Technology & Finance

Tuesday, March 31, 2009

Answers Lacking on the Left

I used to be something of a fan of America’s mildly lefist magazine, The Nation.

But it is always amusing to watch ideologues floundering and Michael Skapliner in the FT today finds their responses to the current crisis less credible than the expressions of humility, or at least realism, from Alan Greenspan, Jack Welch and Deutsche Bank’s Josef Ackerman, who broke ground a year ago when he said he no longer believed in the market’s self-healing power.

“Oddly, those who should be rejoicing most at capitalism’s humbling are as lost as everyone else. When I wrote last year that The Nation, the leftwing US journal, did not have alternatives to offer, its editor wrote to mine that I had not been looking hard enough. The Nation has now published an extensive series of essays called “Reimagining Socialism”, in which one writer after another admits they cannot reimagine socialism.

“Barbara Ehrenreich and Bill Fletcher write: “Do we have a plan, people? Can we see our way out of this and into a just, democratic, sustainable (add your own favourite adjectives) future? Let’s just put it right out on the table: we don’t.”

“Rebecca Solnit, another essayist, suggests “gardens and childcare co-ops and bicycle lanes and farmers’ markets”, but these are projects, not a programme. Several mention the importance of moving to an economy less dependent on fossil fuels, but you hardly have to be an anti-capitalist these days to believe in that.”

One problem is that seizing the means of production is a problem when production has moved to China. Sort of like the spoils of war—seizing miles of wheat fields or acres of coal mines or huge steel mills is a more tangible goal than conquering software engineers.

Skapinker says seizing the commanding heights did not work in East Germany or China. Thomas Friedman made the same point in his book, The World is Flat. He said the fall of the Berlin Wall showed the world the stark contrast in living standards between East and West Germany. Socialists around the world lost thier footing.

He quotes Sir Howard Davies, director of the LSE, on the need to rethink the social contract bwteen the government and the market.

I think that definition needs to be expanded to specifically include workers, who now are less apt to be protected by union contracts than by employment law, at least in Europe where it exists. Probably should also include the environment—see my piece below—and retirees, whose well being has been sacrificed repeatedly through the lowering of interest rates to bail out banks.

The land of Robin Hood has got his legend running in reverse.

David Cameron -- Should You Really Want the Bank of England Regulating?

Philip Stevens in the FT declares that Mervyn King’s autocratic leadership has failed the Bank of England, and through it, the country.l

“The Bank was asleep. Its responsibility for the systemic health of the banks should have alerted it to the risk posed by opaque financial instruments and runaway credit. The rapid expansion of the banks’ balance sheets was sufficient warning of trouble ahead.

“Yet from the outset of his governorship, Mr King made clear he was uninterested in such matters. The Bank’s financial stability department was twice reorganised – and twice downsized. It became a backwater.”

This is the organization that Tory leader David Cameron recently suggested should take over regulation from the FSA?

Does Obama Favor Wall Street Over Detroit?

Michigan seems aghast that Obama has pushed Rick Wagoner out at CEO of GM, after losing billions over the last several years. In Andrew Ward’s piece in the FT, Detroiters talk of sacrificial lambs.

Thaddeus McCotter, Republican congressman from Michigan asked when the administration would call for resignations from Wall Street. Maybe he hasn’t heard, but Wall Street has lost CEOs at Citi, Bear Stearns, Lehman’s, Wachovia, and Merrill Lynch – twice. Except for Citi, the firms have disappeared as well.  Perhaps BoA’s Ken Lewis ought to go too, but for now he is successfully treading water and seems to have enough of a balance sheet, and board support, to get through.

The banks have consolidated and shed thousands of jobs. Detroit CEOs memorably flew to Washington on their corporate jets to ask for bailout funds without offering not even the slightest plan for how they would deal with their problems, which weren’t just the credit crunch but drastic over capacity. When they came back a second time, driving hybrids, they offered a half-baked plan with tough decisions a couple of years out. They should have closed some of their plants years ago, and the UAW needs to develop a standard contract across the industry and dump the local fiefdoms which can shut down individual plants.

One blogger noted that supplier Delphi has been in bankruptcy for years as proof that bankruptcy is not an option for the car companies. But the airlines are in and out of bankruptcy all the time. Some like United, have spent years there.

Planes keep flying passengers buy tickets and book vacations – how different is the auto industry?

Financial Crisis – Great Opportunity to Go Green

Climate change efforts should be a key part of plans for a financial recovery, several experts contended at a debate sponsored by Eco-Connect in London last week.

The discussion was kicked off by Professor Michael Mainelli of the Z/Yen Group, a climate change intellectual and entrepreneur who was the catalyst for the London Accord, which has pulled together climate research from leading City firms, ranging from Deutsche Bank to West LB, plus think tanks like the Santa Fe Institute. (See more at http://www.london-accord.co.uk)

“Where does finance meet the green world credit crunch?” he asked, before dissecting the financial crisis and the responses of politicians.  He noted that in the UK only 7 percent of the fiscal stimulus is targeted at green ventures, while in Spain it is 10 percent, in the US 16 percent, Germany 19 percent, China 34 percent and in South Korea a stunning 69 percent.

But First, A Survey of the Financial Crisis

The financial crisis was not a surprise, or should not have been. For 25 years the money supply has been growing faster than the economy; in the 1990s, financial services firms made up 5 percent of the market cap in the US, and by 2007 it was 23.5 percent.

“Nobody ever wanted to get off,” he added, citing former Citi CEO Chuck Prince who famously said the banks would keep dancing as long as the music kept playing. Mainelli said the politicians’ calls for more regulation are misplaced. The worst offenders, US mortgage lenders Fannie Mae and Freddie Mac, had their very own regulator while they were becoming vastly overleveraged and paying their senior executives millions of dollars. Approvals from credit ratings agencies were essentially written into SEC requirements, while the agency permitted just two and a half (the half being Fitch) to engage in the ratings business up until 2004. (This isn’t a new problem – I wrote about it for Risk Magazine probably 15 years ago.) The agencies produced AAA ratings from 64,000 vehicles while there were only 12 AAA companies, Mainelli pointed out.

“This was all in the last decade, and ultimately regulation brought it here.”

Mainelli made a point I have heard several times from financial services experts – the market will be more demanding, and faster to make the demands, than regulators.

“Competition is the first form of regulation,” he said. “We we want a very good well regulated industry we ought to have a lot of competition.” Instead, the world in 2007 had just 20 global investment banks, four auditing firms and three major ratings agencies. The world of hedge funds and private equity has lots of competition. (To me it is amazing that while the meltdown occurred in the heavily regulated banking sector, politicians want to go after hedge funds which are generally restricted to supposedly sophisticated institutional investors and wealthy individuals. Hedge funds do go bust on a fairly regular basis, but they are off on the margins of the global financial system, so the disappearance of a few hundred a year – many after returning much of the original investments – doesn’t shut down the markets. Maybe there is an argument for regulating the very largest, or insisting they use an independent administrator for valuations, but the hedge funds and private equity firms have not been the cause of this crisis – it has been caused by major hybrid banks such as Bank of America and Wachovia which bought mortgage companies with huge subprime exposure at the top of the market, Citi with its allegedly off-balance sheet investments, and SEC-regulated Bear, Lehman and Merrill which made huge investments in temporarily highly profitable subprime mortgages.)

Mainelli said this crisis can be hugely positive – it offers an opportunity to introduce more competition and reintroduce mutualization – financial firms that are owned b depositors and policy holders.

“Do we want to put Humpty Dumpty back together again or do something new?” he asked.

How do you know when the system is working? Answers he has heard are when LIBOR returns to normal, or when my bank manager treats me the way I was treated in the 1960s.

Mainelli thinks it is a question that we should keep asking.

Today’s 20-year old is ap to live until he or she is 95. For Mainelli, the system will be working when we can look a 20-year old in the eye and recommend a financial vehicle that will provide secure retirement funding 75 years from now, when he reaches the age of 95.

“In the last 10 years, if you had put $100 in your retirement as an American you lost a bit and as a European you lost 25 percent. We have no idea of how to build a 75 year financial structure.” Nor can we predict what the world will look like in 75 years. If you went back to 1909 and tried to explain credit cards, people would have laughed at you. Car insurance? Who needs a car?

“We will know finance is fixed when we have a vibrant economic system, not a handful of large organizations that are too big to fail.”

How to Get There

In the following panel discussion, Michael Meacher, Labour Member of Parliament and former Minister of State for the Environment, disagreed with Mainelli about the role of the state and suggested that he wasn’t taking account of the widespread anger over the financial crisis.

“The idea that governments are bad and will always make a mess of it, so we should leave it to markets and entrepreneurs and everything will be fine—there are many people out there who think we have had a 30 year experiment in that and see what has happened.  I think there is a strong case for going back to safe, tedious high street banks which you can rely on.” Investment banking can take risks, but it shouldn’t expect any protection or bailouts.  Mainelli said he too favors a division between commercial banks and investment banks, something like Glass-Steagall in the US which was overturned in the American push to deregulate financial services.

GOING GREEN

On climate change, he said government lags finance and other businesses.

“The movement in dealing with climate change has been glacial, and a very small fraction of what is needed; politicians are not giving leadership in any part of the world. New Labour has done an awful lot of talking about it but not actually carrying it through. This is an opportunity to see a different kind of economy and different kind of civilization, and one which both the private sector and public sector should get behind.”

Meacher criticized the lack of leadership and predicted change would come from outside government.

“Politicians will be forced to change by the demand coming up from the real economy, very disappointed with political governance, there hasn’t been a leader in this country since Mrs. Thatcher. I didn’t agree with her but she was a real leader. Change will happen when the pressures from below are so powerful it will force a change.”

In many cases, government gets in the way of change because it allies itself with the large companies, such as electric and gas utilities, and supports them at the expense of innovative startups which are starved for funding, Meacher added.. One reason is that politicians can expect generous speaking fees and directorships from large corporations once they retire; another is that government bureaucracies prefer to deal with big companies.

“Whitehall likes to deal with big business far too much,” said Meacher. Large industries which have dominated the UK economy for 50 years have too much influence, he added. Meanwhile, startups have to find their way through a thicket of individual government offices to seek support. Robert Wylie of WHEB Venture, which invests in startups, said finding and winning government support is incredibly complicated. There are 250 support mechanisms in the UK government, but they are subscale with just one or two people and hard to find. However, he noted, the public sector is a huge purchaser and could bring about change by insisting on environmental qualities in the good and services it buys.

Wednesday, March 25, 2009

Would David Cameron Please Shut Up?

The noise level is similar on both sides of the Atlantic – the world is confronting the greatest financial crisis since the 1920s and politicians are squabbling like five year olds on a playground.

Where is the adult supervision?

The latest, from my UK vantage point, is Tory leader David Cameron proposing that financial regulation should move from the FSA, set up some years ago by Gordon Brown while he was Chancellor, to the Bank of England.

Give the guy a steward’s white uniform and put him in charge of the Titanic’s deck chairs. 

In the middle of disaster you want to change regulators? The Bank has lost its experts when it lost the responsibility – about the last thing the UK needs right now is reorganisation. 

The American congress people – both Republicans and Democrats, look just as idiotic most of the time.  But is there any alternative?

Bankers, perhaps?

§ Syndicate

• RSS 2.0
• Atom