In “Shoot the messenger but accept the facts” (February 11), Nobel Laureate Peter Doherty says, “What keeps scientists honest is the constraint that their published data must be verifiable,” meaning peer-reviewed publications.

However reports like the Himalayan glacier errors and others in the Intergovernmental Panel on Climate Change’s findings and East Anglia “climategate” show that peer review alone is not enough verification for an issue as big as climate change.

East Anglia is evidence that scientists with a vested interest cannot always be trusted. This adds doubt to the peer-review process which has never been perfect anyway. No one trains scientists on how to peer review but it’s the most verifiable and objective science available.

The IPCC engages committees that attempt to represent the best overall assessment of relevant peer reviewed publications. It’s an opinion measurement task that attempts to represent a scientific consensus. Just as peer review makes research more objective, a vote makes consensus measurement objective. Yet the IPCC has never verified its opinion measurements with a vote nor acknowledged dissenting opinions in its reports.

As I said in, “Copenhagen: red herring or lame duck?” (Letters, September 3, 2009), “A vote by experts is the only robust way to measure expert opinion on the science and economics of global warming”. Copenhagen was set to fail in its main objective because it was not supported with a resolute verified measure of scientific opinion. The right objective remains unclear without a vote.

A science vote will quantify the full range of opinions in a unified expression that respects all sides of the debate and sharpen the focus of peer reviewers. In contrast the IPCC’s less inclusive, unverified committee-style assessment process encourages division that confuses the public and policymakers.

All scientists agree that climate change science is extremely complex with many critical unknowns in the feedback mechanisms. Caution demands open debate and rigorous assessments of informed opinion resolved with frequent verifiable votes — inviting all specialists, working and retired and leading scientists like Doherty from other disciplines. The most verifiable, effective and practical vote will be transparent, continuous, interactive and online.

In (“Change the structure of the banking system”, January 27), renowned Yale University professor of economics, Robert Shiller, supports a proposal from the Squam Lake Working Group for a new bank debt funding instrument called regulatory hybrid securities.  It’s a form of debt that converts automatically to equity in the issuing bank but at a time when both the bank and the financial system are under stress.

The idea can smooth a few bumps in a banking crisis but while hailed by Shiller as a “major new idea that might fix the problem of banking instability”, I believe it may even make things worse overall.

The intention is to protect the public from the cost of bank rescues. However it’s unclear if this saving will offset the implementation cost. Shiller admits these instruments will raise the cost of capital to banks. This means higher interest rates that will hurt national economies in normal times. The precise specification of the conversion trigger is messy and exposed to unintended risks such as market manipulation to force conversion triggers.

The idea attempts to shift more risk to the private sector. However wealth is still destroyed which means lost jobs. Net bank equity can still be negative even after conversion. It’s a more formal coding of what inevitably happens when a bank too-big-to-fail gets into trouble. One way or another, the market or a regulator causes the bank to restructure. The idea does nothing to fix the root cause of bank failures — that is, the ease with which banks can create dangerous hidden risk.

An idea which does attack the root weakness in the banking system is to force banks to make bank risk transparent. Real transparency is an online virtual place where all banks too-big-to-fail must report daily their exposure to wide-ranging movements in all economic variables to which they are exposed. What’s needed is a transparent, continuous stress analysis. This idea will immunise the global banking system against excessive risk in the most effective way possible. The cost to implement this idea is while it guarantees a net reduction in dangerous bank risk and the first integrated global management of bank risk.

Shiller often mentions the importance of human psychology in understanding market bubbles. However the psychology that causes bankers and regulators to fear transparency gets little attention.

In “Cyber attacks: we’ve got bigger problems than China” (Monday, item 1). Crikey downplays the China risk as “economic espionage” from just another “friendly” country.

No mention of the authoritarian Chinese government’s shocking human rights record or Google’s statement, “we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists”.

Apparently our “friend” was seeking information on people who respect democratic values. Anyone discovered in China by this “economic espionage” can expect long term imprisonment, torture or execution.

The most powerful bully in the world is now our biggest trading partner. However the bigger problem is our timid silence as our economic partner trashes the values that so many of our young died trying to protect.

The chief UN climate official Yvo de Boer strenuously defends the procedures of the Intergovernmental Panel on Climate Change, saying, “I do not believe there is any process anywhere out there that is that systematic, that thorough and that transparent.”  (Leaders defend climate science”, December, 9).

In fact the IPCC’s procedure for representing scientific opinion fails the most basic test of robustness and transparency. It has never invited scientists to vote. A vote is the only scientific means of resolving group opinion.

Vocal and frustrated scientists concerned about global warming say there is no debate about its cause while others write letters and books in strong disagreement. None are calling for a vote. Scientists don’t vote. Climate scientists ignore the science of opinion resolution. Not surprising, warming science remains hotly disputed in Parliament — as it should until scientific opinion is measured scientifically.

Politicians admit they don’t understand the science of global warming but do understand how to resolve group opinion. Yet no politician has asked for the obvious, a vote from scientists.

Collective opinion cannot be resolved fairly or safely without a vote. Scientific opinion on the biggest risk management issue in history is no exception. Ask scientists to vote, resolve each debate and move forward.

Threatened with a 25 per cent two-strike rule, suddenly Australia’s boards are passionate about corporate democracy. Their placard reads, “A minority of shareholders should not impose their will over the majority”, “Debate rages over ‘two-strike’ spill move”, (November 9). It’s exactly what trampled shareholders want to hear but as yet are too numb to realise.

The core complaint of abused shareholders is summarised in exactly the same placard. The majority of people with capital at risk including superannuants have no voice and no vote. Real democracy will fix it, nothing else can — it’s the answer to fair pay, board diversity, management ethics and talent.

Give shareholders a real vote on the issue that matters most — the appointment of the CEO. The non-binding vote, the two-strike rule, enforced pay caps are all absurd ideas against the obvious fair democratic solution. The problem is boards appointing the CEO. It’s a failed idea.

Expect potential CEOs, worthy of the job and superhuman pay, to assess their own value and win the CEO position in a competition for shareholder votes. Asking price should be part of the CEOs election platform. 

It follows automatically from the majority rule placard that the corporate voting system must be fixed and made fair. This means superannuants get a vote, every election has an audit trail, no vote is ever lost, voting is convenient and efficient and proxies cannot be abused or cherry picked. None of this is true at present. All can be satisfied with direct online voting.

Unearned pay is a measure of greed not talent. Some of the nation’s best managers work in the non-profit sector — which leads corporates on voting reform.

Don’t let the nation’s most highly paid cherry pick the democracy debate. Hold boards to account on their democracy placard — let the majority rule.

In condemning the Productivity Commission’s 25 per cent two-strike idea as “rule of the minority”, Australia’s most senior business leaders opened a debate on corporate democracy, “Boards slam executive pay reform” (Headline, October 12). It’s a debate worth having. The system our business leaders know and defend is a sham democracy.

Real democracy needs participation. Yet the super industry blocks it, as illustrated by the frustration of small shareholder David Albert in, “Shareholders need backing in board pay” (Letters, 23 October). Every year he and most other small shareholders vote against board pay increases while institutional shareholders, with the controlling votes, vote in favour or abstain. The two-strike rule recognises that David Albert’s votes are more likely to align with the interests of superannuants than the votes of those representing them, the super funds.

The two-strike idea attempts to patch a sham democracy. It’s creative but messy with uncertain effectiveness. The fair democratic solution is to abandon compulsory super or let superannuants exercise the votes on their capital invested in super funds. This idea is rejected by the super industry as too complex and too expensive. Yet it’s neither. With electronic processing and voting the cost and technical hurdle is tiny in comparison with the industry size and payoff.

Real democracy needs competition. In “Time’s up for closed-shop Australian boards” (Friday 23), Peter Wilson, national president of AHRI, calls for competition as the solution to the “national disgrace” of low diversity in Australian boards. Competition is also central to fair pay and management quality. Competition matters most in selecting the CEO.

What is fair competition? In “Why not a fair and transparent contest” (Letters, April 2) I suggested CEOs be selected by shareholders in an open contest and direct voting. Real democratic transparent competition is the best risk manager of the nation’s wealth. Yet this idea that shareholders, not the board, select the CEO is not even on the agenda. Why not? The same shareholders select our national leaders and ordinary board members and are equally capable of selecting a CEO. The non-binding vote is part of a choked democracy with no contest. CEOs on superhuman pay ought to be capable of winning their title in an open contest, assessing and stating their own value upfront — without wasting shareholder funds on remuneration boards and consultants.

Real democracy needs a reliable, cost effective way to harvest and count votes. Direct online voting is the answer to the current expensive paper system with no audit trail that loses votes and allows chairmen to cherry pick proxy votes.

Many of the best managers work for modest pay in the non-profit sector. No one can directly manage more than 12 or so people effectively regardless of company size. Public company CEOs rarely accept personal risk — like the risk of continuing this debate.

Ross Buckley, professor of international financial law at the University of NSW, supports the idea of a small tax to inhibit short-term speculative foreign currency transactions (“Forex tax just the antidote to hubris”, September 3).

In essence the argument is that short-term speculation increases market volatility, defined as “white noise”, and that this noise decreases the market‘s efficiency in reacting to long-term transactions and thus interferes with monetary policy.

Actually, it’s not clear that natural white noise volatility in a free, open economy is a bad thing. It’s a sign the economy is alive and breathing. However, constrained and opaque economies are prone to sudden shocks, a very dangerous form of volatility that costs jobs.

Volatility does affect the cost of asymmetric instruments like options but the expected return is no more or less. White noise has no impact on the expected or average short-term or long-term exchange rate. Monetary policy can ignore it. White noise volatility is measured as dispersion about the mean exchange rate.

Exchange rates can move dramatically over time in a market with zero volatility or show no net change in a market with high volatility.

The assumption that a Tobin tax [a tax on currency speculation] automatically reduces volatility also warrants analysis. A Tobin tax affects volatility in several ways.

Firstly, the additional cost of a tax acts like a widening of the bid/ask spreads or increase in dispersion and in this sense contributes to increased volatility. Secondly, spreads tend to widen with less trading volume, again an increase in volatility.

 Thirdly, the Tobin tax argument assumes that the transactions it inhibits — those most sensitive to an increase in transaction cost – act to increase market volatility. The opposite may be true. Short-term trading can increase or decrease market volatility. For example the manufacture of a long synthetic option tends to increase volatility, a short position tends to decrease volatility and both are highly sensitive to transaction costs. Speculative trading will contain elements of both.

Nobel laureate James Tobin had Buckley’s chance of understanding the real impact of his tax idea 37 years ago – without access to relevant market data to test it and before volatility was explained in the development of the Black-Scholes option theory.

A more obviously useful tax is a tax on “dark noise”, the transactions and risk hidden from the market.

Published version - AFR - 16 Sep 2009

The Business Council of Australia and the Opposition Leader Malcolm Turnbull are in conflict over when the Parliament should vote on an emissions trading scheme (“Copenhagen a ‘red herring’”, 25 August). All sides are divided. Copenhagen is not a red herring but a lame duck because everyone is focused on the wrong vote.

A vote by experts is the only robust way to measure expert opinion on the science and economics of global warming. Without it no one has authority to represent the experts and the most basic questions of climate change science and economics will remain unanswered. Vested interests will determine the outcome. It may be a dangerous overreaction or expensive and useless under-reaction to the actual threat.

The public has a right, and policy makers an obligation, to really know expert opinion on the issue. And the expert opinion that matters is the current consensus of experts and its sensitivity to change. Accurate reliable measurement of this consensus is a critical bit of scientific data missing from the debate.

The IPPC attempts to be the authority on the science. However the IPCC’s measurements of scientific opinion are neither robust nor objective, regardless of intention. The use of working groups is an efficient way to condense peer reviewed scientific papers and other material into a single less technical report. However this process does not guarantee that the authors of the scientific papers endorse the IPCC reports. The process also excludes the views of many scientists qualified to comment on the published research. Without the vote doubts remain and its voice weakened.

Financial derivatives risk theory is based on robust arbitrage pricing formula. Yet the “rocket scientists” in banking led the world into an economic fire storm with an unscientific risk measure called value at risk, without real debate or a vote. Neither the climate scientists or economists have risk measurement models remotely as accurate as the financial scientists — another reason not to repeat the same errors in open debate and opinion measurement.

The Parliament should require scientists and economists to vote online before it votes. Have all relevant scientific and economic bodies invite their members to participate in a regular global and secure vote. Give every expert equal control over the voting agenda. Make the voting records, credentials and funding sources of each expert transparent. Let the vote to run continuously enabling experts to revise their votes any time. Technically there is no risk or reason to delay a vote. It could start today.

Published version - AFR - 3 Sep 2009

In “Not enough stress in US bank test,” (June 24), Professor Lucian Bebchuk, Harvard Law School, says, “As long as banks are permitted to operate this way, the banks’ supervisors are betting on the banks’ ability to earn their way out.” Bedchuk is referring to the recent flawed stress testing of US banks. His message is that stress testing is essential but that it must be rigorous. As the author of a book on the finer details of stress testing after many years experience of building stress testing related technologies and using them to successfully manage billions of dollars of complex financial exposures, I agree.

A rigorous stress test measures bank exposure to wide ranging movements in all relevant economic variables. There are many ways to get a stress test wrong or be tricked. The value of a stress test depends critically on its frequency and transparency. The prudential regulator, APRA, requires banks to report quarterly and results are not published. Bank trading is a daily activity. A quarterly stress test leaves 99 per cent to trust.

I have repeatedly invited the authorities through my letters to publish rigorous bank stress tests daily in a website. Nothing could be more efficient or cost effective as a regulator of excessive bank risk.

Why not reduce risk and cost with an automated bank risk watch website? Minister Nick Sherry, answered in a letter to me dated 16 April 09, then as Minister for Superannuation and Corporate Law, “To require daily reporting as proposed in your email (to the Treasurer) would impose significant additional costs. These costs would ultimately be paid by the bank customers.” The Minister was poorly advised. Bank customers now know the much higher cost of weak risk management.

What is the cost of rigorous daily bank stress testing and reporting? Daily stress testing is already core risk management for a well managed bank — the entire process is electronic and automated. So the additional cost of daily electronic reporting to a central website is insignificant. There is no reason in the public interest to withhold risk transparency from taxpayers now underwriting bank deposits.

There is another cost however. Banks will lose the freedom to speculate in darkness. It will become apparent that even the current quarterly stress testing ignores the housing price risk — something US investment banks do too. And what about exposure to US sub-prime mortgages?

Governments and regulators have not understood where risk hides. Many senior bankers will fail a rigorous risk test. On the current course, the risk-free prediction is that more avoidable banking disasters will follow, in similar frequency to recent decades.

Published version - AFR- 1 Jul 2009

In Tiananmen Square, June 4th, 1989 unarmed Chinese students chanted “Freedom will not be suppressed,” fearless in peaceful protest. Thousands were slaughtered for it, many crushed by tanks along with their 10 meter high statue, Goddess of Democracy. Thousands were imprisoned.

Published version - AFR - 04 Jun 2009

In Australia freedom to support democratic values was not suppressed. The Hawke Labor government reacted by granting permanent residency to 20,000 Chinese students then in Australia. On Iraq in 2003, Labor in opposition had a strong moral message for an ally too, not intimidated by a powerful friend and gained from it.

How secure are our democratic values now?

On the 20-year anniversary of Tiananmen Square, a parliament not compromised by a growing authoritarian power will tell the Chinese government openly to admit it happened; to release up to 200 people still in detention for it and to release many others imprisoned for reporting it.

Treat China like a friend gone astray. Don’t be intimidated. Tell its authoritarian government what it needs to hear. Unfreeze the past and let it go.

Nobel Peace Prize laureate Aung San Suu Kyi lives without freedom — under house arrest most of the last 20 years, a prisoner of conscience, in failing health, denied her democratic right to lead Burma, the country that elected her in 1990. Her oppressors, the Burmese junta, are the Chinese government’s friends. Our democracy is weak if our elected leaders lack the courage and skill to ask the Chinese government to assist this living Goddess of Democracy.

Tell the United States and Chinese governments that Australia will take the 17 Uighur men persecuted by both powers, held for nearly eight years in Guantanamon Bay charged with nothing.

Moral poverty is not a fair trade for high priced minerals. A robust long term economy has a rock solid moral foundation.