Views on improving the integrity of global capital markets
28 November 2011

Doctor, Doctor, Give Me the News: the Decline of Finance

As if the stalemate in the Super Committee weren’t enough to worry U.S. investors, speakers at the recent Investing Conference held at the University of Virginia Darden School of Business (co-sponsored by CFA Institute) were abundantly clear that this is just one of many problems threatening the global financial system. Debt crises in Europe and Japan, not to mention demographic and loan problems in China, all were creating a systemic vortex that might be worse even than 2008. It was not a conference for the easily depressed.

Presentations by luminaries such as Paul Singer (Elliot Management Corporation), Vincent Reinhart (Morgan Stanley) Steven Galbraith (Maverick Capital), Peter Fisher (BlackRock), and Kyle Bass (Hayman Capital Management) offered unsettling assessments of where we stand — both as a nation and as a global participant in a financial world that appears to be disintegrating as we know it. As one speaker reminded everyone, the U.S. just experienced the ninth-largest contraction in the last 100 years and just finished the “second-worst decade ever” for stocks. All this as Greece teetered, and Italy’s bond yields floated to new heights.

Given the intricacies of the current financial situation both in the United States and in Europe, conference presenters addressed issues ranging from a global historical perspective (the regularity of a 40-50-year fiscal cycle, with a decade of volatility usually following an economic crisis) to the socio-economic (the challenge of implementing  stimulus and austerity measures at the same time). Dodd-Frank was declared a failure, with at least one speaker predicting that, because of it, the next crisis will be “faster and much more intense.” And policies focused on raising bank capital requirements in the middle of a financial crisis were resoundingly criticized.

What lies at the bottom of the rubble? Certainly there appears to be a loss of confidence among investors in the U.S. that anyone in public office knows how to, or can effect, a solution, especially given the current political polarization in the U.S. Congress. Investing has become dramatically short term (four months on average, in some sectors, prompting the “rent” vs. “buy” label). The corporate culture has disintegrated as top executives are paid to jump firms and the board-of-director model is “utterly broken,” evidenced by the lack of knowledge of, and involvement in, company practices prior to the 2008 meltdown. And that’s just in the U.S.

But it is no longer just what the U.S. must fix these days, as most experts agree that no one country can go it alone. As former CIA Director George Tenet—now managing director at Allen & Company —reviewed major country/continent developments and their effect on the current situation, it became patently clear that we share a tenuous web of interdependency on many levels.

So what does the future map look like? The Eurozone is not predicted to last, with Portugal, Italy, Greece, and Spain cited most often for imminent leave taking. Europe has “no chance of avoiding” a recession, Japan teeters as it struggles with its debt, and Spain struggles with youth unemployment numbers hovering at 40 percent.

Where, oh where, is the silver lining to this period of fiscal and political unrest in which we live? Emerging markets, for one, are “no longer the fringe” as they do not have to recover from the economic crises of more established economies. And as some countries are forced to embrace austerity measures, perhaps others will volunteer to shave excess debt and spending before being forced to. Not likely, advises one speaker, given the human nature instinct for “magical thinking.” Harsh medicine.  But then again, these are unprecedented times.

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

3 thoughts on “Doctor, Doctor, Give Me the News: the Decline of Finance”

  1. pchepucavage says:

    The following is exceprted from Warren Buffet’s 2011 letter to shareholders-The Institute should be careful in its speakers’ bias and owes its members a more balanced set of views..
    “Throughout my lifetime, politicians and pundits have constantly
    moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than
    when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential
    is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders
    for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and
    We are not natively smarter than we were when our country was founded nor do we work harder. But
    look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and
    1941, America’s best days lie ahead.”
    if you included Buffet,Gates and Immelt you would have heard a more optimistic view.

  2. Thank you for your comments. Mr. Buffett’s comments certainly have historical validity to support them. In one sense, we share his long-term optimism about not only the potential for the economy and living standards of the United States, but also those of the rest of the world.

    That said, these are interesting times. I am reluctant to use the term unique, as the historical review of sovereign currency and fiscal crises done by Carmen Reinhart and Kenneth Rogoff suggests that they are not. Nevertheless, the depth and breadth of the sovereign debt problems faced by the United States, Japan, the United Kingdom, Italy, Greece, Spain, France, Ireland, Belgium, Portugal and even China — these cover a significant portion of global GDP — suggest that the issues currently facing global financial markets are atypical, if not entirely unique.

    The views expressed by speakers at the UVa conference were based on their experiences, as well as their own reviews and analyses. Mssrs. Buffett, Gates, and Immelt may have different views based on their own assessments, not to mention their own biases, but such views were not in evidence during this conference.

    History has shown that following the conventional wisdom is not a very good guide for earning outsized gains. Then again, sometimes the views of the majority have merit, and betting against that wisdom creates its own problems, as MF Global has discovered recently.

    Ultimately, we felt our report was relevant only because of the overwhelmingly bearish views of nearly all the speakers based on their assessment of the dire sovereign debt picture unfolding on a global scale. Based on these views, we thought readers of this blog might like to hear what these experienced and saavy investment professionals had to say. If their views had been evenly mixed without the difficult problems currently faced by numerous western nations, it probably wouldn’t have warranted a report. We recognize that as a particular bias, and are willing to accept responsibility for it.

    Jim Allen, CFA, Head, Capital Markets Policy, CFA Institute

  3. pchepucavage says:

    It would not take much research to determine the political views of messrs Singer and Reinhart and their views on the economy could not have been a surprise. So it does not seem accurate to say:
    “we felt our report was relevant only because of the overwhelmingly bearish views of nearly all the speakers based on their assessment of the dire sovereign debt picture unfolding on a global scale”

    My point would be that if you invite the most conservative political voices to your summit you will not get an evenl mixed assessment.

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