The general media continues to bombard investors with sensational headlines about the slowdown in the economy, such as the quotation from a speech delivered today at the Brookings Institution in Washington DC by Britain's Chancellor of the Exchequer, Alistair Darling.In the beginning of his speech, Darling said: "Today I want to make the case for urgent action by the world's major economies to deal with what is the biggest economic shock since the Great Depression."
The line was perfect for the news media, who have been repeating it on the radio and television news, combining it with the release of a negative consumer confidence reading and leaving the impression that we are facing the most severe downturn since the 1930s.
However, Darling was specifically referring to the financial system, which did indeed receive a great shock, although that is not the same as a depression or a recession, nor did Darling say it was. In fact, throughout the rest of his talk, Darling said a number of very sensible things which will not be picked up and repeated by the media, such as:
"It is more important than ever to promote openness to trade and investment [. . .] We just need the political will to do so -- all of us, wherever we sit, rejecting protectionism, breaking down barriers to trade" (page 7 of the speech transcript).
Meanwhile, protectionist sentiment grows in the US, as evidenced most recently by the shelving of discussion on trade with Colombia yesterday (see this article in the NY Times and this editorial in the Wall Street Journal).
Darling's speech also contained calls for restraint in regulation in the face of the recent shocks to the financial system. He said that while regulation and supervision are important, he advises against "more regulation," saying: "Not requiring more regulation -- though reform is needed -- but effective regulation" (3).
This is in line with what we wrote some weeks ago, in the post "What NOT to do right now about the economy." And yet in that post we noted links to the inevitable chorus of cries for greater regulation. While the media will repeat Mr. Darling's quotation about the Great Depression, you can be sure it will never repeat his call for "not requiring more regulation." During his talk, Darling noted that the innovation in financial markets (meaning securitization to diversify the scope of risk, which many criticize as inherently bad) in and of itself has considerable benefits, such as enabling more efficient flows of capital.
In short, Mr. Darling's speech was more about the need for economies to remain flexible and avoid retreating into a protectionist or regulatory shell than about a return of the Great Depression. "The evidence shows that economies which are both stable and flexible are more resilient in the face of shocks," he said (2).
As we wrote in our previous post, we believe that the re-assessment of risk will be a positive for well-run companies that are positioned in front of growth trends. We also believe that there are some very evident growth trends that are even now just beginning to take off (and that were delayed by factors we discussed in that same previous post), some of which we will touch on in upcoming articles.
For later posts dealing with this same issue, see also:
- "It's a panic, not a Great Depression" 01/21/2009.
- "Managing Investments in the New Era" 02/18/2009.
If the government persists in orchestrating bailouts, then the price to be paid for that is more regulation. More regulation vs. reform is mere semantics.
ReplyDeleteSince the Bear Stearns shareholders have suffered enormous losses, I'm not sure who was "bailed out," but obviously someone was since the Fed had to take on $29 billion in risk. Either that, or JP Morgan just received one magnaminous gift from Uncle Sam.
Lastly, the small sidenote on securitization and financial innovation begs for additional comment. I am at a loss as to how these types of things (to which I would add derivatives) have improved anything. They have successfully rendered clarity opaque and lent ambiguity and uncertainty to transactions in the name of "mitigating risk." Securitization is like buying a bag of potatoes where all of the good ones are on top and visible with some rotten ones, knowingly and willfully, put into the mix out of sight. You buy the bag, you take the good with the bad.
This kind pf fantastic financial engineering has led to debacles like LTCM, Enron, SARBOX, and whole host of other less than appetizing dishes. The LTCM snafu resulted from really smart guys outthinking themselves. BUT, the Fed orchestrated that little Marshall Plan for the big boys as well. Enron was birthed under the auspices of these types of prestidigitation. In that case, what was heralded as necromancy was simply criminal fraud. BUT, it led directly to Sarbanes-Oxley which is almost universally decried as being onerous to the Great American Business Engine because it makes people cross their "i's" and dot their "t's" and denies them the opportunities to scheme outside the scrutiny of shareholders. Although there have been instances of business executives confessing that it was helpful to the conduct of good business, they have been few and far between. Why? Because if enough people admit it was effective, there may be more.
That's this author's three cents' worth.