At the start of the year I made 14 predictions for 2013.
Here they are.
First, four forecasts for the economic movements of 2013.
At the start of the year I made 14 predictions for 2013.
Here they are.
First, four forecasts for the economic movements of 2013.
This week I’m travelling across Asia, soaking up the changes and developments here.
What’s intriguing is the first debate is about the ASEAN economies and how they are adapting to change.
The speaker is a highly respected Professor and Economist, and he talks about how the world is changing from a US-axis focus to a multi-geographic focus where Asia’s centrifugal point was Japan but is now China; Europe’s is Britain, France and Germany; the North Americas is America, whilst the South is Brazil; not forgetting an African continent dominated by South Africa; and a Middle East focused upon Saudi oil.
There have been some extraordinary activities of late, what with Barclays throwing money transmitters off their network and gaining the wrath of Mo Farah.
HSBC has taken similar action, but went one step beyond and annoyed all the diplomatic embassies based here in London by shutting any they view as suspect accounts based upon five criteria: international connectivity, economic development, profitability, cost efficiency and liquidity.
It is only going to get worse as these actions are all attributable to the behaviours of the US authorities last year, fining Standard Chartered in a move to make headlines and throwing the book at HSBC for being in cahoots with drug lords and terrorists.
This led to me blogging a piece earlier last month that gained some significant reactions, including a dialogue with Mike Laven, CEO of Currency Cloud, that clarified some aspects of what is really going on here.
Pew Research is always producing interesting reports, but this one specifically caught my attention this week: 51% of US adults bank online.
Over half of Americans are banking online or, if you translate that into those who use the internet (about 80% of US adults), then 61% of internet users bank online.
I was just analysing the Banker’s annual tome: the Top 1,000 banks.
It’s a serious piece of research and represents many years of trends and change (I’ve personally now been tracking the Top 40 banks from this list for the past twenty years!).
This year’s figures reinforce the things I’ve been expecting for some time: that China’s banks now rule.
Just spent the weekend in New York City, or New York frickin’ City as the locals say.
When they say this, they are of course referring to the great industrialist and financier Henry Clay Frick who left them this wonderful museum of art.
No, it’s not about flagellation and sado-masochism, although the current regulatory regime is not far off that. It’s also true that the regulatory regime is pretty mind-boggling these days, with fifty shades of interpretation of fifty shades of law. This was made clear to me in dialogue with a group of European banks involved in the LIBOR fixing program last week.
We were talking about the likely implications of American regulatory retaliation, and they made it clear to me that the United States is using LIBOR and money laundering as pure extortion from foreign banks to bolster their political coffers.
That sounds a bit extreme, but it made some sense as the conversation developed.
Back to reality and what’s happening in the world today.
I received a bunch of stats and facts from one of my readers last week lookiing at public (governmental) debt across various countries and geographies, and comparing internal debt (money borrowed within country) with external debt (money borrowed from overseas).
Here’s the low-down.
OK, OK, it’s time to get down to the real business of blogging, banking and bonuses. As per my usual form, here are four specific forecasts for the economic movements of 2013:
So what’s the year been like from an investment view?
Hmmm, well at the start of the year everyone said invest in America and, looking at the returns from the US markets, they may well have been right:
Closing prices 31 Dec 2011 17 Dec 2012 % change
Dow Jones Industrial Average 12,217.56 13,235.39 8.3%
NASDAQ 2,605.15 3,010.60 15.6%
S&P 500 1,257.60 1,413.54 12.4%
FTSE 100 5,572.30 5,932.96 6.5%
Gold 1,566.80 1,700.76 8.5%
It surprises me that banks rarely get lauded and applauded, as it is far easier to critique and blast.
A good example is the post Hurricane Sandy fallout, where banks in the USA are doing everything they can to support hard hit Americans.
I didn’t see much about this in the news generally but, whilst following a few tweets, discovered that most US banks are waiving fees and doing the right thing.
A few examples .
We had a great meeting at the Financial Services Club Clearing & Settlement Working Group (CAS-WG) plenary this month.
The CAS-WG is rocking and rolling forward, with four subject groups meeting regularly between the plenary meetings.
The four subject groups focus upon the challenges of clearing and settlement to deal with risk, regulations, standards and market infrastructure operations. Each group has nominated chairpersons:
and are moving forward with focus.
At the July plenary each Chair gave an update of their group’s progress, along with two panel discussions in between.
The first panel discussion debated the merits of the European Market Infrastructure Regulation (EMIR) which is now in consultation with the European Securities and Markets Authority (ESMA) through 5th August, before ratification by the European Parliament at the end of September for implementation in 2013.
The second panel picked up on the ISO17442 standards for Legal Entity Identifiers (LEI). These are agreed for rollout from March 2013, and should make it far easier to track and monitor OTC Derivatives and other financial instruments as they move between different clearing systems.
This area was discussed in depth by:
So I’ll start by writing up a little bit on this debate.
By way of background, Legal Entity Identification (LEI) is a new ISO standard (ISO17442) which will apply to all Financial Contracts from 2013, according to an agreement made by the G20 earlier this year.
This means there will be a single, universal standard for identifying all parties involved in a financial contract, and will make it far easier therefore to see counterparty positions should another crisis occur such as the Lehman’s crash.
The standard has been established by the U.S. Treasury's Office of Financial Research following proposals by the Depository Trust & Clearing Corporation (DTCC) and SWIFT.
SWIFT will act as the registration authority, acting on behalf of the International Organisation for Standardisation (ISO) to assign the ISO 17442 LEI standard. The DTCC will act as the facilities manager which will receive, review and publish entity information.
The development of a single global standard for LEIs is a key element in the broader effort to understand and monitor systemic risk across banks and capital markets.
Furthermore, LEIs will allow Trade Repositories to keep a single record of a financial instrument, which will make it far easier to sort out a liquidity or counterparty collapse.
For a comprehensive background of the development of this standard, you can checkout this document: download LEI timeline of events.
Interestingly, in Virginie’s update on standards, she had picked up this chart from the Financial Stability Board’s list of recognised and approved trade repositories:
It shows the DTCC’s strength, which some are calling a monopoly, and a lot of discussion took place about concentration risk when so much dependency is placed upon one CCP.
On the other hand, some argued that concentration of monitoring is a good thing, as the more centralised a single record of risk, the easier it is to manage.
The general discussion however was the feasibility of implementing a single global standard for LEI’s.
James was adamant that this has been agreed and is being rolled out, no matter what other standards are mooted.
In the earlier panel:
discussed EMIR, the European Market Infrastructure Regulation.
EMIR has three objectives.
First, to reduce counterparty risks by:
Second, to create safe and resilient central counterparty systems (CCPs) by developing a comprehensive set of organisational, conduct of business and prudential requirements for CCPs.
Third, to increase transparency by:
The text of EMIR was issued on 25th June 2012 for consultation, and the consultation will close on 5th August. At this point it moves into Parliamentary submission for full EU endorsement on 30th September 2012.
That’s a rapid cycle regulation and led to a lengthy dialogue around the effectiveness of the rapid cycle consultation process taking process around EMIR, and whether with Basel III, Dodd-Frank, the LIBOR crisis and other issues, the regulatory framework was being too rushed and fragmented or whether it could actually work.
In particularly the whole notion of transparency was questioned as to whether it was a good or bad thing. Peter Randall was particularly dismissive, describing it as being like an airline security system. The idea of a secure airline is one where all passengers fly naked. You know you’re safe as everyone can see what everyone else is carrying with full transparency. However, there wouldn’t be many passengers.
That is the fear for the impact of EMIR: that it creates transparency but all trading and liquidity disappears.
Robin Poynder made the position clear when he said that you may not like the regulatory framework, but the regulators are pushing through their changes whether the markets like them or not, and are even willing to see markets collapse if that’s what it takes to make them effective.
In other words, whether liquidity is there or not after the regulatory process, they really don’t care as long as the markets are safe.
Kathleen responded by saying that this is more likely to result in a flight from the markets, where these regulations force full transparency and movements to other geographies. What that means in reality is that you see liquidity disappear in the markets where they are needed – Europe and America – leaving only higher risks for the pension funds and corporates trying to manage their collateral.
From the Subject Group updates, the main highlights were their progress in creating future agendas.
The Risk Subject Group was discussed by Shaun Cooke, and has four focus areas:
The aim is to develop these areas into working papers and recommended best practices to share across the Subject Groups and other interested parties.
The Regulations Subject Group update came from nominated Chair Rory Webster, a Director with trade repository CapitalTrack Ltd.
The Subject Group is working in two key areas today:
In particular, the group has initially focused upon EMIR and how it affects non-financial counterparties: will they be caught up or caught out by the regulation?
Bearing in mind the short-term focus for input to the consultation process by 5th August, the Subject Group asked for all input to be sent to the CAS-WG Chair by 2nd August 2012 to ensure our views are represented effectively to ESMA.
The group has also drawn up a matrix of regulations and how they impact different market functions, which is available from group co-chair Greg Caldwell of aSource Global Ltd if required.
The Standards Subject Group has focused upon trade repositories and the DTCC, and their slides – compiled by Standards Subject Group Chair Virginie O’Shea, Lead Analyst with Aite Group – can be seen below (from Slide 15):
The main activities of this group are to:
With the aim to:
The focus areas of the group include:
And the Group will identify:
In their on-going meetings.
Last, but not least, the Market Infrastructure Subject Group chaired by Kathleen Tyson-Quah of Granularity Ltd, are looking at the models for market complexity and are creating their own map of these structures to avoid any surprises.
The model the Group has developed will track the harmonisation of regulations and standard, and identify any overlaps or conflicts these create in the market infrastructures.
This is something I have advocated for a while now: we need a clear map of how the changes to system, structures, standards and regulations relate to each other.
Price formation is also on the group’s agenda, as the current LIBOR crisis will expand how pricing is set. Historically, prices have been set using mark-to-market reference rates, but self-certifying reference rates for derivatives pricing will now be called into question and change demanded. What will this mean for markets?
The group also recognises that there are 20 new CCPs being built today, with six in London alone. Does this mean too much concentration risk? It certainly means that there are changes to the way CCPs are capitalised.
Finally, the group is reviewing the impact of the new rules for clearing and settlement announced in April, when CPSS-IOSCO released three reports:
The new principles are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks, with the new rules applicable to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively “financial market infrastructures” or FMIs).
These FMIs collectively clear, settle and record transactions in financial markets.
As mentioned, the Group’s deliverable will be a model that maps out all such changes, and makes clear the implications.
So there you have it.
Four Subject Groups and two Plenary Panels.
The Subject Groups will continue to meet through the summer and the next plenary meeting will be in September.
If you’re interested in joining in, just let me know.
Talking with a friend this week, they said that they had found my blog entries a little over the top lately.
“Calm down”, she said, “and stop being a rebel without a cause.”
But that’s where she’s wrong.
I am a rebel (?) with a cause: the disruption of banking as we know it.
Now it’s not me that’s trying to disrupt banking, but my approach to studying the future of banking is to track what might disrupt the industry and never before has there been so much potential change.
The change that most of us are tracking within the industry is the regulatory agenda.
I recently made a list of what’s on the regulatory agenda and who’s driving it, and the non-exhaustive list below gives you a little clue as to how challenging this space is.
Things the regulator is focused upon:
Key players involved in new bank regulations:
Some of the regulations:
This is only a partial list - it doesn't even mention half the changes in the FSA - and so you can see from the above that we could spend days discussing the regulatory cause and probably still be left with many questions unanswered.
In fact, this one chart from JPMorgan’s annual report shows the situation at its best and worst (doubleclick image to enlarge):
This chart (page 20) shows how challenging the regulatory regime has become, with many new rules and agencies layered on top of or replacing old ones.
The regulations aren’t joined up much either, as the US ones are not quite the same as the European ones, and you need a Magellan regulatory nerd to navigate you through the waters of such complex change.
This is why Jamie Dimon has been so outspoken against Dodd-Frank and Volcker, which prompted Mad Money’s Jim Cramer to label Jamie Dimon a ‘whiner’ when he saw this chart in the JPMorgan annual report … but the whiner is now whining all the way to the bank as his bank’s $2 billion trade failure has led to Dodd-Frank being bolder and stronger than ever before.
The regulatory regime is not a deal-breaker for banks however, as it can be negotiated, debated, discussed and determined in advance.
What cannot be negotiated, debated, discussed and determined in advance is customer change.
But it can be foreseen and forecast, which is what I try to do and why I go off on one every now and again.
You see, we all grew up in a world where governments and corporations determined technology directions.
Large systems would be implemented in back office rooms, and would grind and steam away data for administrative cost savings gains.
That’s where the fundamental change is happening because today’s world reflects the consumerisation of technology.
No longer is technology direction determined by governments and corporations, but by children and consumers.
That is why it is too easy to dismiss the technology change being influenced by the iPad generation, as just being froth on the cake as the back office steam machine will stay the same.
Of course, the infrastructure may change, but the consumerisation of technology has already meant that steam machines that are non-responsive to change are being replaced by cloud machines.
Of course, some organisations get this and are rapidly rearchitecting their infrastructures to be responsive to unpredictable demands.
Today, you may have 400 downloads of your bank’s mobile app; tomorrow, 400,000; and 4 million the next.
You may see huge upward spikes in transactions and interactions as a result, with no control of peaks and troughs.
That’s why the consumerisation impact of technology on the front and back office is of so much interest to those who are looking for disruption to the banking system.
Sure, the regulators will disrupt the system, but that’s predicable; the consumer is not.
You need to watch both.
Did you ever wonder why Wall Street is called Wall Street?
We all talk about Occupy Wall Street, an area of downtown New York that stretches across eight blocks from Broadway to South Street on the East River in Lower Manhattan.
Over time, the phrase has come to symbolise the financial markets of the United States as a whole.
This is down to the fact that Wall Street is the home of the New York Stock Exchange, as well as several other major exchanges who have or had headquarters in the Wall Street area including NASDAQ, the New York Mercantile Exchange, the New York Board of Trade, and the former American Stock Exchange.
But do you ever wonder why it’s called Wall Street?
Here’s the lowdown.
Wall Street traces its origins to the original early settlers of America.
Back in the 17th century, way before Independence and pucker stock markets prevailed, early Dutch settlers were building what has now become New York, originally known as New Amsterdam of course.
The key man at this time was one Peter Stuyvesant, he of the famous cigarette brand and wooden leg.
Of course, tobacco was one of the things traded by colonists, but back in 1647 things were very different. Manhattan Island was owned by the Dutch West India Company and they appointed Peter – or Pieter or Petrus if you prefer – to be the new Director General of New Amsterdam, the main fort and colony settled on the tip of the island.
Various trips and battles took place between the Dutch and other settlers – the British, Spanish and French – throughout this period, and during these moments Peter would lead troops to fight, only to find, on his return to New Amsterdam, that the Native Americans had laid plunder to the town.
One particular occasion was a major issue for Stuyvesant.
He had sailed with seven ships and 700 men to Wilmington, Delaware, and fought a battle with the Swedish settlers who had laid claim to the land, naming it New Sweden.
Stuyvesant won but it angered the Susquehannock Nation, who were close trading partners with the Swedish and liked them. The Susquehannocks gathered their warriors and, with other allied Native Americans, attacked several New Netherland settlements with New Amsterdam being the focal point, in September 1655.
Stuyvesant was incandescent when he returned to find the devastation reaped upon his lands and colony, and ordered the building of a strong 12 foot high wall around New Amsterdam to protect them from further incursions.
Thus began the building of "de Waal Straat".
Waal Straat followed the path of a bustling commercial thoroughfare which joined the banks of the East River with the Hudson River in the west, and was home to many early merchants’ warehouses and shops.
The wall also provided a good meeting spot for trading, and merchants and traders would gather there by a buttonwood tree that had been planted on Waal Straat, for the auctions of their goods through the buying and selling of shares and bonds in their shipping ventures.
A century later, after the Dutch ceded New Amsterdam to the British who renamed it New York in 1664, merchants were fed up with the fees being charged by the auctioneers for their goods, shares and bonds.
Therefore, in March 1792, twenty-four of the largest merchants decided to change the way the securities business was run. These merchants signed the Buttonwood Agreement, named after their traditional meeting place.
The agreement called for the signers to trade securities only among themselves, to set trading fees, and not to participate in other auctions of securities. These twenty-four men had founded what was to become the New York Stock Exchange, which is still there today at 11 Wall Street.
If this is of interest, I might post a few more historical pieces over time but, for the moment, if you ever wondered why Wall Street is called Wall Street ... now you know!
Occupy Wall Street is seven months old.
It started on September 17th 2011, inspired by the Arab Spring, and rapidly became a global movement representing the 99 percent who are squeezed out of opportunity by the 1 percent who control all the assets and wealth of the world.
The trouble is, being seven months old and now turfed out of their occupancies by the authorities, the movement has nowhere else to go.
Or does it?
In a fascinating series of articles, the US magazine the Nation asked a range of commentators and analysts to discuss the movements future.
And there are some key things in the articles that point to more radical action and activism.
For example, from April 25th, the annual general meetings of major US banks like Wells Fargo and Bank of America, along with GE and more, will see their shareholder discussions disrupted.
And, on May Day, there are calls for a General Strike across America, something that strikes fear into many as we have not seen General Strikes in most developed economies since the 1930s.
Oh yes, there are many comparisons with past struggles, and so, in the spirit of sharing, here are a few highlighted paragraphs from the over twenty pages of analysis:
Horizontal Meets Vertical; Occupy Meets Establishment by Stephen Lerner, architect of the Justice for Janitors campaign
Starting with GE on April 25 in Detroit and moving on to Wells Fargo, Bank of America and dozens of other corporations in May and June, tens of thousands of people from Occupy, community organizations, unions and environmental groups will show up at the annual shareholder meetings of major corporations. Some people will be on the inside with proxies, and others will be massed in the streets, all delivering the message that it is no longer acceptable for giant, unaccountable corporations to decide the political and economic fate of the country.
The next big challenge and opportunity is May Day. In New York, heeding calls for a general strike that originated with Occupy LA, Occupy Wall Street has been in lengthy meetings with organized labor and a collation of immigrant groups. It appears that after some initial hiccups – labor didn’t think a general strike was feasible – compromise wording will for a day that combines militant occupy actions with a mass march in the late afternoon, beginning at Union Square and heading to Wall Street.
It’s not a bad idea to restate Occupy’s core principle: it is a movement on behalf of the thwarted 99 percent against the dominant institutions that fatten the 1 percent. It aims to bring to an end the grotesque state of affairs in which the burden of big money crushes democracy and to depose the forces that produced economic catastrophe, along with their shabby ideas and financial delirium. It knows, in the words of one sign, “The system isn’t broken, it’s fixed.”
An economy driven to enrich the 1 percent cannot meet the needs of the 99 percent for a secure, sustainable future. We need a strategy to counter the threats to economic security and climate security by putting people to work to create a low-pollution, climate-friendly, sustainable global economy—what is sometimes described as a Global Green New Deal. It will require democratizing our economy so that we can direct our labor and our investment to sustainably meeting the needs of all people. It will require not just different policies, or even different structures, but a global society mobilized for change. A Global Green New Deal will ensure jobs and livelihoods for all, because it will take all the work—and all the creativity—we can muster.
The Purpose of Occupy Wall Street Is to Occupy Wall Street by Michael Moore, filmmaker and author
It’s important to remember that Occupy Wall Street is about occupying Wall Street. The other Occupies that have sprung up around the country are in solidarity, and while they attack the tentacles and the symptoms of the beast that exist locally everywhere, the head can be chopped off only in one place—and that place is in downtown Manhattan, where this movement started and must continue.
The secret to Occupy’s strength remains its ability to disrupt power—an ability retained by Occupy movements working on housing, labor, finance, electoral reform, corporate accountability, the food supply and pretty much any other issue you can think of. It can be seen from Occupy the SEC, which released a stunning 325-page critique of the Volcker Rule
The rallying cry of the Occupy movement—“We are the 99 percent”—has also taken on a life of its own. With a spirit of inclusiveness that mimics the slogan, established institutions from MoveOn to National People’s Action to the United Auto Workers are investing collective resources into The 99% Spring, a massive training project that aims to train 100,000 people in nonviolent civil disobedience and economic literacy.
The fact that several opinion polls over the past four years have indicated that about 30 percent of the population is open to alternatives to capitalism seemed to have gone almost unnoticed, at least until the emergence of the Occupy Wall Street movement. Thirty percent is about 90 million people, but it also roughly the proportion of the colonial population that supported the Revolutionary War.
Under capitalism, decisions are made by those with economic power and then political decisions follow to support them. The Occupy movements turn this trajectory on its head and say, No! First comes democracy; first people decide, and this political process is inseparable from economic and social issues. That is the slogan of the 99 percent. It is a framework of the majority—the people lead. This is the meaning of democracy, coming from the Greek, δημοκρατία (dēmokratía), “rule of the people,” which says nothing about economic interests predominating.
The great victories that have been won in the past were won precisely because politicians were driven to make choices in the form of policy concessions that would win back some voters, even at the cost of losing others. Thus the Democrats who finally supported civil rights legislation were not stupid. They knew that by conceding to the civil rights movement they were risking the long-term support of the white South. They tried to straddle the divide. But the movement forced their hand.
Thanks to the lunacy that has overtaken the GOP, Obama is in a good position to win re-election. But he is vulnerable to an escalating Occupy movement. In particular, minority, young and poor new voters are volatile voters, and they are susceptible to the appeals of Occupy. I, for one, hope the movement forces Obama to pay for its support, in desperately needed economic, political and environmental reforms.
And there’s lots more at the Nation’s website area dedicated to Occupy Wall Street http://www.thenation.com/occupy-wall-street.
I was asked to keynote at the ISITC 18th Annual Industry Forum & Vendor Show in Boston this week.
Knowing that it’s always important to pull the chain a little bit, I put forward the title: “The next mega global financial crisis will be in 2045”.
This was based upon an earlier blog, where I talked about the tensions of China and India leading to another crisis.
Here is the slide deck:
Pretty much speaks for itself I think and to be clear, some of this I truly believe will happen, and some of it does not stand a cat in hell’s chance of ever happening.
You decide which.
There were a few questions afterwards about where Russia sits and what about Canada?
I answered that Russia is too unfocused to have a clear picture of its future, whilst it stays under the iron first of Putin, and what about Canada?
Anyways, hope you enjoy.
It’s Davos time, as usual.
In the last week of January, the great and the good of the world’s leadership from governments, business, academia and media all gather in Switzerland to debate the future of the world’s economies and the World Economic Forum, #WEF.
In the build-up to this year’s WEF, it seems that all the magazines, media and men are talking about capitalism, what capitalism means post-crisis and what the future of capitalism will be.
David Cameron made a speech about this last week, as did Nick Clegg and Ed Miliband, and much of the debate resonates with the speech of Amartya Sen that I attended last week.
The core of the debate is embodied in the quote by Winston Churchill that “capitalism is the worst form of economics, except for all the others that have been tried.”
The debate is then what form of capitalism you want: state capitalism or liberal capitalism.
A wholly state run economy fails, as demonstrated by communism; whilst a wholly liberalised, free market economy also fails, as demonstrated in 2008.
So there needs to be a middle ground, but how middling is that middle ground?
Somewhere between the extremes of Western and Eastern approaches to commerce.
Some believe that the West is crumbling due to over-excessive free market liberalism.
In a 2011 report, the Organisation for Economic Co-operation and Development figured that the level of income inequality in the 22 member nations it studied increased by 10% since the mid-1980s, with conditions deteriorating in 17 of them.
A recent report by the Institute for Policy Studies, a Washington-based think tank, found that CEOs at large U.S. firms earned, on average, $10.8 million in 2010, a 28% increase from the year before, while the average worker took home $33,121, a mere 3% more. At that level, CEOs’ paychecks are 325 times bigger than their employees’. In the 1970s, CEO pay rarely topped 30 times more.
Meanwhile, the average income for an American has reduced every year for the past three years.
On the other extreme, Asian markets are rising fast and taking over, using a more state-led capitalistic approach.
“The world’s ten biggest oil-and-gas firms, measured by reserves, are all state-owned … state-backed companies account for 80% of the value of China’s stockmarket and 62% of Russia’s.” [The Economist]
“The ten largest economies in Asia now spend roughly $400 billion a year on research and development (R&D)—as much as America, and well ahead of Europe’s $300 billion. China’s investment leapt 28% in a year, propelling it past Japan to become the world’s second-biggest spender … America’s share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia’s rose from 24% to 35%. But science is not a zero-sum game.” [The Economist]
So there is a new model rising which, according to Time Magazine, “is not so much between capitalism and another ideology but between competing forms of capitalism. The financial crisis, growing inequality and faltering economic performance in the U.S. have tarnished American ‘leave it to the markets’ capitalism, which is being challenged by ‘capitalism with Chinese characteristics’, eurocapitalism, ‘democratic development capitalism’ (India and Brazil) and even small-state entrepreneurial capitalism (Singapore, UAE and Israel). All these models favour a more significant role for the state in regulation, ownership and control of assets.”
The Economist furthers this debate, asserting that the winner is ‘state capitalism’.
“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation.”
Examples of state capitalism include:
“The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world’s oil reserves, are all state-backed including the world’s biggest natural-gas company, Russia’s Gazprom, China Mobile and Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Russia’s Sberbank is Europe’s third-largest bank by market capitalisation. Dubai Ports is the world’s third-largest ports operator. The airline Emirates is growing at 20% a year ... State companies make up 80% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil. They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones.” [The Economist]
“State-Owned Enterprises (SOEs) make up most of the market capitalisation of China’s and Russia’s stockmarkets and account for 28 of the emerging world’s 100 biggest companies.” [The Economist]
“France owns 85% of EDF, an energy company; Japan 50% of Japan Tobacco; and Germany 32% of Deutsche Telekom. These numbers add up: across the OECD state-owned enterprises have a combined value of almost $2 trillion and employ 6m people.” [The Economist]
The Economist believes the trend for the next decade will be towards state capitalism based upon the Chinese model, albeit with caveats and issues along the way, and concludes that “the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model:
But note that, unlike America where CEOs’ paychecks are 325 times bigger than their employees, state capitalism is fairer in terms of income disparities: “in 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000.” [The Economist] China Mobile has 600 million customers and is one of the largest telecoms in the world.
FYI, I debated these points a couple of years ago, and concluded that the future is one where capitalism is heavily influenced by the influence of the Chinese and Islamic principles.
Seems to be coming true?
Link: The World Is Not Enough
The main reading behind this blog post is inspired by two cover page stories:
I attended an interesting lecture last night from an economic legend: Professor Amartya Sen of Harvard University.
If you haven’t heard of him, he’s known as the Mother Teresa of economics in his native India, and has spent a lifetime fighting poverty with analysis rather than activism.
Awarded the Nobel Prize in Economic Sciences in 1998, for his contributions to welfare economics and interest in the problems of society's poorest members, Sen is best known for his work on the causes of famine.
He is currently Professor of Economics and Philosophy at Harvard University, as well as being a senior fellow at the Harvard Society of Fellows, distinguished fellow of All Souls College, Oxford and a Fellow of Trinity College, Cambridge, where he previously served as Master from 1998 to 2004.
An impressive guy.
Amartya delivered his speech as part of the London Stock Exchange Group series of lectures on the future of global finance, and the evening was hosted by LSE Chairman, Chris Gibson-Smith.
Here’s a brief summary of Amartya’s sentiments (I say ‘sentiments’ as this is not a record of his speech and incorporates my own spin on his words).
Some people say we live in interesting times, but I think we live in baffling times.
We live in baffling, rather than interesting, times because it is very hard to get any clarity about the future.
The only thing that is certain is, in the words of George Bernard Shaw, “the greatest of evils and the worst of crimes is poverty”.
Shaw wrote this in the Preface to his brilliant play, Major Barbara, published in 1907.
The tragedy of poverty is, of course, obvious to all - whether in Latin America, or in Asia or Africa, or in Europe and the United States.
The calamity of deprivation and penury can hardly be missed by those who have bothered to think about the subject, no matter whether they are themselves poor or not.
Lives are battered, happiness stifled, creativity destroyed, freedoms eradicated by the misfortunes of poverty.
But Bernard Shaw was not talking, on this occasion, about the hardship of poverty, or the misfortune that goes with it.
He was commenting, in a rather unusual way, about the causation and consequences of poverty - that it is bred through evil and ends up being a crime.
If poverty is indeed an evil, not to mention “the greatest of evils” as Shaw puts it, then there must be some wickedness, or at least some culpability, behind poverty - some wrong-doing that allows such human tragedies to occur and persist.
This raises the immediate question: who, then, are the wrong-doers?
If you look to protesters today, such as the Occupy Wall Street movement, the wrongdoers are represented by the corporate greed of capitalists and the banks.
You can just as easily take the opposite view however, and look to the Tea Party movement who see the failure being that of government and government policies.
The Tea Party align with Adam Smith, the guru of capitalism, and believe that free markets should rule.
Who is right and who is wrong?
Or is this the right question?
In thinking about strategic issues, we cannot but go into the question of culpability and the failure of duties and obligations.
We have to ask: how can things be done differently so that the evil of poverty is ousted?
We have to identify the nature and genesis of the wrong-doing that is responsible for the affliction.
That is not, however, the same as trying to identify the wrong-doers?
The identification of wrong-doers is not our task and trying to identify the evil-doers is not the right strategy since the responsibility for creating an evil is very widely dispersed in the society.
We have to see how the actions - and indeed inactions - of a great many persons together lead to this evil, and how changing our modes of actions - our policies, our institutions, our priorities - can help to eliminate poverty.
Our focus definitely has to be on removing evil-doing, as part of our strategies and programs, rather than going on the wild-goose chase of catching the hugely dispersed collectivity of evil-doers, who may not even fully understand how their actions can be seen as part of an evil state of affairs.
In fact, we should eliminate the discussion of wrong doers completely, and focus our efforts more on how to stop poverty full stop.
This is why strategies such as closing sweatshop labour factories in poor countries, or arresting those who employ children in the making of carpets, would fail to eliminate the poverty of the victims if such action is separated from a general economic and social program.
In the vast majority of cases the employees are there in those terrible jobs because they have very few options - none that are particularly good.
This is because there has been a failure of the state and the society to create opportunities for decent employment, which makes it possible to recruit labour to do terrible jobs as the alternative may be unemployment and starvation.
That is why exploited labourers are led to soul-destroying work today in the poorer countries, and closing down sweated-labour factories without giving the victims alternative opportunities for employment or education - the latter is extremely important in the case of child labour - is not an adequate solution to the problems and predicaments of the precarious poor.
There is, of course, moral merit in restraining the pursuit of profit of businessmen through exploiting vulnerable and freedom-less labour, but a fuller solution can emerge only through positive opportunities of alternative employment and occupation, and that demands societal action.
So the first action to address poverty is to expand labour opportunities and assist in education, and not to just shutdown existing sources of income.
My argument so far has been based on seeing poverty as lowness of incomes.
Is employment with income a full solution to all problems of poverty?
To believe that would be to underestimate vastly the complexity of poverty, particularly the nature of persistent poverty.
By way of example, lowliness of income is the primary cause of starvation rather than the lowliness of the availability of food.
Is employment for income in order to buy food the answer to everything therefore?
No, as this misses the point of why there is persistent poverty
Strategic examination about eliminating poverty, or even reducing its burden, has to go more deeply into the nature of poverty.
Poverty is about the inability to lead a decent, minimally acceptable life, and while low income does make it difficult to lead a life of freedom and well-being, an exclusive concentration on seeing poverty as lowness of income misses out a great many important connections.
What are the other non-income factors that contribute to poverty: a lack of education, availability of work, investment in infrastructure and more, and capitalism addresses these issues by providing an insurance.
For example, all affluent societies have addressed extreme poverty issues through public policy programs, such as the public pension, the provision of school education, the availability of healthcare and more non-market non-commercial arranged facilities.
The economics of these areas are not obvious except that an insurance system run by the state or by some other social support system, not by profit-oriented private firms, may be a necessary part of the elimination of poverty.
Affluent societies focus upon profit maximisation and the unrestricted search for profit, but if they only relied on profit maximisation they would not function.
As a result, they balance between market mechanisms and state activities.
There is no strategic formula as to the correct balance between market mechanisms and state activities – the contrast between China and Taiwan or America and Sweden are good examples of how approaches differ – but we need to understand these balances in order to create a better world that addresses poverty with finance.
Does this mean arguing against Adam Smith’s principles for free markets?
That view is a result of a huge misunderstanding of Adam Smith’s principles, and my position is strongly influenced by his.
Adam Smith clarified how markets work and how they can work exceedingly well. He believes that you need a well-functioning market economy and clarity of why you want such efficient markets to be.
The task of politicians in managing the economy is then to search for two distinct objectives: first, to provide plentiful revenue to cover the basic subsistence needs of the people before the subsistence needs of the state; and second, to provide the state with enough revenue to finance public services.
The financial focus of public services is a critical part of Smith’s work and Adam Smith had an overwhelmingly clear view about support of the poor and undersupported in his market view.
Within his free market principles, he clearly defended the role of the state to fund public services, such as education and poverty relief.
Adam Smith was deeply concerned about the inequality of society and never used the word capitalism.
The word capitalism does not appear in any of his books or any other writing, and it would be hard to carve out anything in his works on market economies that were based purely upon capital.
For example, he specifically argued about protections from unlimited usury practices.
So how should we think about the wrongdoers that need rectification, and how should we address poverty?
According to Adam Smith and my own thinking, the key is increasing employment.
Increasing employment must remain a worldwide priority and China, Brazil and India are doing much better at this than America and Europe.
As employment and economic welfare rises, the state must use such employment to improve public services for good living and public welfare and, in this respect, India is not doing this as well as China and Brazil.
Finally, for the West in general and Europe in particular, the crisis of 2008 was created by the malfunctioning of market economies – the result was the state had to create support for their economies and this is the reason for rising sovereign debt.
But the cause of this malfunctioning is clearly what was thought of as lack of accountability of governments, but governments are accountable and this is what we are seeing today.
What we are seeing is that, in order to pay back their debts, governments have far more accountability. However, they are addressing this accountability in the wrong way.
It’s hard to see how massive austerity drives, which cuts demand and growth, can therefore be supported,
Just look at Japan and learn from what happened there over the last 20 years of austerity, which is still biting.
What these governments need is fast economic growth.
Economic growth creates resources to address unemployment and poverty.
This is the key to addressing issues in Europe and the West, and it is the indiscipline of governments that has failed the markets, not the markets themselves.
Europe needs a better form of economic accountability and management of their economies, rather than austerities which decimate human lives and economic growth.
In conclusion, I end by affirming that George Bernard Shaw was right, a hundred years ago today, to point to the connection between poverty and evil and crime. The fact that this insight came not from an economist but from a dramatist and literary giant fits in well with my general thesis that the economics of poverty involves much more than just economics. Human lives in society are interlinked through economic, social, political and cultural associations. The nature, causes and consequences of poverty reflect the richness of those connections. We have no reason to be surprised by that elementary understanding.
Amartya then took Q&A from the floor and was asked a few interesting questions.
Q: You appear to be saying that in this current crisis, it is the failure of states to regulate markets effectively that failed, rather than the markets themselves. Is this your view?
You cannot separate markets and state, and this crisis was a failure of both, but you also have to be aware of the relationship between free markets and state influence.
For example, Adam Smith argued against usury, but was convinced to change his thoughts on interest after reading the works of Jeremy Bentham.
The core of how markets and state should work is that free markets is the most efficient model of economic management, but free markets need states that set efficient regulations to avoid failure in order to be truly workable.
As this shows, free markets and the state are two separate entities that are interdependent.
A key question in the last crisis however is whether globalisation killed that interdependency to cause the spiral of crisis we see today.
Globalisation may have undermined national states, as government can no longer effectively regulate the free markets?
There may be some truth in this statement, and this is why the G20, G8 and other global activities – the World Bank and IMF included – are key to solving these issues this time around.
Q: Do you think the euro will survive?
When the euro was created, I didn’t see why it was needed and didn’t believe it made sense. I am a fan of Europe, don’t get me wrong there as my late wife was Italian, but to start a European integration without a fiscal foundation meant that it was never going to work.
You can see this today as many parts of the EU are not served well by a Europe that has no fiscal union. Greece is a good example.
Now however the loss of a country would be very destabilising for this European Union.
This is why Germany is being forced to bailout Europe.
Could they retreat out of it? Yes.
Is that the right thing to do? I think so.
Postnote: some of Amartya’s speech is taken from a write up of an earlier presentation he made in 2007. These words of wisdom are integrated in parts of this article to ensure more accuracy of content.
I’ve been debating some future presentations with various folks today, and a little ray of light went off in my head.
The light was triggered by a comment: “can you talk about what impact regulatory change may have on bank to corporate relationships using examples historically?”
The question was really asking about the unintended impact of regulatory change in the past and what it might mean for their future, but it made me think about something else.
Each time we have seen a major bubble burst, the cause has been a coagulation of several forces of change.
Forces for change come from four major directions: Political, Economic, Social and Technological (PEST).
These forces for change are used in many ways, and can be seen in my banking history discussions (and soon to be published book) which talks about many historical periods including the Italian Renaissance, the Great Depression and the Credit Crisis.
In each of these, we can see Political, Economic, Social and Technological forces working together at the same time to drive change.
In the fall of the Renaissance Italians, it was a mixture of change between the break from the Catholic Church with the Protestant and other movements (Political), mixed with the ruin of the Italian banks due to over-extension of credit to overseas Royal Houses (Economic), along with expansion of merchant shipping and colonisation (Technological).
In the Great Depression, we saw the end of the Industrial Revolution (Technological) combined with post-war wrangling over the gold standard (Political and Economic).
Right now, we see a major world of change too.
We have the rebalancing of power between America and Asia/China (Economic) combined with an internet revolution that is connecting everyone on the planet (Technological), leading to changes in society, where a Molly Katchpole can reverse a bank’s policy and an #Occupy movement can change global thinking (Social).
The Political outcome of all of this is what is driving bank regulations right now.
And the outcome of all of this will be a massive change.
A New World Order?
We already have a New World Order as China is expected to be the world’s largest economy by 2018 (ten years ago, it was estimated to be 2047).
But we will see a restructured playing field and one that is not level.
We can see this already as one major economy (America) bans prop trading whilst another (UK) just separates prop trading from retail bank operations.
Even more pronounced are the differences between the US and EU on OTC Derivatives regulations and how to define and regulate Systemically Important Financial Institutions (SiFi).
From CME Group in October 2011:
“In an ideal world, global financial regulators would function something like a team of horses, with policymakers in the United States, Europe, Asia and elsewhere all pulling at once in the same direction, and moving toward a common goal.
“Reality is turning out be far more chaotic, however. Regulators and lawmakers are having a tough time forming a consensus even within their own national borders, let alone across international boundaries. The result is turning out be a patchwork of overlapping and often inconsistent approaches to regulation in the aftermath of the financial crisis that gripped global markets in 2008 and 2009. Many financial experts fear that the inconsistent global regulatory framework will alter the flow of capital around the world, as trades are directed to the cheapest jurisdiction, a process known as regulatory arbitrage.”
So we end up with a world where the politicians are trying to react to the implosion of markets at the end of another revolution – Globalisation – and find that they are seriously lacking consistency, vision, leadership or agreement.
The Eurozone is one of the best illustrations of this, although America and China aren’t guaranteed to come out of this stainless as the American elections will change ground again, as will China’s challenges of a property market bubble and inflationary pressures.
All in all, the PEST approach to the world today says that we are going through a momentous change from all angles – Political, Economic, Social and Technological.
Where will it end up?
Probably in a place no-one expects and one which, on this blog, I’m going to avoid predicting decisively.
“By 2020, the workforce in western Europe will shrink by 2.4 percent, including a 4.2 percent contraction in Germany, according to a Boston Consulting Group study.
Looking further ahead, HSBC projects that Germany's working population will shrivel by 29 percent by 2050, Russia's by 31 percent and Japan's by 37 percent.
Over the same period, the population of many African countries will double. Nigeria will log a rise of 3 percent a year in its workforce - in contrast to a 1 percent decline in Russia and Japan - and will have as many people as the United States by 2050.
On current projections, Pakistan will be the sixth most-populous nation by the middle of the century. And the Philippines could be the world's 16th-biggest economy, HSBC reckons.”