It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.
Here’s Paul Blustein on Alan Greenspan:
The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.
Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.
Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.
(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)
The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.
The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:
Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.
IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.
Michael Lewis, in his highly entertaining new book, The Big Short, has a pop at ratings agencies (amongst a bazillion other targets). All the big Wall Street firms, he writes, were highly effective at manipulating Moody’s and Standard and Poor’s:
Everyone on Wall Street knew that the people who ran the models were ripe for exploitation. ‘Guys who can’t get a job on Wall Street get a job at Moody’s,’ as one Goldman Sachs trader-turned-hedge fund manager put it.
Inside the rating agency there was another hierarchy, even less flattering to the subprime mortgage bond raters. ‘At the rating agencies the corporate credit people at the least bad,’ says a quant who engineered mortgage bonds for Morgan Stanley. “Next are the prime mortgage people. Then you have the asset-backed people [dealing with sub-prime mortgages, for the most part], who are basically like brain dead.
Wall Street bond trading desks, staffed by people making seven figures a year, set out to coax from the brain-dead guys making high five figures the highest possible rating for the worst possible loans. They performed the task with Ivy League thoroughness and efficiency.
Despite their pivotal and disastrous role in the financial crisis, business for the ratings agencies is booming. If anything, their influence, meanwhile, has grown, especially over governments, as they threaten countries with a sovereign debt downgrade.
I was especially intrigued by media coverage for a recent report from Moody’s, which claimed that the US, UK, Germany, France and Spain are all at risk of social unrest as governments struggle to get their finances under control. According to Moody’s Chief International Economic and Financial Policy Analyst, Pierre Cailleteau:
Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.
We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society.
Strong stuff. And interesting too. One of the key questions for the next few years is whether the fallout from the financial crisis will be toxic enough to damage, or even break, some societies.
So I thought I’d read Mr Cailleteau’s report, rather than just relying on the Telegraph’s summary. I wondered how strong his analysis was. Was he a smart guy or one of those dubbed in Lewis’s book as the ‘brain dead’?
But then I hit the buffers. Go to Moody’s website and there’s no content at all available unless you register (which includes pretending to read a 6103 word user agreement – the site knows if you haven’t at least scrolled through it).
Once I’d gone through all this rigmarole and logged in, I was told that access to Cailleteau’s report “is not part of your current service”. (I was allowed to read the report’s press release. Big deal. I struggle to think of another organisation that requires registration for that.) Nor could I find a biography for Cailleteau. Only one of his reports was freely available to subscribers (a research note on methodologies). And even the link to pricing information for his ‘social unrest’ report was not working.
So I am left none the wiser about Cailleteau’s argument or credentials. All I do know is that he dismissed talk of a systemic global banking crisis in August 2007, a year before [corrected] Lehman’s nearly brought down the world’s economy.
Of course, anyone can make a mistake (though that one’s a doozy) – but surely it is no longer acceptable for the ratings agencies to hype their work to the press and lord it over the world’s economies, without letting us see the evidence on which they base their diagnosis and prescriptions.
More transparency please. Either on a voluntary basis. Or enforced through regulation.
– The FT has news that London’s position as the dominant global financial hub is slipping, with the UK capital now tied with New York for top spot in the latest rankings. Elsewhere Barry Eichengreen and Kevin H. O’Rourke examine the latest economic data comparing the present crisis with the Great Depression across a range of indicators (including global output, world trade, and equity markets). Robert Shiller, meanwhile, explains the difficulties of using past experience to predict the course of the current crisis.
– European Geostrategy suggests that EU security and defence policy is like a jazz band and explains why a White Paper providing a “grand strategy” is needed. EUobserver, meanwhile, has news on the emerging shape of the European diplomatic service – its structure and staffing – as member states gear up to secure the important EEAS secretary general post.
– Elsewhere, Constanze Stelzenmüller takes an in-depth look at the travails of German security policy, offering insights into how it might evolve. Highlighting the lack of strategy, she argues that “fundamental decisions regarding German security policy have been repeatedly forced into the Procrustean bed of moral necessity, domestic imperatives, or the demands of external alliances.”
– Finally, over at openDemocracy, Andy Yee explores the “hedgehog’s dilemma” between China and the West, highlighting a gradual acceptance of different core values. TIME magazine, meanwhile, assesses the slow progress toward democracy in Hong Kong and the possible wider implications from Beijing’s perspective.
– With the US and Russia reportedly close to agreeing a successor START deal, Gareth Evans and Yoriko Kawaguchi chart the next steps for a secure nuclear future. Details of their recently published report on nuclear non-proliferation and disarmament can be found here. Henry Kissinger, meanwhile highlights the importance of kick-starting progress on six-party talks with North Korea.
– Elsewhere, Nouriel Roubini reflects on “gold bubbles” and the need to beware the calls of “gold bugs”, given that the “recent rise in gold prices is only partially justified by fundamentals”. The FT’s Alphaville blog offers an alternate view.
– Catherine Ashton, the EU’s High Representative for Foreign Affairs and Security Policy, outlines her vision of a “quiet diplomacy” keenly focused on “getting results”. The BBC’s Europe Editor, Gavin Hewitt, assesses the upcoming challenges she is likely to face – whether a winter energy crisis, shaping a coherent EU policy towards the Middle East, or establishing the much-trumpeted EU diplomatic service. Charlemagne, meanwhile, argues that when it comes to European foreign policy there are simply “too many cooks”. Philip H. Gordon, US Assistant Secretary of State for European and Eurasian Affairs, offers his thoughts on what the post-Lisbon landscape is likely to mean for US-EU relations.
– Finally, Prospect presents 25 key public intellectuals that have helped us navigate the squalls of the financial crisis – Simon Johnson, Avinash Persaud, and Adair Turner make up the top 3. Niall Ferguson, meanwhile, offers his take on the most influential thinkers of the past now showing renewed relevance – Keynes, Polanyi, Kindleberger and Darwin, among others, have places on his list.
– With the upcoming anniversary of the fall of the Berlin Wall, Timothy Garton Ash surveys the current debate about the causes behind those dramatic events twenty years ago. Commenting on the role of the superpowers, he suggests: “They made history by what they did not do… both giants stood back partly because they underestimated the significance of things being done by little people in little countries.” Adam Roberts, meanwhile, explores how civil resistance has fared around the world since 1989. When confronted with the reality of power politics, he suggests, choosing the right time for action from the bottom-up is critical.
– Looking to Copenhagen, Bruce Bueno de Mesquita propounds the predictive capacity of game theory and rational choice theory to explore what the climate negotiations might hold. Der Spiegel, meanwhile, has a report about the Danish island of Samso – at the forefront of the country’s green revolution.
– Elsewhere, Robert Skidelsky assesses the current debate raging between New Keynesian and New Classical economists over the financial crisis. Fully grasping the “implications of irreducible uncertainty for economic theory”, he suggests, would lead to a better understanding.
– Finally, Mihir Bose explores the contemporary state of Anglo-Indian relations, suggesting that fragility, rooted in history, is still very apparent. And with Indian and Chinese officials set to meet, Kapil Komireddi argues that rivalry between the two rising superpowers will come increasingly to define the 21st century.