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.