I was asked to make a presentation today about “Is the growth story still on?” at a banking conference.
Making a presentation about growth at a banking conference right now seemed like a bit of joke, but there you go.
Luckily, most of the audience were from Asia and Latin America, and therefore less affected by the American crisis unravelling on the news hour by hour. They are affected by the ‘contagion effect’ as discussed yesterday. Just less so.
After all, they had their crises in the late 1990’s, learned their lessons and reckon it’s time someone else had one as illustrated by the opening comment from the plenary: “How do Wall Street banks manage their accounts? On the left and on the right. On the left, there’s nothing right, and on the right there’s nothing left.”
It kind of reminded me of the joke from SIBOS which was one delegate says to another: “Have you seen the best prize on offer from the exhibitors this week? They’re giving away banks!”
I guess we all need a good joke right now, and I thought the vote down of the rescue plan for America's financial system was a joke last night.
Then I found out it was true!
The Bailout Bill was rejected, and left America’s rescue dream in tatters.
Was it because the Bill would not work?
Maybe, as the UK government has spent over $200 billion bailing out Bradford & Bingley and Northern Rock, just two banks. So will $700 billion cover the whole US banking system and its problems? Maybe not.
But that’s not why it failed to go through.
It failed because some Republicans allegedly blame Nancy Pelosi, the Speaker of the House, and a Democrat.
Her speech before the bill vote was viewed as far too partisan.
For example, here were her opening remarks.
“Madam speaker, when was the last time anyone ever asked you for
$700 billion? It’s a staggering figure. And many questions have arisen
from that request. And we have been hearing, I think, a very informed
debate on all sides — of — of this issue here today. I’m proud of the
“$700 billion. A staggering number. But only a part of the cost of the failed Bush economic policies to our country. Policies that were built on budget recklessness. When President Bush took office, he inherited President Clinton’s surpluses — four years in a row, budget surpluses, on a trajectory of $5.6 trillion in surplus. And with his reckless economic policies, within two years, he had turned that around.
“And now eight years later, the foundation of that fiscal irresponsibility, combined with an anything goes economic policy, has taken us to where we are today. They claim to be free market advocates, when it’s really an anything goes mentality. No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute, and the taxpayer will bail you out.
“Those days are over. The party is over in that respect. Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form, as encouraged, supported, by the Republicans — some in the Republican Party, not all — it has created not jobs, not capital, it has created chaos.”
Here’s the equivalent paragraphs that were the original draft of her opening remarks:
“Madam Speaker, when was the last time someone asked you for $700 billion?
“It is a number that is staggering, but tells us only the costs of
the Bush Administration’s failed economic policies—policies built on
budgetary recklessness, on an anything goes mentality, with no
regulation, no supervision, and no discipline in the system.
“Democrats believe in the free market, which can and does create jobs, wealth, and capital, but left to its own devices it has created chaos."
As you can see, she embellished that opening somewhat and continued to do so throughout her speech, continually referring to ‘them’ and ‘us’ in the typical style of political partisanship.
The result is that yes, I can see why some Republicans might have switched their vote and decided against it.
Just 12 votes separated a win from a loss.
228 votes to 205.
12 Republican votes made the difference even though, by doing so, she and the other politico’s have completely blown out any American credibility in financial markets ... but some would say they blew that credibility away a while ago, with the mismanagement of the markets that led to this crisis. The 'some would say' particularly being the Democrats as made clear in Ms. Pelosi's speech yesterday.
Is this the end of the American dream?
Seems to be ... until the next vote.
Is this the end of America’s global dominance?
Now I am not anti-American. I love America and much of what it stands for.
However, as the BBC reported, the politicians were running frightened as there is an election in five weeks, and so “rejected a bill which the Treasury and the Federal Reserve had insisted was essential to the stability and viability of the American financial system - and by extension the financial system of the entire world.”
Have they killed the world’s financial system?
No. But they have seriously infected it and need to find an antidote fast.
But that's not why they have killed the American dream.
What was killed yesterday is the 'rose-tinted glasses' by which the rest of the world has judged America.
Those glasses were smudged by the Iraq War, fogged by the subprime crisis and broken by the last two weeks mess of indecision.
For example, I may be speaking out of turn here, but the first error in the dream was the decision to invade Iraq in 2003. Afghanistan was supported as a reaction to the Taliban over 9/11, but Iraq is seen as an unjustified war.
I travel the world and know that America blew it’s goodwill with the Iraq War. From Britain to France to Germany to Australia to China to India, I cannot find one voice amongst citizens who believe this was a righteous war. They all tell me it was a mistake.
That's not to say the poor soldiers fighting on our behalf should not be supported. We all salute them. But the politician's made a mistake.
Even Americans admit this now. Just look at the McCain-Obama debate last Friday night, where Barack said directly that, on Iraq, McCain was “wrong”.
So, America lost a lot of kudos, goodwill and support as a result of the Iraq War, but it had not diminished America’s economic and financial dominance. The inter-linkage of all economies is to the global currency reserve of the dollar, for example, and that is still the case.
America equally has led the world in believing that financial leverage creates growth creates commerce creates GDP creates wealth creates leverage … until yesterday.
America has also led the investment markets thanks to Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. Until now.
This is because America created a toxic recipe under the Alan Greenspan years where greed, globalisation, technology and regulation combined to shatter the American dream. These ingredients were all placed in a melting pot and what came out was a complex soup of derivatives, which are now unravelling. Collateralised Debt Obligations (CDO), Credit Default Swaps (CDS), Structured Investment Vehicles (SIV) and their kindred have blown the American dream to pieces.
You only need to look at the charts on the BBC’s website to see the killer combination and timing that led to yesterday’s vote in the House of Representatives. Interestingly, my American colleague at this conference described the BBC as 'far too liberal', but then we are run by Labour (the Democrats equivalent) rather than the Liberals?
The BBC do make an incisive comment however, that American voters perceive Wall Street bankers to be "greedy, incompetent fat cats who have created this crisis themselves and who are now being allowed to pick the pockets of American voters to fix it.“
That’s why the Republicans voted it down. There's an election in five weeks and they are running scared of being voted out of office.
None of this is new though. Not the political self-interest, or these boom and bust cycles.
The causes of this crisis are not new either.
It all lies with structured finance, leverage and complex derivatives.
This is not to say that these financial weapons of self-destruction should be banned, as the growth fuelled by such products has been appropriate in the past, just unchecked. And the difficulty is finding the right checks and balances.
For example, Long Term Capital Management (LTCM) and Michael Milken’s junk bonds were origins that showed the vulnerability of the leveraged model when it goes unchecked and unregulated.
And the 1987 film, “Wall Street” had it all in there, with the end of the film showing Gordon Gecko, the asset-stripping, junk bond trading, investment banker, tarnsihed and tainted.
During that movie, you may remember the defining moment where Michael Douglas as Gecko says: “Greed is good”.
Greed is good, as long as it is regulated and the risks are known. And just as greed is good whilst that lasts, greed is not good when it is unregulated and risks are unknown.
That was Gecko’s mistake.
That was Milken’s mistake.
That was LTCM’s mistake.
That is America’s mistake.
And no, I’m not saying something in hindsight, as I said this in 2002 after Enron and Worldcom. Today’s situation is exactly the same, just a different situation. But the underlying causes are the same.
And I have a solution.
I think there’s a way to avoid this ever happening again in the banking world.
I’m going to make that tomorrow’s blog, because today I raise my glass, hang my head and hold my hat to the end of the American dream.
The dream was damaged by war, ravaged by money and assassinated by political self-interest.
And back to Nancy Pelosi's 'them' and 'us' comments. It's not Democrats versus Republicans right now, but possibly America versus the Rest of the World.
I think the political self-interests of all of your politicians killed the American dream yesterday.
You also pulled the rug on the little bit of credibility you might have had left.
And back to the jokes, apart from the one I've just talked about?
Apparently, a major investment was made yesterday in Pfizer's stocks by 12 Republicans as they wanted to ensure they had a little bit of help in the next five weeks to get a stronger election.
It didn't work.