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
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.