john’s economic thoughts
the financial crisis that is hitting the world at the moment is riveting. i find myself glued to google news refreshing every few mintues to get a blow by blow update. if only i had a bloomberg terminal at work. so here are my thoughts on whats happening.
Predictable - It was oh so predictable. I don’t say this with 20/20 hindsight, i say this with simple common sense. The central banks of the world kept interest rates too low for way too long. Between 2001-2003 interest rates were hovering around 3.75% in the UK. This was largely due to the reactionary response brought about by the dot com flop and 9/11. Neither instance was a case of a fundamental systemic failure. Rates had to be lowered but central banks slackened the line of liquidity to the extreme and while the world boomed no politician dared to be responsible for ending it. With rates so low inflation and over leverage was predictable. This is classic economic theory.
Reactionary - Peter Thiel came out with some brilliant comments at Techrunch50 about the economy. He said government actions have always been too reactionary when it comes to economic matters. I tend to agree with this. There is no pre-emption. We raise interest rates once inflation is high NOT as it begins to escalate. Sarbannes Oxley comes in AFTER large scale corruption (Enron). Where is the forthought?
Risk/Reward?!?! - CEOs or even other executives win if they win and win if they fail. Case in point. The CEO of Freddie Mac and Fannie Mae walked away with $14million and $9million respectively. Despite their massive failure. With no downside, people take stupid risks and those stupid risks not only hurt the American taxpayer but millions throughout the world. Now you could say they’ve suffered reputational damage and they have. Perhaps the CEOs of Freddie and Fannie will be shunned at their local bridge club. But surely, most people would consider any reputational damage minor if it comes with a big fat check.
So a summary of this is that governments are not learning from history, they react to cure instead of prevent and highest levels of corporate governance have messed up the incentives game. So what’s the solution? I think that’s for another post….stay tuned!
