...........READ THE PRISM...........READ THE PRISM..........

IN THE MOOD FOR LOVE

CHINESE DRINK

OIL FLOW TO LAST MONTHS

ANGLO IRISH BANK CHAIRMAN ARRESTED

VOTE FOR EXTINCTION

ALICE IN WONDERLAND

THE FINANCIAL CRISIS NOVEL

PUU OO ERUPTS

COMMENT

EDITORIAL

SOME AVOIDED BEING TAKEN TO THE CLEANERS

NEW BOOKS

EAT YOUR DOG!

Owners should consider doing without, downsizing or even eating their pets to help save the planet. A medium-sized dog has the same impact as a Toyota Land Cruiser driven 6,000 miles a year, while a cat is equivalent to a Volkswagen Golf. But rabbits and chickens are eco-friendly because they provide meat for their owners while a canary or a goldfish has little effect on the environment. At the same time a pair of hamsters do the same damage as running a plasma television, suggests the book Time to Eat the Dog: The Real Guide to Sustainable Living. New Zealand-based authors Robert and Brenda Vale base their findings on the amount of land needed to grow food for pets ranging from budgerigars to cats and dogs. They say an average Collie eats 164kg of meat and 95kg of cereals a year, giving it a high impact on the planet. But a pair of rabbits can produce 36 young annually, which would provide 72kg of meat and help decrease the owner's carbon footprint.

AMADINEJAD JEWISH?

KIM JONG IL DYING

BANKSY EXHIBITION

Graffiti artist Banksy has pulled off an audacious stunt amid tight secrecy to stage his biggest ever exhibition. A burned-out ice-cream van is among 100 works Banksy has installed at Bristol's museum, replacing many of the museum's regular artefacts. The reason the museum was closed was kept secret from top council officials. Banksy said: "This is the first show I've ever done where taxpayers' money is being used to hang my pictures up rather than scrape them off." Staged in the council-owned City Museum and Art Gallery, Banksy v Bristol Museum features animatronics, installations and a sensory display. "This show is my vision of the future, to which many people will say: 'You should have gone to Specsavers'", Banksy added. The exhibition and its location have been a closely-guarded secret since October, with just a couple of museum officials in the loop. "I think we may have dragged them down to our level rather than being elevated to theirs," said Banksy of the subterfuge involved in staging the show in his home city. The artist himself was involved in setting up the exhibits and came to the museum to oversee its installation, but staff were unaware who he was among the crew setting up the show. He became famous after a series of "guerrilla" stunts which saw him paint the West Bank barrier and put an inflatable figure of a Guantanamo Bay prisoner at Disney World.

GORILLA WARFARE

SRI LANKA HUMANITARIAN CRISIS

FINANCE AND WAGES

Something has clearly changed within the past 40 years. Banking and asset management used to be perceived as fairly dull jobs, which did not attract a significant wage premium. But after 1980, financial wages started to climb much more quickly than those of engineers, another profession that ought to have benefited from technological complexity.

Around the same time, banks became more profitable. Andrew Smithers of Smithers & Co, a firm of consultants, points out that the return on equity achieved by British banks averaged around 7% between 1921 and 1971; since then it has averaged around 20%.

Such a sustained rise suggests that the finance sector has been able to extract “rents”, a term that economists use to explain excess profits. But that suggestion only raises another question; why haven’t those rents been competed away?

Barriers to entry are a standard explanation for an uncompetitive market. In the case of banking, these barriers may exist in the form of the implicit subsidy provided by government support; this lowers the cost of finance for leading institutions. In March Andrew Haldane, executive director for financial stability at the Bank of England, argued that the effective annual subsidy for the five biggest British banks during the credit crunch was more than £50 billion ($73 billion), roughly equal to the whole industry’s annual profit in the years before the crisis.

As evidence of the industry’s lack of competition, Mr Smithers points to its increasing concentration. The proportion of bank assets held by the three biggest American banks has tripled since 1994. It is far from clear that this concentration is healthy for the rest of the economy; Mr Haldane cites research showing that economies of scale peak when banks have $5 billion-10 billion of assets.

The big banks may have benefited from other factors apart from a lower cost of capital. In market-making, for example, size gives banks an advantage since they have more knowledge of institutional investors’ order flow and can position themselves to benefit.

In addition, the growth of the financial industry has coincided with the move to floating exchange rates and market liberalisation. The result has been the creation of a whole series of instruments, mainly derivatives, designed to deal with the risks of interest-rate and currency movements. The more complex the product, the less transparent it is to customers; that makes it harder to judge the price they are being charged. The surge in trading volumes is also significant; at every stage the finance industry takes a cut in the form of a bid-offer spread, a fee or a commission. This churning is a classic rent-seeking activity.

What to do about it? At the moment, governments are wading in with all kinds of levies and regulations, which will probably have unintended consequences. Rather than tackle the big problem (for example, by breaking up the banks), they waste their time on populist measures like banning short-selling.

It would be far better if the private sector could deal with the problem. Paul Woolley, a former fund manager who set up centres for studying capital-market dysfunctionality at the London School of Economics and the University of Toulouse, has published a manifesto which he believes should be adopted by the world’s biggest public, pension and charitable investment funds. Among other things, he proposes that the funds should adopt a long-term investment approach, cap annual portfolio turnover at 30%, refuse to pay performance fees or invest in alternative assets such as hedge funds and private equity, and invest only in securities traded on a public exchange (so no structured products like the infamous collateralised debt obligations).

Some will argue with the details but the thrust of the argument is simple. If the big funds in effect own the market in aggregate, then frenetic trading activity is fruitless, even before costs. Perhaps they are chasing a chimera: they all wish to be above-average performers. Perhaps they are bamboozled by an asset-management industry that competes not on price but on the basis of (probably unrepeatable) past performance. Whatever the reason, the effect is that the returns that millions of savers hope to earn end up being paid to the finance sector as rents.

GRASSHOPPERS AND ANTS

Yet life is more complex than in Aesop’s fable. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.”

Ants and grasshoppers are happy. Being frugal and cautious, the ants deposit their surplus earnings in supposedly safe banks, which relend to grasshoppers. The latter, in turn, no longer need to make goods, since ants supply them so cheaply. But ants do not sell them houses, shopping malls or offices. So grasshoppers make these, instead. They even ask ants to come and do the work. Grasshoppers find that with all the money flowing in, the price of land rises. So they borrow more, build more and spend more.

The ants look at the prosperity of grasshopper colonies and tell their bankers: “Lend even more to grasshoppers, since we ants do not want to borrow.” Ants are far better at making real products than at assessing financial ones. So grasshoppers discover clever ways of packaging their grasshopper loans into enticing assets for ant banks.

Now, the German ant nest is very close to some small colonies of grasshoppers. German ants say: “We want to be friends. So why do we not all use the same money? But, first, you must promise to behave like ants forever.” So grasshoppers have to pass a test: behave like ants for a few years. The grasshoppers do so and are then allowed to adopt the European money.

Everyone lives happily, for a while. The German ants look at their loans to grasshoppers and feel rich. Meanwhile, in grasshopper colonies, their governments look at their healthy accounts and say: “Look, we are better at sticking to the fiscal rules than ants.” Ants find this embarrassing. So they say nothing about the fact that wages and prices are rising fast in grasshopper colonies, making their goods more expensive, while lowering the real burden of interest, so encouraging yet more borrowing and building.

Wise German ants insist, gloomily, that “trees do not grow to the sky”. Land prices finally peak in the grasshopper colonies. Ant banks duly become nervous and ask for their money back. So grasshopper debtors are forced to sell. This creates a chain of bankruptcy. It also halts construction in the grasshopper colonies and grasshopper spending on ant goods. Jobs disappear in both grasshopper colonies and ant nests and fiscal deficits soar, especially in grasshopper colonies.

German ants realise that their stores of wealth are not worth much since grasshoppers cannot provide them with anything they want, except for cheap houses in the sun. Ant banks either have to write off bad loans or they must persuade ant governments to give even more ant money to the grasshopper colonies. Ant governments are afraid to admit that they have allowed their banks to lose the ants’ money. So they prefer the latter course, called a “bail-out”. Meanwhile, they order the governments of the grasshoppers to raise taxes and slash spending. Now, they say, you must really behave like ants. So the grasshopper colonies go into a deep recession. But grasshoppers still cannot make anything ants want to buy, because they do not know how to do so. Since grasshoppers can no longer borrow, to buy goods from ants, they starve. The German ants finally write off their loans to grasshoppers. But, having learnt little from this experience, they sell their goods, in return for yet more debt, elsewhere.

As it happens, in the wider world, there are other ant nests. Asia, in particular, is full of them. There is a rich nest, rather like Germany, called Japan. There is also a huge, but poorer, nest called China. These also want to become rich by selling goods to grasshoppers at low prices and building up claims on grasshopper colonies. The Chinese nest even fixes the foreign price of its currency at a level that guarantees the extreme cheapness of its goods. Fortunately, for the Asians, or so it seems, there happens to be a very big and exceptionally industrious grasshopper colony, called America. Indeed, the only way you would know it is a grasshopper colony is that its motto is: “In shopping we trust”. Asian nests develop a relationship with America similar to Germany’s with its neighbours. Asian ants build up piles of grasshopper debt and feel rich.

Yet there is a difference. When the crash comes to America and households stop borrowing and spending and the fiscal deficit explodes, the government does not say to itself: “This is dangerous; we must cut back spending.” Instead, it says: “We must spend even more, to keep the economy humming.” So the fiscal deficit becomes enormous.

This makes the Asians nervous. So the leader of China’s nest tells America: “We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing.” The leader of the American colony laughs: “We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us.” So America teaches creditors a lesson from a dead sage: “If you owe your bank $100, you have a problem; but if you owe $100m, it does.”

The Chinese leader does not want to admit that his nest’s huge pile of American debt is not going to be worth what it cost. Chinese people also want to go on making cheap goods for foreigners. So China decides to buy yet more American debt, after all. But, decades later, the Chinese finally say to the Americans: “Now we would like you to provide us with goods in return for your debt to us. Thereupon, the American grasshoppers laugh and promptly reduce the debt’s value. The ants lose the value off their savings and some of them then starve to death.

What is the moral of this fable? If you want to accumulate enduring wealth, do not lend to grasshoppers.

martin.wolf@ft.com

More columns at www.ft.com/martinwolf

Read and post comments at Martin Wolf’s blog

FINANCIAL DOOMSDAY MACHINE

THE NEW GEOLOGICAL ERA - THE ANTHROPOCENE

PALESTINIANS RIOT IN JERUSALEM

RATINGS FIRMS CLOSE IN ON BRITAIN

SCIENTISTS CONCLUDE DINOSAURS WIPED OUT BY GIANT ASTEROID

WILL AMERICA, THE FRAGILE EMPIRE, GO THE WAY OF THE DINOSAURS?

For centuries, historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms. From Polybius to Paul Kennedy, from ancient Rome to imperial Britain, we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane. No matter whether civilizations decline culturally, economically or ecologically, their downfalls are protracted. In the same way, the challenges that face the United States are often represented as slow-burning. It is the steady march of demographics -- which is driving up the ratio of retirees to workers -- not bad policy that condemns the public finances of the United States to sink deeper into the red. It is the inexorable growth of China's economy, not American stagnation, that will make the gross domestic product of the People's Republic larger than that of the United States by 2027. As for climate change, the day of reckoning could be as much as a century away. These threats seem very remote compared with the time frame for the deployment of U.S. soldiers to Afghanistan, in which the unit of account is months, not years, much less decades. But what if history is not cyclical and slow-moving but arrhythmic -- at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night? Great powers are complex systems, made up of a very large number of interacting components that are asymmetrically organized, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder. Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems "go critical." A very small trigger can set off a "phase transition" from a benign equilibrium to a crisis -- a single grain of sand causes a whole pile to collapse. Not long after such crises happen, historians arrive on the scene. They are the scholars who specialize in the study of "fat tail" events -- the low-frequency, high-impact historical moments, the ones that are by definition outside the norm and that therefore inhabit the "tails" of probability distributions -- such as wars, revolutions, financial crashes and imperial collapses. But historians often misunderstand complexity in decoding these events. They are trained to explain calamity in terms of long-term causes, often dating back decades. This is what Nassim Taleb rightly condemned in "The Black Swan" as "the narrative fallacy." n reality, most of the fat-tail phenomena that historians study are not the climaxes of prolonged and deterministic story lines; instead, they represent perturbations, and sometimes the complete breakdowns, of complex systems. To understand complexity, it is helpful to examine how natural scientists use the concept. Think of the spontaneous organization of termites, which allows them to construct complex hills and nests, or the fractal geometry of water molecules as they form intricate snowflakes. Human intelligence itself is a complex system, a product of the interaction of billions of neurons in the central nervous system. All these complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes -- what scientists call "the amplifier effect." Causal relationships are often nonlinear, which means that traditional methods of generalizing through observation are of little use. Thus, when things go wrong in a complex system, the scale of disruption is nearly impossible to anticipate. There is no such thing as a typical or average forest fire, for example. To use the jargon of modern physics, a forest before a fire is in a state of "self-organized criticality": It is teetering on the verge of a breakdown, but the size of the breakdown is unknown. Will there be a small fire or a huge one? It is nearly impossible to predict. The key point is that in such systems, a relatively minor shock can cause a disproportionate disruption. Any large-scale political unit is a complex system. Most great empires have a nominal central authority -- either a hereditary emperor or an elected president -- but in practice the power of any individual ruler is a function of the network of economic, social and political relations over which he or she presides. As such, empires exhibit many of the characteristics of other complex adaptive systems -- including the tendency to move from stability to instability quite suddenly. The most recent and familiar example of precipitous decline is the collapse of the Soviet Union. With the benefit of hindsight, historians have traced all kinds of rot within the Soviet system back to the Brezhnev era and beyond. Perhaps, as the historian and political scientist Stephen Kotkin has argued, it was only the high oil prices of the 1970s that "averted Armageddon." But this did not seem to be the case at the time. The Soviet nuclear arsenal was larger than the U.S. stockpile. And governments in what was then called the Third World, from Vietnam to Nicaragua, had been tilting in the Soviets' favor for most of the previous 20 years. Yet, less than five years after Mikhail Gorbachev took power, the Soviet imperium in central and Eastern Europe had fallen apart, followed by the Soviet Union itself in 1991. If ever an empire fell off a cliff, rather than gently declining, it was the one founded by Lenin.If empires are complex systems that sooner or later succumb to sudden and catastrophic malfunctions, what are the implications for the United States today? First, debating the stages of decline may be a waste of time -- it is a precipitous and unexpected fall that should most concern policymakers and citizens. Second, most imperial falls are associated with fiscal crises. Alarm bells should therefore be ringing very loudly indeed as the United States contemplates a deficit for 2010 of more than $1.5 trillion -- about 11% of GDP, the biggest since World War II. These numbers are bad, but in the realm of political entities, the role of perception is just as crucial. In imperial crises, it is not the material underpinnings of power that really matter but expectations about future power. The fiscal numbers cited above cannot erode U.S. strength on their own, but they can work to weaken a long-assumed faith in the United States' ability to weather any crisis. One day, a seemingly random piece of bad news -- perhaps a negative report by a rating agency -- will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but the public at large, not to mention investors abroad. It is this shift that is crucial: A complex adaptive system is in big trouble when its component parts lose faith in its viability. Over the last three years, the complex system of the global economy flipped from boom to bust -- all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the radical monetary and fiscal steps that were taken in response. Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will ultimately lead to much higher inflation rates or outright default. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece. Ask Russia too. Fighting a losing battle in the mountains of the Hindu Kush has long been a harbinger of imperial fall. What happened 20 years ago is a reminder that empires do not in fact appear, rise, reign, decline and fall according to some recurrent and predictable life cycle. It is historians who retrospectively portray the process of imperial dissolution as slow-acting. Rather, empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse. Washington, you have been warned. Niall Ferguson is a professor at Harvard University and Harvard Business School, and a fellow of Jesus College, Oxford.

TRAGEDY HITS CHILE IN MASSIVE QUAKE

NASA PROBE FINDS TREES ON MARS

AMONGST ALL THE BAD NEWS SOMETHING SPARKLES!

Gemstone producer Gemfields today announced the discovery of an 'exceptional' 6,225 carat rough emerald in its Kagem mine in Zambia. The emerald was recovered during normal mining operations on February 5, the company said in a statement, and is being examined by Gemfields' experts to establish a clearer understanding of its value and significance. The emerald has been named "Insofu" (which means "elephant" in the language of the Bemba people indigenous to the region) due to its size and in honour of the World Land Trust's "Wild Lands Elephant Corridor Project", of which Gemfields is a participant.

MAN JAILED IN DUBAI FOR WEARING THIS T-SHIRT

IS A GREEK TRAGEDY COMING TO THE USA?

IRANIAN TROOPS

SHARKS IN WAITING

WATER ON MOON

A GIGANTIC FINANCIAL CUCKOO IN THE NEST

FIGHTING THE TALIBAN IN PAKISTAN

NASA CRASHES ROCKET ON MOON

BRITISH ARMY IN AFGHANISTAN

DOUBTS OVER AFGHANISTAN

STOCK MARKET ROLLERCOASTER RIDE

CHINA LIFTING ONE CHILD POLICY

FORTY YEARS AFTER MOON LANDING APOLLO BLASTS OFF

Forty years after the historic Apollo 11 mission to the Moon, Nasa's Space Shuttle Endeavour and seven astronauts blasted off from the Kennedy Space Centre in Florida to begin a 16-day trip to deliver the last piece of Japan's research laboratory to the International Space Station.

BRITAIN BLOCKS SPARE PARTS TO ISRAEL

OBAMA TALKS TO AFRICA

BATTLE AGAINST TALIBAN

CITY OF LONDON RENTS FALL 19%

LONDON - The banking meltdown has seen rents in the City fall by 19 per cent over the past year, new figures show. The collapse of the financial sector has crushed demand for pieds-à-terre in the Square Mile, meaning those still flat hunting can negotiate far better deals with landlords. The average City rent is now £916 a month, still the highest in the capital. A year ago it was £1,217.

MADOFF GETS 150 YEARS PRISON

CLEVER CARLA AND TROUBLED KAREN MULDER