A note from Shumeet Banerji to Booz & Company clients ...My observations are backed with a particular form of data--the recent views of business leaders in some of the most important places in the world. For I am writing this on a flight back to London from Beijing, having just attended the World Economic Forum's Tianjin summer conference--and having spent the previous two weeks visiting Booz & Company clients in Asia, Europe, and the Americas. So. Is this the end of Capitalism? What caused this? When will it end? This downturn originated almost entirely in the U.S. financial markets. Essentially, cheap credit from the U.S. Federal Reserve fuelled an extraordinary leveraging of the U.S. economy over the past six years. Its locus is in consumer debt, especially mortgage debt. The original sin was not in (the lack of) regulation, but in the expansion of credit with outrageous terms to un-credit-worthy people--for example, 105% "Loan to Value" loans with no credit checks. ... The second victim of cheap debt was the bank balance sheet. Many financial services institutions have imploded because their asset purchases were fuelled by leverage, raising debt/equity rations of some banks to 30: or 40:1. I strongly believe that, once again, the culprit was not the lack of regulation, nor the "complexity" of risk. The job of financial institutions is to collect, price, disaggregate, de-correlate, re-aggregate, and price risk. To blame complexity is to seek a barter economy. The culprits are bad incentive systems and poor risk management at several major banks. Our financial services practice is working on these issues right now. The impact of all of this on the "real economy" is fairly clear. Foreclosures and tough credit don't ease spending, and the U.S. economy is heavily dependent on credit-based consumer spending. (This comprised 72% of the U.S. economy last year). Demand and growth will be slow, with most commentators expecting a recession by 4th Quarter this year. I expect this will be painful, but it won't lead to another Great Depression. Swift macroeconomic action will soften the blow, and growth will probably return late next year. <...> While some commentators argue that decoupling does not exist, I think we have genuine duality in the world today. Countries with big demographic or resource dividends will follow a very different trajectory through this downturn than the U.S. and Western Europe. And I think they will pull us out. Having heard the Chairman of the China Banking Regulatory Commission (CBRC) and Premier Wen Jiabao speak this week at the World Economic Forum, I must say that the world has something to learn from Chinese leadership in terms of their steady hand on the tiller. In the end, there will be a tough adjustment in the U.S. and the U.K., a mixed story in Western Europe, and some anxiety in the rest of the world. I expect the U.S. correction will take time. Sovereign wealth funds will own big chunks of Western assets and we will end up with a saner financial system--until the next leap off the cliff.
A note from Shumeet Banerji to Booz & Company clients
...My observations are backed with a particular form of data--the recent views of business leaders in some of the most important places in the world. For I am writing this on a flight back to London from Beijing, having just attended the World Economic Forum's Tianjin summer conference--and having spent the previous two weeks visiting Booz & Company clients in Asia, Europe, and the Americas.
So. Is this the end of Capitalism? What caused this? When will it end?
This downturn originated almost entirely in the U.S. financial markets. Essentially, cheap credit from the U.S. Federal Reserve fuelled an extraordinary leveraging of the U.S. economy over the past six years. Its locus is in consumer debt, especially mortgage debt. The original sin was not in (the lack of) regulation, but in the expansion of credit with outrageous terms to un-credit-worthy people--for example, 105% "Loan to Value" loans with no credit checks. ...
The second victim of cheap debt was the bank balance sheet. Many financial services institutions have imploded because their asset purchases were fuelled by leverage, raising debt/equity rations of some banks to 30: or 40:1. I strongly believe that, once again, the culprit was not the lack of regulation, nor the "complexity" of risk. The job of financial institutions is to collect, price, disaggregate, de-correlate, re-aggregate, and price risk. To blame complexity is to seek a barter economy. The culprits are bad incentive systems and poor risk management at several major banks. Our financial services practice is working on these issues right now.
The impact of all of this on the "real economy" is fairly clear. Foreclosures and tough credit don't ease spending, and the U.S. economy is heavily dependent on credit-based consumer spending. (This comprised 72% of the U.S. economy last year). Demand and growth will be slow, with most commentators expecting a recession by 4th Quarter this year. I expect this will be painful, but it won't lead to another Great Depression. Swift macroeconomic action will soften the blow, and growth will probably return late next year. <...>
While some commentators argue that decoupling does not exist, I think we have genuine duality in the world today. Countries with big demographic or resource dividends will follow a very different trajectory through this downturn than the U.S. and Western Europe. And I think they will pull us out. Having heard the Chairman of the China Banking Regulatory Commission (CBRC) and Premier Wen Jiabao speak this week at the World Economic Forum, I must say that the world has something to learn from Chinese leadership in terms of their steady hand on the tiller.
In the end, there will be a tough adjustment in the U.S. and the U.K., a mixed story in Western Europe, and some anxiety in the rest of the world. I expect the U.S. correction will take time. Sovereign wealth funds will own big chunks of Western assets and we will end up with a saner financial system--until the next leap off the cliff.
What does "countries with big demographic or resource dividends" mean in non-strategic consultant speak?
Also, is there any other way of interpreting "a steady hand on the tiller" except as a metaphor for government regulation? Truth unfolds in time through a communal process.
Having heard the Chairman of the China Banking Regulatory Commission (CBRC) and Premier Wen Jiabao speak this week at the World Economic Forum, I must say that the world has something to learn from Chinese leadership in terms of their steady hand on the tiller.
Here is what Mr. Liu Mingkang, the Chairman of the China Banking Regulatory Commission, whose speech Mr. Banerji references, had to say:
"When U.S. regulators were reducing the down payment to zero, or they created so-called `reverse mortgages,' we thought that was ridiculous," Liu said at the World Economic Forum in this eastern Chinese city. He said debt in the United States and elsewhere rose to "dangerous and indefensible" levels.Liu's comments were unusually pointed criticism of U.S. financial regulation for a Chinese official. They added to suggestions by countries that are under U.S. pressure to liberalize their financial markets that Washington's model might not be ideal.
But then, Mr. Banerji said that "The original sin was not in (the lack of) regulation." He is clearly an extremely smart man. So I would be curious to hear how he reconciles these two (what seem to me) contradictory positions. Truth unfolds in time through a communal process.
I strongly believe that, once again, the culprit was not the lack of regulation, nor the "complexity" of risk. The job of financial institutions is to collect, price, disaggregate, de-correlate, re-aggregate, and price risk. To blame complexity is to seek a barter economy. The culprits are bad incentive systems and poor risk management at several major banks.
What is regulation but an "incentive system"?
the culprit was not the lack of regulation, (...) the world has something to learn from Chinese leadership in terms of their steady hand on the tiller.
(...)
the world has something to learn from Chinese leadership in terms of their steady hand on the tiller.
What is regulation but a "hand on the tiller"?
Why do we even pretend to listen to these wankers???? In the long run, we're all dead. John Maynard Keynes
Now, are we aware of our own ulterior motives? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Spelling out one's own hidden biases is a bit harder :-) A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
So, our bias may be correlated to the bias in the general media. If the main winds were to change, we may change in the opposite direction. Or maybe not, we can't know because it hasn't happened. Yet I remember your warning that we should not try to find confirmation of what we were saying in each and every item of the current crisis -confirmation bias.
I tend to see ET as having different standards for some countries (Russia and China come to mind) -being ready to defend things that would be slammed in many other ones. That's an example of appearing to overshoot in opposing the mainstream bias. Similarly, and I say that as an ardent supporter of wind power, I have the impression that some graphs are explained with enthusiasm trumping a purely neutral analysis -again, the barrage of bad faith from the mainstream may explain some of that.
As for myself, I know that the French right has been so awful for so long that I have to fight deep scepticism if something they say seems to make sense. I'm always looking for the catch (there very often is one. Is there always one? Maybe not). "The womb that spawned that thing is fertile yet"
Well, I personally wouldn't call him a wanker. But I think we need to listen to people like him if only because they have enormous influence, and if we disagree with them, then we need to provide arguments that are persuasive to people who are uninformed or undecided.
Your two points --
-- are examples of such argumentation that will help in convincing people that the "de-regulation was not the problem" meme is wrong. Truth unfolds in time through a communal process.
And they bug me also when they pick all the contracts thanks to their absolute absence of shame in talking complete bullshit. Then they leave with nothing done and we have to pick up the pieces and actually do the work, except there is only 20% of the budget left.
For instance, I'm working on some improvement projects that used to be the tiny brother to a major program. Well, now it's part of the major program, and in fact pretty much ALL of the major program. Said major program included it because, well, it had not delivered anything and needed to actually show some results, which is what we were getting.
Now, prior to that, the major program (I can't tell you which consulting company did it of course, but you just know it was 'strategic consulting' of course) had communicated quite a lot on what they had done. Guess what was the main metric in their communication?
The length of the process maps they had produced (we're talking post-its on flipcharts there). They were bragging about how many meters they had. [Cyrille's Jawdrop™ Technology] there. Of course they got a lot (A LOT) more money than we'll get for actually finding the problems and fixing the main ones. Oh, and in passing, their process maps were unusable and we has to redo the ones we needed. Silly us, we failed to measure them and use that as proof of our action.
That was my rant for the day. Mmm, maybe that's why Mig thought I was a lot older than I actually was.
(and I can just picture a ((*rant Cyrille)) popping up next now, silly me) "The womb that spawned that thing is fertile yet"
