On the turbulence in the global financial markets

From the Business Times of Singapore:
Business Times - 27 Mar 2007

Deconstructing the financial markets

Industry players may be making their work sound more exotic and complex than it is


DURING the 198Os, post-modernist philosophy was all the rage in social science and humanities departments in Western universities. As a doctoral student at that time, I had the misfortune of having to study the works of such great French philosophers as Michel Foucault, Jacques Derrida, Jean-Francois Lyotard, and Jean Baudrillard, and dig into such esoteric disciplines as phenomenology, hermeneutics, structuralism, post-structuralism, and my favourite (Not!), deconstruction.

And what can I say? I didn't and still don't get all this post-modernist stuff and I have a strange feeling that most of my fellow-students who were nodding with their heads in class as they tried to, well, deconstruct such statements as 'deconstruction is not an enclosure in nothingness, but an openness to the other'. An attempt 'to discover the non-place or non-lieu which would be that 'other' of philosophy' shared the same experience.

So perhaps all this post-modernism stuff is nothing more than meaningless rhetorical gymnastics which provide the intellectual con-artists who are purveyors of these pop-philosophical products with an opportunity to gain fame, make money, and meet women. The fact that most of us don't get it, works to their advantage by helping their so-called field of knowledge acquire a certain aura of mystery, suggesting that only the very bright can decode their penetrating utterances. And who, after all, is going to have the courage to state the obvious: the king has no clothes?

I seem to have experienced once again that sense of deja vu, that I just don't get it and I'm not sure that anyone else does, while attending recent conferences in Washington about the latest developments in the financial services industry.

And that is ironic because the discipline of economics unlike, say, post-modernist literary theory, tends to attract people who deal with hard facts and numbers, whose pronouncements about the rise and fall in the unemployment rate or the latest trade figures are clear and simple. They're never expected to say something like: 'The meta-narrative of the Fed's decision to lower interest rates reflects the breaking of traditional frames of genre, structure and stylistic unity, and the overthrowing of categories that are the result of logo-centrism and other forms of artificially imposed order.'

A little confused

Yet, it seems to me that when investment bankers discuss today what they refer to as 'capital market products' (which already sounds a bit fuzzy) and explain that, say, hedge funds may be either 'long' or 'short' assets and may enter into 'futures', 'swaps' and other 'derivative' contracts, I have a strong sense that most of those sitting next to me in the audience are a little confused.

I'm not implying that these investment bankers are con-artists or that they do not know what they are talking about or that they are engaging in meaningless rhetorical gymnastics. It just seems to me that just as the financial markets are becoming such critical components of the global economy, the average citizen is having problems understanding what is going on.

Indeed, unlike problems phenomenology and hermeneutics that are of interest to a few academics, the working of the financial markets ends up causing a problem for all of us, which has become quite obvious as one analyses the reasons and the consequences of the current meltdown of the subprime mortgage sector.

Home buyers who didn't have the necessary cash or credit have borrowed from lenders who expect interest rates to continue falling and home prices to continue rising. And making all of this possible are Wall Street investment firms, banks, pension funds and other financial players that take care of the 'mortgage backed securities' which are packages of subprime mortgages bundled together and sold to investors seeking high yields in an environment where interest rate are low.

Financial alchemy

Other financial firms issued 'credit default swaps' which are a form of insurance for investors - the ones who make it possible for the subprime mortgage companies to lend to the credit-less and cash-less home buyers - in case the bundles of mortgages go bust. The argument being made now is that the credit default swaps made mortgage backed securities seem less risky, in a process that could resemble financial alchemy.

But when interest rates start falling and expose the real economic fundamentals, it is the borrower at the end of this process who cannot pay his mortgage and is sometimes forced to evict and live in the streets. Eventually, if the problem impacts Wall Street, the entire national and global economies suffer. The argument is that as long as everything involved in this process is 'transparent', then the players - home-buyers, lenders, investors - who ended up as losers just 'didn't do their homework'. Now they had to learn the hard way, next time things are going to work better.

Perhaps. But it seems to me that when we are dealing with the complexity of the global financial markets more than transparency is required. Those who are involved in this business, from the investors to the regulators, including economic analysts and journalists, need to provide the citizen-consumer with a clear picture of reality, that like other areas of economic activity, someone is going to win and someone is going to lose.

Economic discipline

After all, the beauty of the economic discipline is its capacity to summarise complex phenomena by the application of a handful of principles that should lead to an understanding of the complex world around us better than any other branch of science or philosophy.

Indeed, those working in and explaining the financial industry are sounding more and more like Jacques Derrida than Adam Smith. Rightly, some wonder whether that by making their professional discipline sound more exotic and complex than it is, they are helping their industry to become more resistant to pressure from shareholders, customers, regulators and competitors when it comes to profits and compensation.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.

Business Times - 23 Mar 2007

Ease up on financial rules: US firms

Mr Paulson did not put all the blame on Sarbanes-Oxley and also stressed that the potential 'challenges' to the US financial sector are the result of complex changes in global markets


THE results of last year's Congressional elections that made it possible for the Democrats to take control over Capitol Hill, have led many pundits to conclude that the economic and social policies that would come out of Washington in the next years would reflect a more populist, if not antibusiness approach.

After all, many Democratic lawmakers have political ties to the labour unions and other progressive political groups, and have won elections by promoting an agenda critical of the pro-business policies of the Bush Administration.

Moreover, public opinion polls indicate that the majority of Americans, including members of the middle class who have probably been following the news about the many scandals that engulfed Corporate America in recent years, are not only concerned over the growing economic and social inequality in America but also want Washington to restrain those greedy guys on Wall Street.

So you would expect that officials, lawmakers and journalists would be discussing now new legislation and policies that would place more regulations on businesses, especially when it comes to the wild financial markets and to protecting the defenceless consumer right? Wrong!

In fact, in the same week that the Dow Jones was on its way down and the front pages of the newspapers reported on the collapsing subprime mortgage business and the threat that it all posed to American companies and consumers, the top leading figures in the community of US economic policymakers, including two former Federal Reserve chairmen, a former Treasury secretary, and many CEOs met in Washington, DC, to discuss US economic policy, including ways to deregulate American financial markets.

The debate between the participants, led by Treasury Secretary Henry Paulson, was not on whether Washington lawmakers and policymakers should deregulate, but on how far they should move ahead with these regulation changes.

The 'Conference on US Capital Markets Competitiveness' which was convened by the Treasury Department in Georgetown University in Washington, brought together as participants many economic and business superstars, such as former Federal Reserve chairman Alan Greenspan, New York Mayor Michael Bloomberg, celebrated investor Warren Buffett, General Electric chairman Jeffrey Immelt, and investor Charles Schwab.

These and other panelists have expressed their concern, echoed by leading business groups such as the US Chamber of Commerce, that litigation costs and the regulations that were imposed by Congress and the Bush Administration five years ago in the aftermath of the accounting scandals at Enron, Worldcom and other companies, and in particular the so-called Sarbanes-Oxley law are burdening American companies and hindering the ability of the US financial sector to compete in the global markets, especially at a time when other financial centres like London are threatening Wall Street's dominant position. Ironically, Sarbanes-Oxley and other regulations were adopted in reaction to corporate fraud, including increased audit requirements on companies that were part of an effort to restore investor confidence in US financial markets. But as former treasury secretary Robert Rubin suggested during the conference, these regulations like many others have produced unintended consequences by placing huge legal and financial costs on companies and their CEOs that need to comply with the new laws.

Indeed, several recent reports issued by politicians and business executives have blamed the post-Enron legislation, and in particular Sarbanes-Oxley for the alleged erosion in the competitiveness of US financial markets. A group of public figures in New York City led by Mayor Bloomberg and Democratic Senator Charles Schumer, warned in a report released early this year that unless some of the regulations would be changed, New York could lose its leadership position in the global financial markets. The US Chamber of Commerce, in a report issued on Wednesday, has expressed similar concerns over what it describes as the overreaction of Washington to the 2002 corporate scandals.

Secretary Paulson, a former head of Goldman Sachs, who also addressed the conference in Washington, seems to agree that the new accounting and governance rules which, while necessary, were also creating unnecessary costs and introducing new risks to the American economy and proposed that 'the right regulatory balance should marry high standards of integrity and accountability with a strong foundation for innovation, growth and competitiveness'.

But interestingly enough, in a conference last year, Mr Paulson did not put all the blame the problems facing financial companies on Sarbanes-Oxley and also stressed that the potential 'challenges' to the competitiveness of the US financial sector, reflected in the decline in initial public offerings in US capital markets, are the result of complex changes in the global financial markets. This includes the development of markets outside the US, particularly in London and Hong Kong. US investors are able to participate in these offerings.

In any case, it is clear that Secretary Paulson as well as the chairman of the Securities and Exchange Commission (SEC) are hoping to take advantage of the momentum for change advanced by Corporate America to press for reform that would prevent US markets from losing its global competitiveness.

The SEC and the Justice Department have already taken steps to constrain the pressure of litigators on companies and to provide more flexibility to CEOs. The Bush Administration also hopes to work with Congress on 'reform', that is, enact changes in the current rules that would create a regulatory structure that is more agile and responsive to changes in today's marketplace. The administration wants to take a risk-based approach to regulation, weighing the cost to shareholders against the benefits, while putting in place an enforcement regime that should punish and deter wrongdoing and encourage good behaviour without hindering responsible risk-taking and innovation.

At the same time, most observers agree that Congress needs to start taking a 'global view' when it enacts legislation affecting American companies. As Mr Paulson suggested in his speech last year: 'We don't operate in isolation, so it is very important to consider how changes we make affect the ability of our companies to compete globally and how these changes affect our interaction with markets and regulators around the world.'

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.


weknow music@aol.com said…
"The meta-narrative of the Fed's decision..." whoa that is a beautiful sentence. I can hear Crazy Al saying it at a cocktail affair after two or three drinks to rationalize the Fed's lowering of interest rates to 1% five years back. The subprime problem is the result of the Fed leaving the punchbowl out too long, probably to facilitate the 2002 election. Anyway the current derivitives craze (25 years old and going strong) is like modern art and outside jazz, a hype. Oh I've enjoyed each in their way for the alloted fifteen minutes but I've gone back to the basics; Renoir, in tune singing and Treasury bills, notes and bonds. There is no replacement as yet for the products the Fed offers, indeed the only true blending of the public and private spheres here on Earth.
However just as we see Hong Kong or the like replacing New York in a generation as the tip top spot for art, music and commerce; there will have to be an International Reserve that somehow makes International Capitalism palatable. And somehow there has to be a dividend to the Internet Revolution that shrinks the wealth gap, a tide that lifts all boats mentally , physically and spiritually. Wow I guess this is a reaction to the signs I saw at the protest march. They said "Tax the Rich" but the children's eyes said "Eat the Rich".
Thanks for the Federal Reserve link.
Humphry said…
Really helpful information, lots of thanks for your post.
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