Mr Paulson, tear down that Wall
(Street) By Chan Akya
Treasury Secretary Hank Paulson has the
toughest job in the world now. Taking over as the
US dollar"s cheerleader proved problematic enough
for much of this decade, but to do it in the last
few months of an unpopular and lame duck
Presidency was perhaps adding too many variables
in itself. Billed as the China Expert who would
get Beijing to float his currency, Paulson soon
found himself less welcome in the Great Hall as
Treasury Secretary than in his previous job as
head of a Wall Street brokerage.
Then
along came the financial market crisis, and with
all his old friends from Wall Street hankering for
bailouts, the poor chap must be getting very
little sleep these days. The instinct to preserve
people from one's own past is almost impossible to
avoid, seeing as the process
only validates one's own credentials. Thus, jobs
for the boys have remained the hallowed tradition
in both government and business for centuries.
The financial system meltdown of last year
has been too dramatic to condense into one essay,
and in any event I have written many articles on
the subject previously, which are available in the
online archives. The salient points to note are
that bankers messed up by tying together the
egregious greed of the common man to the grand
design of Asian governments in running up large
foreign exchange reserves. The results are now
there for everyone to see. The reaction from
the favored few that stand atop the banking
world's pyramid has much in common with what you'd
expect if you cut the lunch money of an obese kid.
A lot of tantrums, followed by pleading are the
order of the day now, but eventually everyone
settles down to indignant sullenness. That at
least is the theory - trouble is there is always
the one authority figure that decides to be
"compassionate" and in so doing creates a much
larger monster than ever before.
Before he
opens the sluice-gates of government largesse that
could help his old Wall Street buddies to find the
keys to their Ferraris and Porsches though,
perhaps the Treasury Secretary should spend some
time thinking about the Old Continent. Yes, that
one.
Like father like
son France's only claim to a last military
victory involves the war it did not fight, namely
the independence battle of America against the
British. Inspired by French thinkers and receiving
the Statue of Liberty in return, Americans had
much cause to show gratitude to the French. Yet,
the record of saving the French in World War II
from a fate they had resigned themselves to
changed much of the dynamic, while pushing America
closer to its matriarchal tyrant, the British.
As the American economy started
outstripping the war-ravaged European economies
last century though, much of that admiration
turned to crude humor, with particular emphasis on
France's lack of a military record and its
supposedly effeminate culture. Meanwhile, the
Anglo-Saxon model of capitalism produced
substantial economic gains for the US and much of
Western Europe, leading eventually to the
implosion of a Soviet Union that simply couldn't
keep up with the Joneses.
At the same
time, war-ravaged Europe followed a model of
capitalism that involved significant levels of
state intervention, much like Japan in the same
period. In both groups, the process involved the
grouping of companies into nuclear family pods,
with each pod essentially competing against other
pods while providing optimality in resources
internally. This was, in other words socialism for
the elite.
No group of people adapted to
this system faster than the French, who eschewed
the concept of family groups in favor of creating
an elite group of insiders who ran the system.
Knowing each other from their days in the various
Grande Ecoles and other fine institutions, the
French soon created a system of Mandarins that
resemble Confucian China more than any other
political system. Having control though isn't the
same as doing anything useful with it.
As
the decline of Japan in the late '80s showed, the
family pods failed to adapt quickly enough to
external environment changes and thus eventually
failed. Their guiding hands in government,
including the ridiculously powerful bureaucrats at
Japan's Ministry of International Trade and
Industry failed to understand the workings of
modern finance to the same degree of proficiency
as they understood six-valve engines. Germany
suffered a similar fate albeit a much slower and
drawn out one, with its market capitalization
changes rarely showing the kind of growth seen in
American stock markets for the past few decades.
The relative under-performance of German
companies to their American counterparts persists
today, as any comparison of market capitalization
against top-line revenues or total assets would
show. Despite being much bigger in terms of assets
and / or revenues, these companies have lagged
their American counterparts in profits and hence,
share price.
Interestingly, the question
of whether oligarchies can perform better than
modern capitalism was addressed over many decades
with a resounding victory for the latter group.
Indeed, an often-quoted statistic is often
misinterpreted: when investors talk about the
companies that have survived in the Dow Jones
Index for the past hundred odd years, they
inevitably conclude that frequent changes in the
index represent the value destruction endemic in
the Anglo-Saxon model.
In fact, it shows
the exact opposite, namely the constant
improvement of some business processes that in
turn produce the great monopolies of each age,
that are then discarded by the inexorable move of
technology and innovation. Thus, the most valuable
technology company of 10 years ago now struggles
to remain relevant, while the giants of the
American automotive industry are firmly nailed to
their deathbeds.
This "creative
destruction" owes much to a European thinker,
namely Joseph Schumpeter, who argued that it was
in getting rid of the old deadwood that new life
could flow through the economy. After having
followed him almost religiously for the past few
decades, the US today stands ready to discard the
lessons right at the point when they are needed
most, ie the unraveling of today"s global
financial system.
Let Wall Street bleed
instead Since we are discussing financial
systems, perhaps its even more important for
Hank's team to examine how state intervention has
failed to work in Japan, Germany, France or indeed
any other country you can think of.
Just
this week, Berlin has upped the bailout package
for one of its moribund entities, IKB, while the
financial regulator in Japan announced that
Japanese banks had gorged themselves with over 1.5
trillion yen (US$14 billion) of collateralized
debt obligation (CDO) structures which will
probably cause losses of around 1 trillion yen
eventually. Let that sink in for a moment -
Japanese banks, after decades of state-guided
control and serial rescues of the last decade,
would likely manage to lose more than the top Wall
Street firms combined.
Similarly, the big
French banks that are products of serial shotgun
mergers (even after the $7 billion trading debacle
at Societe Generale debacle, see Rogue and the pogue, Asia
Times Online, January 26, 2008, the first instinct
of the French government was to find a suitable
French buyer for the bank) have proved to be lousy
at risk management. In large part, this is due to
the overly complicated and horrendously difficult
business models that come into being when
organizations are merged; but the government
doesn't allow anyone to be fired nor any business
to be discarded. That kind of thing only
happens because of the dead hand of the State that
stifles innovation and perpetuates bad habits. It
is understandable that Paulson and his partner in
crime (Ben Bernanke, chairman of the Fed) would
see the panic differently to armchair strategists
such as myself. Yet, as I argued in the above
article, the worst thing to do now is "something".
The better choice would be to let Wall Street
drown in its own morass of mis-labeled deals and
mismanaged risk. Let the ones who failed to follow
the Anglo-Saxon model of capitalism perish, and
let the winners pick up the pieces and move on.
(Copyright 2008 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
