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Anglo Disease - My job is done

by Jerome a Paris Wed Apr 30th, 2008 at 09:35:26 AM EST

One of the goal of the European Tribune was to change the prevailing economic discourse by pointing out some inconvenient facts in the current narrative. With the helpful hand of reality, which has kindly provided undeniable and impossible-to-ignore facts in the shape of the current massive financial crisis, that goal is pretty much fulfilled, as the following sample of articles from the FT and the WSJ over the past few days shows:

the credit bubble that emerged this decade was so large in scale, and created so many dislocations, that it will inevitably take time to deflate. (1) - FT, 30 April

“For years we have been told that bankers were paid so much because you were cleverer than the rest of us. Now it turns out you were not clever at all and we are all suffering for your stupidity.” (2) - FT, 28 April
"The role of finance in the economy is going to come down significantly in the coming years," says Carlos Asilis, chief investment officer at Glovista Investments, a New Jersey money manager. "From a societal standpoint, we got carried away with finance." (3) - WSJ, 28 April
we must develop a framework or “route map” to set priorities for both public and private sector investment. Unfortunately, the fear of returning to anything that remotely resembles centralised industrial planning has in the past resulted in the discussion of such a framework being off limits.(4) - FT, 22 April

Massive, unsustainable bubble? Check.
Financiers absurdly imposing their rules to the rest? Check
Government planning & regulation needed? Check.

All that's needed now is for my catch-all label, "Anglo Disease", to make it into their pages.

The question, of course, is: what do we do next? And how do we get them to pay attention to our similar warnings on the energy front before the shock of reality (which is likely to be even more painful that this financial crisis) hits as well?


(2) The binge culture of banking must be changed

(...) “For years we have been told that bankers were paid so much because you were cleverer than the rest of us. Now it turns out you were not clever at all and we are all suffering for your stupidity.”

(...) Investment banks are all about making money. At the extreme, this means making money for employees not shareholders. The big revenue producers are revered. It is not considered prudent to upset them by asking too many questions. The subprime meltdown is a perfect example of the “emperor has no clothes” phenomenon. These were complex products, yet obfuscation was considered acceptable.

(...) investment banking culture has a cult aspect to it. If you work on Wall Street or in the City, you toe the party line. Despite lip-service to “diversity”, diversity of thinking is not encouraged. This atmosphere of craven conformity breeds at first complacency and then mistakes.

(...) The sad truth is that the culture is one of lemming-like imitation. There is too much looking over the shoulder at rivals and not enough scrutiny of internal decisions. “It is not how we do,” a senior US banker told me last summer, “it is how we do relative to our peers.”

This could be called: the "cult of the derivative": Focusing on relative positions rather than absolute ones. Focusing on (accelerating) growth rather than (sustaining) prosperity. Revering money at all times to the exclusion of everything else (and make it the sole source of "value"). And, of course, imposing these rules on everybody else.

(3) Has the Financial Industry's Heyday Come and Gone?

For the past three decades, finance has claimed a growing share of the U.S. stock market, profits and the overall economy.

But the role of finance -- the businesses of borrowing, lending, investing and all the middlemen in between -- may be ebbing, a shift that would redefine the U.S. economy. "The role of finance in the economy is going to come down significantly in the coming years," says Carlos Asilis, chief investment officer at Glovista Investments, a New Jersey money manager. "From a societal standpoint, we got carried away with finance."

(...) "Is securitization going to go away? I doubt it," he says. "Is it going to be more transparent? Are ratings going to be more robust? Is there going to be more regulation? Yeah."

Global governments are moving to require financial firms -- both commercial banks and investment firms like Bear Stearns -- to hold bigger capital cushions against the credit they extend so they are better able to withstand financial tornadoes. And that lower leverage, inevitably, means lower profits for finance.

Funny how we rediscover that regulation is possible - after years of telling us that it was not, because of globalisation or whatever else. The dirty secret is that regulation makes finance boring and less profitable. In fact, the only price of regulation seems to be fewer billionaires, and it is a sad indictment of our times (whether one blames the naivety of the populace, or laments ththat this was a sufficient reason to proceed with deregulation on the first place e incredible hold by a very tiny minority over actual policy making). But now even the billionaires seem to realise that you don't get rich by killing the goose that lays the golden eggs. What a price to pay, though.

(4) Britain needs an industrial route map

for the UK the credit crisis gives a unique opportunity to start answering fundamental questions about how the country should earn its living in the 21st century. (...) The first priority is to stop treating manufacturing as some kind of relic of the industrial revolution. High value-added manufacturing brings huge benefits. It penetrates the economy of the entire country rather than just London and the south-east; it pays well but avoids bewildering distortions of income; it drives and enables a broad range of skills; it demands and supports a wide supply chain and it adds value and creates wealth.

(...) we must develop a framework or “route map” to set priorities for both public and private sector investment. Unfortunately, the fear of returning to anything that remotely resembles centralised industrial planning has in the past resulted in the discussion of such a framework being off limits.

Yes, calls for industrial policy and government long term planning in the financial press. Desperate times indeed.

And thus the preference for denial amongst some, such as FT headline writers:

(1) A passing storm? Is the worst over? There is still little demand for high-yield debt, or bonds that carry ratings below investment grade, and even some highly rated companies still struggle to raise short-term funds.

Banks are finding it very hard to relaunch their securitisation businesses (...)

The markets are still plagued by some startling pricing anomalies, which reveal the continued sense of dislocation and fear. (...)

Another problem is that while central banks have injected funding into the system, banks are not passing this benefit on. “The cost of funds for banks, corporates or individuals is not falling despite the recent cut in base rates. The process of credit creation is now impaired and there is a risk that it may become further impaired,”(...)

“There is much less liquidity and a big change in the investor profile ... The leveraged buyer is gone and there are few signs that void will get filled.” Indeed, the sense of unease is continuing to affect even areas with little or no connection to the subprime woes. (...)

This pattern is repeated on a much wider scale across the corporate world. “If you have a world where it costs banks more to raise funds than many of their clients, then ... it will be hard to have any return to normality,” says one senior banker. Adding to the uncertainty is a lingering fear that the economic downturn could create a new wave of losses and bad loans in the coming months.

But maybe the worst is indeed over - the aura of infallibility and coolness of financiers is gone, and that's a fundamentally good change.

Display:
Whoddathunk?


Through having a respected industrial base we have greater influence in the world. In the past, we were significant providers of infrastructure. But what happens today when a country such as China or India wants to discuss improvements in its infrastructure? It talks to Bombardier, Siemens and Alstom about railways; Alstom, Siemens and General Electric about power generation; Areva, GE and Westinghouse about nuclear power; Boeing or Airbus about aircraft; and Dubai Ports, Hutchison Whampoa, AP Moller-Maersk or PSA Singapore about ports.

Hmmm... lots of French companies there. With Bouygues, Vinci, EDF, Suez not even mentioned.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Apr 30th, 2008 at 09:56:29 AM EST
http://www.dailykos.com/storyonly/2008/4/30/9482/78489

Thanks for your support.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Apr 30th, 2008 at 09:57:11 AM EST
Jesse's Café Américain

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Apr 30th, 2008 at 09:58:19 AM EST

A rising euro threatens American dominance

As the dollar continues its relentless six-year slide against the euro and other main currencies, the question is being asked more and more: what would it mean if the dollar ceded its global dominance to the euro?

The question is a serious one because the US Federal Reserve is pumping new dollars into the global economy at an astounding pace. (...) we are living witnesses to Milton Friedman's famous dictum that "inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output".

(...)

The dollar is looking more and more like a typical developing country's currency, with long-term market interest rates, crucial to determining borrowing and investment behaviour, climbing as the Fed pushes hard in the other direction.

(...)

 In a financial crisis, central banks are supposed to act as "lenders of last resort", printing money to prop up banks and reassure their depositors. This does not work in developing countries. People withdraw money anyway, not because they fear the governments will let the banks collapse but because they fear the inflation and depreciation that printing money brings. So they exchange it for dollars, undermining the putative powers of their central banks. But what if Americans were to do the same, selling dollars for euros in a crisis? The Fed would become impotent. This is not science fiction. American investors have lately been pouring money into foreign bond funds at a record rate.

(...)

The US has exploited the unique role of the dollar in international trade and investment to disrupt the financial flows of its adversaries, such as North Korea and Iran. If such transactions switched to euros and were funnelled through institutions not doing business in the US, this power would be neutered. The US would likewise lose influence over both friends and enemies facing financial problems, as they would be looking increasingly to Europe for euros, rather than to America for dollars.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Apr 30th, 2008 at 10:01:02 AM EST
And if the dollar is threatened, where does this leave Sterling?  A charming regional affectation?

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Apr 30th, 2008 at 01:27:10 PM EST
[ Parent ]
When the exchange rate reaches parity, Britain will start making noises about joining the euro, but since they are not even in the exchange-rate mechanism it would take upwards of two years to join and by then maybe the pound will be worth 50 Euro cents.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Apr 30th, 2008 at 01:33:26 PM EST
[ Parent ]
Alternatively, you will be hearing claims that the "over-valued" Euro would damage British Competitiveness if Britain were to join and that "British Industry" needs the £ to devalue to regain competitiveness.  What will kill Sterling is if the "financial Services Industry" starts losing out to Frankfort/Paris

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Apr 30th, 2008 at 05:28:19 PM EST
[ Parent ]
I already noticed all that stuff getting into FT in my famous flght from paris...so it has been there for some time...now the weird thing is to read something which is different from what we have been saying here. plus we have a bunch of reality-based economists in Berkley, Harvard, Princeton.. saying basically the same things..and even in some bank analyst groups (crazy but true) besides Stephen Roach.

we all need is the anglo-disease word out there....

regardign energy... well, it will take some time. a ocuple years more. Quite a lot of time.. I do not expect any significant reduction in oil demand or peception until gas does not gets 6$ a gallon in the US. Electric eenrgy will be produced with coal in the US...and wind, nuclear adn coal in Europe, so no pain felt there.

Then, the narrative of finite resources and a reduction of demand and car use will happen. From $4 to $6 per gallon, everything you get is the US getting rid of SUV like in Europe (stable consumption)... only above that I expect a strong reduction in demand, and they might listen and take a coherent energy plan.

A pleasure


I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Apr 30th, 2008 at 10:44:35 AM EST
European Tribune - Anglo Disease - My job is done
The dirty secret is that regulation makes finance boring and less profitable.

is that really true though? when you take into account the inevitable crashes, dosn't that wipe out the increased profitability? surely it just makes the banks more open to plunder by owners and employers during the good times, a sort of Robert Maxwell school of finance. the more I look, the more modern finance system seems like an elaborate game of three card monte, and we've reached the point where the cards are turned over and we're going to find ourselves the loser because the lady is definitely in the dealers pocket.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Wed Apr 30th, 2008 at 10:56:53 AM EST
but the whole point is to kill off profitability in the first phase, so that those that want to get rich actually need to earnt it, and produce something of value, rather than simply taking it from our pockets while pretending to enrich us and leaving us with the empty pocket later.

Banking is profitable for banker - they earn a lot in the good times, and lose little in the bad ones. Ironically, it might be bad for long term shareholders, but given the short term mentality of everybody, and the idea that what matters is your relative performance rather than the absolute one, fund managers don't lose out.

Thr only shareholders that really lose out are the passive ones - pensions and savings by the middles classes.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Apr 30th, 2008 at 11:23:23 AM EST
[ Parent ]
While kudos are in order for seeding the concept, your job is nowhere near finished.  Until the world order reflects the fundamentals upon which these initial analyses were built, we've only just begun.

I don't mean at all to denigrate what you've accomplished, especially as i feel privileged to have learned so much here, but until i see a healthy, sustainable civil economy undergirding our future, i know we still have much more success to accomplish.

Though you've made some incredible steps in rewriting the media baseline.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Wed Apr 30th, 2008 at 01:30:31 PM EST
YES!

The dirty secret is that regulation makes finance boring and less profitable.

I am old enough to remember when it was impossible for a bank to go broke, or even lose money, unless they broke the law.  Boring indeed.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Wed Apr 30th, 2008 at 01:50:54 PM EST
Jerome, if your job is done, does that mean you are going off the air? I hope not. I suspect you are just gloating a bit here.

I don't blame you. You've been quite prescient, and have informed many other people by widely publishing your observations and predictions. Doing so requires courage, as it is embarrassing to be mistaken about something in front of a lot of people. That did not happen here.

Great work. Thank you! And, please do continue.

by Ralph on Wed Apr 30th, 2008 at 04:30:45 PM EST
But, quite the contrary, trying to motivate myself to write more and that this is all worthwhile...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Apr 30th, 2008 at 04:42:45 PM EST
[ Parent ]
He's not going off the air, but he's having a sort of midlife crisis...
16 I thought to myself, "Look, I have grown and increased in wisdom more than anyone who has ruled over Jerusalem before me; I have experienced much of wisdom and knowledge." 17 Then I applied myself to the understanding of wisdom, and also of madness and folly, but I learned that this, too, is a chasing after the wind.

18 For with much wisdom comes much sorrow;
       the more knowledge, the more grief.



When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Apr 30th, 2008 at 05:04:45 PM EST
[ Parent ]
Seems there's still work to be done...

This morning's "economics" report on France Inter:

Global Eco

The astounding, wonderful American economy wins again while Europe is clueless.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 1st, 2008 at 02:32:37 AM EST
Well done Jerome . But there are other questions about the effect of the net. Suppositions about the strength of thenet as a democratic agency are misplaced- these bloge actasa club with their discourse ( inevitable) and their exclusions. Ive been reading you for some time. You are not dealing with the political activist dimension. Who is doing something, How will anything be changed? Sorry - I  know this is bothersome but it cant be ignored - the rumbling of the masses they wont be allowed to get mad - think T.V. Still keep trucking! Best.

As Donald Rumsfeld said death gives war a bad reputation.
by nick w on Thu May 1st, 2008 at 11:28:18 AM EST
The first priority is to stop treating manufacturing as some kind of relic of the industrial revolution. High value-added manufacturing brings huge benefits. It penetrates the economy of the entire country rather than just London and the south-east; it pays well but avoids bewildering distortions of income; it drives and enables a broad range of skills; it demands and supports a wide supply chain and it adds value and creates wealth.

Amen!

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri May 2nd, 2008 at 01:36:31 PM EST


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