30th November 2008
The Malta Independent - Friday Wisdom
There comes a rare moment in time,
once in a handful of decades, where the pace of change evolves into a complete
transformation in the way we do things. 2008 is proving to be one of those years
where a new generation and a new way of thinking takes over as old paradigms are
invalidated.
Never since the great depression of the 1930s did the world financial system been under so much stress. The paradigm that we have an efficient international financial system with deep liquidity and sophisticated tools for managing and distribution of risk, which had dominated regulatory thinking since the Reagan/Thatcher revolution of the eighties, has been invalidated by the Black Swan that hit us since Lehman Brothers filed for bankruptcy in mid-September.
The transformation we are witnessing in this sphere will be multi-faceted. At micro level the general theme will be back to basics. Bank will be banks again and there will be the re-introduction of rigorous separation of traditional commercial banking from modern investment banking. Deposit taking banks that enjoy too big or too important or too inter-connected to fail status, cannot expect to continue enjoying the freedom of channelling these funds into risky investment banking ventures.
Investment banks will have to come under the same supervisory regime as deposit taking banks and will revert to their traditional core competence in corporate finance and financial engineering related to mergers, acquisition and takeovers. Investment banks will revert to merchant banking status where most of their revenues will be fee income without having to fund the deals they advise on. Their balance sheet will be de-risked. Those who maintain money brokerage as core competence will do so for clients’ account and proprietary trading will be considerably curtailed.
Hedge funds cannot expect to persist with their unregulated status. They will find it difficult to raise credit to leverage, as they have been doing even if they are properly regulated, let alone if they continue to defend their jungle status.
Transformation is also needed in the carbon footprint of our lifestyle. I do not think that anyone would make the mistake of reverting to past habits of excessive energy consumption assuming that the price of oil will remain at current lows, below a level that can encourage increase in supply. While oil may not reach the record levels of last July, we must assume that present price levels are unsustainable and our energy demands must adjust to permanently expensive oil prices. 2008 will be the year when consumers decided things have to change. Americans kicked their habit of buying gas-guzzling SUVs and are taking to driving fuel-efficient cars even though gas at the pump is back to below two dollars.
Even locally I get the feeling that finally we have accepted the wisdom of investing in domestic systems for alternative energy. We must no longer depend on Chavez whims or Chinese government energy demands to define how much spending power remains in our pockets.
Another major transformation is happening in the political world. The election of Barack Obama as the 44th US President is not normal change; it is a transformation. This is not only because a post-war baby boomer with very limited Washington experience carrying a name more typical of an Islamic fundamentalist has made it to the most politically powerful post in the world; and not only because an Afro-Asian in the White House seemed an impossibility even if his name were Paul Newman, but principally because his agenda goes against conventional wisdom.
Rather than continuing Bush’s policy of unilateralism attempting to shape the world to the US agenda, Obama proposes that America’s interests are best served by becoming a global player willing to engage with adversaries and to treat friends with respect without attempting to overpower them or steamroll over their legitimate concerns.
Obama knows that in the end the buck stops at the Oval Office. However, he has a record of listening to different views, indeed encouraging outlier opinions and taking all into consideration before arriving at his own conclusion and decision. This policy has been well reflected in the appointments he is making in his Cabinet and executive. It is a policy of meritocracy and inclusiveness. Retaining Robert Gates as Secretary of Defence crosses party lines and avoids change for the sake of change. Tim Geitner’s appointment as Treasury Secretary shows Obama’s ability to look beyond his immediate ranks to hire technical competence where it is critical. The appointment of Paul Volcker to furnish advice based on the view of Main Street to parallel that of the view from Wall Street from Economics adviser Larry Summers, shows the President-elect’s means to consider decisions from all angles before plunging in. He means to bring in those that elected him, not just the powerful lobbies, in the equation leading to his decisions.
Even locally we are witnessing Labour transforming itself. Changing the name, logo and other symbolism is important but not really transforming. More in line with the transformation that Labour needs is the disbanding of the Brigata and the abolishment of Bord tal-Vigilanza u Dixxiplina (BVD). Children should be allowed to enjoy their childhood and be spared Madrassa politics. The BVD had become the party’s worst enemy and rather than enforce ethics and good conduct, it was used as a censorship tool to quash internal criticism. Good riddance!
Never since the great depression of the 1930s did the world financial system been under so much stress. The paradigm that we have an efficient international financial system with deep liquidity and sophisticated tools for managing and distribution of risk, which had dominated regulatory thinking since the Reagan/Thatcher revolution of the eighties, has been invalidated by the Black Swan that hit us since Lehman Brothers filed for bankruptcy in mid-September.
The transformation we are witnessing in this sphere will be multi-faceted. At micro level the general theme will be back to basics. Bank will be banks again and there will be the re-introduction of rigorous separation of traditional commercial banking from modern investment banking. Deposit taking banks that enjoy too big or too important or too inter-connected to fail status, cannot expect to continue enjoying the freedom of channelling these funds into risky investment banking ventures.
Investment banks will have to come under the same supervisory regime as deposit taking banks and will revert to their traditional core competence in corporate finance and financial engineering related to mergers, acquisition and takeovers. Investment banks will revert to merchant banking status where most of their revenues will be fee income without having to fund the deals they advise on. Their balance sheet will be de-risked. Those who maintain money brokerage as core competence will do so for clients’ account and proprietary trading will be considerably curtailed.
Hedge funds cannot expect to persist with their unregulated status. They will find it difficult to raise credit to leverage, as they have been doing even if they are properly regulated, let alone if they continue to defend their jungle status.
Transformation is also needed in the carbon footprint of our lifestyle. I do not think that anyone would make the mistake of reverting to past habits of excessive energy consumption assuming that the price of oil will remain at current lows, below a level that can encourage increase in supply. While oil may not reach the record levels of last July, we must assume that present price levels are unsustainable and our energy demands must adjust to permanently expensive oil prices. 2008 will be the year when consumers decided things have to change. Americans kicked their habit of buying gas-guzzling SUVs and are taking to driving fuel-efficient cars even though gas at the pump is back to below two dollars.
Even locally I get the feeling that finally we have accepted the wisdom of investing in domestic systems for alternative energy. We must no longer depend on Chavez whims or Chinese government energy demands to define how much spending power remains in our pockets.
Another major transformation is happening in the political world. The election of Barack Obama as the 44th US President is not normal change; it is a transformation. This is not only because a post-war baby boomer with very limited Washington experience carrying a name more typical of an Islamic fundamentalist has made it to the most politically powerful post in the world; and not only because an Afro-Asian in the White House seemed an impossibility even if his name were Paul Newman, but principally because his agenda goes against conventional wisdom.
Rather than continuing Bush’s policy of unilateralism attempting to shape the world to the US agenda, Obama proposes that America’s interests are best served by becoming a global player willing to engage with adversaries and to treat friends with respect without attempting to overpower them or steamroll over their legitimate concerns.
Obama knows that in the end the buck stops at the Oval Office. However, he has a record of listening to different views, indeed encouraging outlier opinions and taking all into consideration before arriving at his own conclusion and decision. This policy has been well reflected in the appointments he is making in his Cabinet and executive. It is a policy of meritocracy and inclusiveness. Retaining Robert Gates as Secretary of Defence crosses party lines and avoids change for the sake of change. Tim Geitner’s appointment as Treasury Secretary shows Obama’s ability to look beyond his immediate ranks to hire technical competence where it is critical. The appointment of Paul Volcker to furnish advice based on the view of Main Street to parallel that of the view from Wall Street from Economics adviser Larry Summers, shows the President-elect’s means to consider decisions from all angles before plunging in. He means to bring in those that elected him, not just the powerful lobbies, in the equation leading to his decisions.
Even locally we are witnessing Labour transforming itself. Changing the name, logo and other symbolism is important but not really transforming. More in line with the transformation that Labour needs is the disbanding of the Brigata and the abolishment of Bord tal-Vigilanza u Dixxiplina (BVD). Children should be allowed to enjoy their childhood and be spared Madrassa politics. The BVD had become the party’s worst enemy and rather than enforce ethics and good conduct, it was used as a censorship tool to quash internal criticism. Good riddance!
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