the community.

Either way, allowing a child rapist to go free does nothing to inspire confidence in the justice system.

Monday, March 2, 2009

Rewarding Failure Is The Real Obscenity

The genuine concern over excessively generous corporate executive pay packets and bonuses could easily be overshadowed by some of the more hysterical suggestions for cutting the tall poppies down to size. While the federal government is openly canvassing ideas on how to deal with what is a legitimate problem, there is the temptation to simply label all big pay packets as obscene. Unfortunately such a label only obscures the real problem while doing nothing to solve it.

We frequently hear criticisms of “obscene” figures, but the truth is that there is no such thing as an obscene amount of money. It is just an amount, neither good nor bad, nothing more nor less. What may or may not be obscene is what is done with that amount. If it is paid as a reward for destroying value, cutting jobs, and delivering an inferior result, then that could well be obscene. But more likely it is simply an example of bad judgment and poor business practices, inspired by self interest and greed in people who are not held sufficiently accountable.

At the same time the idea that all big pay packets are bad is equally counterproductive and equally stupid. Salary payments in any kind of sensible world should reflect the level of responsibility of a position as well as the qualifications and the skill of the person in that position. There is nothing wrong with using incentives and bonuses to reward achievement. In fact, it’s important for people at every level to see real rewards for their efforts, and if your efforts are at the highest level it makes sense that the rewards should also be higher.

But that is the problem with the current state of play. Corporate pay structures have been rewarding the wrong things, with extreme cases seeing failed executives being paid big fat termination payments to go away and stop causing trouble. It is fundamentally bad business practice to reward failure and to pay sums that don’t represent value in terms of the performance of the executive. The corporate buccaneers who have been lining their own pockets have gotten away with it because those who should have been responsible, that is the directors, have fallen for false arguments about paying top dollar to get top people, who ultimately turn out to be working for their own interests rather than the interests of their shareholders.

That’s why there have been increasing calls for some kind of government regulation to cap salaries. While it sounds appealing to the workers who have been put out of a job, and to consumers tired of being ripped off by companies selling inferior products at premium prices, a salary cap is actually not a good idea. It is contrary to the principles of a free market, and would be counter productive in that it would act to remove incentive. For business to succeed there must be the capacity to reward those who make that success happen. Of course, that capacity should extend to everybody in the company, not just a handful of managers at the top. It is conceivable that top managers may well be worth many millions of dollars, and if the company is sound there should be no impediment to any reasonable reward.

Of course, just because something is a poor business practice doesn’t stop it from happening, so there is a need for some form of regulation. The purpose of regulation should be to protect human rights, to prevent abuses of power, to encourage best business practices, and to prevent criminal behavior. Regulation should discourage excessive rewards from being given for the wrong reasons, and the usual tool for any government to discourage anything is tax. Any review of regulations for corporate salaries should revisit the old practice of imposing a high marginal tax rate on supersized salaries. Once upon a time, the top marginal tax rate was 60%, levied on those who earned about 20 times the average wage. Today, that would be around $1.2 million, right in the ballpark for this debate. Along with that there is also a clear need for increased power for shareholders in approving or blocking bonus payments, rights and options issues, and all of the other methods of handing over shareholder equity as a substitute for actual cash.

Those two measures should help restore some commonsense to corporate management without the need for communist policies like government regulated salary caps.