by Alex Evans | Oct 6, 2008 | Cooperation and coherence, Global system, Influence and networks
Two excellent columns in the FT last week explored the extent to which the credit crunch is a crisis of trust – and not just in the obvious sense of whether you trust your bank to be able to pay you back your deposit, or whether banks trust each other as counterparties.
As Chrystia Freeland notes, one dimension of the broader crisis of trust is the collapse of faith between electorate and political establishment in the US, seen in vivid colour in the House of Representatives’ initial refusal to approve Paulson’s bailout. For all that “the nearly unanimous verdict of what we might once have called the wise men in both parties, in government and in business, in academia and in the so-called MSM (mainstream media), was that the Paulson plan definitely, absolutely, undoubtedly should be approved”, 228 members of Congress – and countless voters on the phone to their offices – “decided they didn’t believe their country’s political and economic establishment”. She continues,
Americans have good reason to distrust their elite. The country’s political rulers, led by George W. Bush’s strong-arm White House, have made it easy to believe that the US government just doesn’t work. From Katrina to the war in Iraq (at least before the surge), to the budget deficit, to the lack of a national energy policy, Washington doesn’t seem to be delivering very good value to its citizens.
Nor do the nation’s business leaders appear particularly trustworthy at the moment. Even before the credit crunch bit, median wages were stagnating while the incomes of the super-rich soared, creating a gap bigger than at any time since the Gilded Age.
All of this makes the nation’s widely felt, bipartisan impulse to just “kick the bastards out” easy to understand. [But] here’s the rub: the current financial crisis is global, fast-moving and fiendishly complicated. It is precisely the sort of thing it takes selfless, sophisticated technocrats to fix. But, even if America can find the necessary, honourable financial wizards – no mean feat – can it bring itself to trust them?
Luke Johnson, on the other hand, explores the collapse of trust that led to the credit crunch in the first place. Most commentators, he notes, blame Wall Street for the crisis – and yet,
…the heart of this wealth destruction is a collapsing subprime property market. And in that dark and catastrophic place, I suspect that there have been more lies told than by all the world’s bankers put together. It is inconceivable that the many thousands of realtors, mortgage brokers, valuers, developers, builders and other members of the great daisy chain were not in on the game.
Moreover, the homeowners themselves were also willing participants. Many lied to get mortgages and paid more for properties than they could afford, thinking they would flip them for a profit – because property only goes up in value, right?
We may be witnessing the greatest financial fraud of all time – on many levels. Western societies have been guilty of living beyond their means, and the reckoning we face is a sobering jolt. As they say: I have seen the enemy, and it is us.
The breakdown of trust in financial services is fraying the basic systems we rely on to conduct our daily lives. If citizens cannot rely upon multinational banks to safeguard their money then our way of life will grind to a halt. So many participants – executives, regulators – appear to have been negligent and some perhaps worse. In this miasma, who is delusional and who is deliberately misleading? Many of the players are themselves the losers: the staff of Lehman Brothers held $10bn worth of their own shares – now worthless.
The biggest victim in the whole shambles is not the foreclosed householder, the sacked investment banker or the devastated shareholder. It is our self-confidence and belief in the institutions that help fund almost everything.
The current collapse of trust in institutions is not new, and has been well documented for a while now. But we’ve rarely seen the effects of that collapse in quite such sharp relief, or in quite so many dimensions, as during the current financial crisis.
by Alex Evans | Oct 1, 2008 | Climate and resource scarcity, Conflict and security, Global system
Oh, so you thought that the torrent of criticism directed at US Congressmen for voting ‘no’ on the bail-out meant that Senators would be more likely to vote yes tonight, and that this would finally bring some reprieve?
Well, Javier Blas at the FT has news for you: the world’s super-rich don’t share your optimism.
Investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen. Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.
“There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,” said Jeremy Charles, chairman of the LBMA. “The gold refineries cannot produce enough bars.” The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds. Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. “It is a flight into gold because it is a physical asset,” he said.
Well, that’s a vote of confidence, eh readers? They’ve probably been perusing Nouriel Roubini, who reckons (bailout prospects notwithstanding) that “we are now back to the risk of a total systemic financial meltdown”:
The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates – as it may now – a total meltdown of the US financial system could occur.
We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.
Doom, gloom. Still, readers may also like to be aware that in noting the ongoing travails of Morgan Stanley and Goldman Sachs, Nouriel suggests that “the only institution sound enough to swallow Goldman may be HSBC”. Another reason – as though one were needed! – why those of us who bank with HSBC’s lovely First Direct can shake our heads in bewilderment at those of you who choose not to.
Now, if they only offered safe deposit boxes…
by Mark Weston | Sep 30, 2008 | Global system, Off topic
The BBC, which seems to be relishing the current financial crisis, reports on its website, under the headline ‘US failure hits Europe shares‘, that “European share indexes have been volatile in Tuesday trading” after the US Congress rejected its government’s rescue plan yesterday. Other headlines on the site tell us that ‘Shares slump after rescue bid fails’, and that ‘Asia stocks fall after US failure’.
Now I’m no expert on this, and clearly there is potential for great volatility over the next few days, but it seems to me from the articles appended to the scary headlines that many markets in the rest of the world outside the US have so far been quite robust in the wake of yesterday’s news. The UK’s FTSE, for example, was up 0.18% by midday today, France’s Cac was down just 0.2%, and Germany’s Dax by 0.9%. Hong Kong’s Hang Seng rose by 0.8%, with just Japan’s Nikkei really struggling, down 4%. Even some banks, including Lloyds TSB and HSBC, have seen increases in their share prices. And all this despite Wall Street’s biggest ever one-day points fall yesterday.
That doesn’t look like meltdown, or even volatility, to my untrained eye, and it would be nice to see the BBC’s headlines and commentary matching the facts it presents in its own articles. On last night’s Ten O’Clock News the Beeb criticised George’s Bush’s alarmist comments about panic in the markets. Would that the organisation practised what it preached…
Update at 14:49: The offending headline, though not the text, has now been removed from the BBC website and replaced with George’s Bush’s latest warning of the dire consequences that will follow rejection of his plan. Why he or the BBC think any sane person would listen to his advice in all this remains a mystery, but at least the latter has toned down its own scaremongering slightly.
by Richard Gowan | Sep 25, 2008 | Africa, Conflict and security, Cooperation and coherence, Economics and development, Europe and Central Asia, UK
Gordon Brown is getting a good write-up for his speech to the UN on Africa and development. It’s short, sharp and effective. Here’s the essential extract:
In the museum in Rwanda, which commemorates the thousands killed as the world looked on and looked the other way, there is a picture of a young boy who was tortured to death and the plaque reads:
Name: David
Age: 10
Favourite Sport: Football
Enjoyed making people laugh
Dream of becoming a doctor
Last words: the United Nations will come for us.
But we never did. Even as he died, that child believed the best of us. In reality, our promises meant to him nothing at all.
Today, facing famine, we promised we, the United Nations of the world, will come to help, but the hungry are dying while we wait. Facing poverty, we promise that we will come to help, but poor are dying while we wait. Facing betrayal of the Millennium Development Goals, we say again we will come, but many continue to die while we wait. And I believe our greatest enemy is not war or inequality or any single ideology or a financial crisis; it is too much indifference. Indifference in the face of sole-destroying poverty, indifference in the face of catastrophic threats to our planet.
A powerful point. But you can’t just wish away “war or inequality or any single ideology or a financial crisis”. As I’ve argued here before, differences over how to handle conflict and ideological tensions are increasingly complicating Europe’s relations with Africa. Brown’s focus today was development, but what about issues like Darfur (that’d be in the war file), the ICC indictment of Bashir and Zimbabwe (revealing deep ideological tensions)? The PM didn’t mention these – wisely – but they are fouling up the West’s relations with Africa pretty badly. And they aren’t about indifference, but real political differences over who governs Africa and how.
This is a theme that I discuss in a guest post over on the iR2P blog, where I argue that a Euro-African alliance that flourished around issues like the Responsibility to Protect a few years ago is withering. We can’t just keep on blaming ourselves for indifference towards Africa, although we have to remain wary of it. We need to explore the real political obstacles to continued Western engagement there.
by Alex Evans | Sep 24, 2008 | Cooperation and coherence, Europe and Central Asia, Global system, Influence and networks
Over at the UN in New York, where it’s the annual jamboree that is the General Assembly, Nicolas Sarkozy has been calling on world leaders to hold a summit later this year on building a “regulated capitalism”. Four thoughts:
1) if this summit were to go ahead, it would mark the continuation of a trend towards head of state / government level summits on specific issues (as opposed to gatherings that cover a whole range of foreign policy issues, like the G8 or the Security Council). Earlier this year heads of government turned out in force for the FAO food summit; last year, Ban Ki-moon got a good turn out for his high level event on climate change at the UN.
But there’s only value in getting heads engaged if a) their involvement is needed in order to join up the dots between different areas of ministerial or department responsibility within their goverments (e.g. cross-sectoral bargaining that involves energy, climate and trade all at once), or b) their political clout is needed to forge a deal. I’m not sure that either of those conditions applies here – in which case, wouldn’t it make more sense to leave such a summit to finance ministers?
2) Sarkozy also said at a press conference yesterday that “we cannot wait any longer to turn the G8 into the G13 or G14, and to bring in China, India, South Africa, Mexico and Brazil”. Interesting to see this idea reviving; the scale of the current crisis (‘perfect storm’ etc.) might appear to militate in favour. But as ever, the big questions are less over who would be around the table and more about what it would do, how it would work and – above all – whether it would be any more effective than the G8 (which hasn’t achieved very much lately). More on this in a paper I wrote on new global leaders’ forums a while back.
3) While Sarkozy knows he wants a summit, it’s also clear that – so far – he doesn’t have any specific proposals for multilateral action. You can bet this will cause a frisson or two at Number 10, given that Gordon Brown does have a set of proposals for international financial reform, but so far lacks a coalition to push them. There might be potential for France and the UK to team up quite effectively here, not least given that Sarkozy will have recognised that without at least one major financial centre involved front and centre, his idea’s dead in the water (n.b in that regard that Sarkozy mooted London as a possible venue for the summit, along with NYC, Paris and Brussels).
4) Whether Brown’s proposals are the right ones to deal with the current crisis is, of course, a separate question. Looking at them again, the main impression is of the lack of specificity: calling for a “common approach to handling major global market disruptions”, a “clearer, more authoritative watchdog” or “common principles, shared analyses and information and collaborative management of crises” is all very well, but if there was ever a case of the devil being in the detail, this is it. (As for his calls for a global early warning system for financial crisis – by all means, but is now really the time to be thinking about that?)
It’s good to see that someone’s asking the big questions about long term prevention and looking to facilitate a serious high level conversation about where we go from here, and the UK should certainly get involved and think seriously about offering to host. But it’s way too soon to be thinking about shared operating systems or even shared platforms at this point: the key tasks now are a) to put out the immediate fire and then b) to build up shared awareness of what’s happened, why, and what we want to achieve as we consider a new financial architecture.
(For explanation of shared operating systems, platforms and awareness, see here.)
