The shape of things to come
By the standards of recent weeks and months, the past few days have been relatively quiet on most markets. The reason for this almost certainly has more to do with internal market dynamics than with fundamental economic developments. The sheer intensity of the moves in and across the financial markets in the days leading up to and during what we must presumely call ‘the Bear Stearns crisis’ has left traders exhausted and analysts devoid of new ideas. A well-deserved period of respite (not rest) and recuperation (not relaxation) is in order.
Whatever the cause or causes of this relative lull, it is allowing people to turn their thoughts toward a longer time horizon than the next day’s trading. Most analysts and serious investors have now internalised the single most important fact regarding the pre-crash financial system: it ain’t comin’ back. Maybe it’s dead and maybe it’s just in hiding, but either way it’s gone forever. Once you get that on board, you can start moving past it and probing the mega-question of what comes next.
That no-one really knows, goes without saying. That ‘it’s too early to say’ is also a cliché that is true, but unhelpful. What we’re looking for is a general orientation, perhaps even a point of departure. In this respect, it is certainly possible to present ideas that are likely to be realised, but are not predictions in any formal sense. In particular, we can focus on the negative side, i.e. what will be absent in the post-crash world. Let’s highlight two inter-linked ‘absentees’, from which we might deduce something positive.
The most striking feature of the pre-crash world was the dominant role of the financial sector in the global economy. This was not limited to the fact that the markets played an ever-larger role in the way economies worked, although that was of the utmost importance. Beyond that was the fact that financial institutions of various sorts were among the central players, not because (as in Israel, as well as Japan and some European countries, in the past) banks and insurance companies owned large chunks of the real economy, but in their own right as financial institutions. Finance, in all its forms, was itself the centre of the action. Its share of total action grew steadily, and its role on the cutting edge of the growth and development of economies around the world became steadily larger.
As a consequence, the financial sector attracted the best and brightest from around the globe. Nowhere was globalisation more apparent, more successful and making a greater contribution to companies than in the leading financial institutions, whether they were in London, New York or the lesser centres in Continental Europe and the Far East. Conversely, the inability or unwillingness of some countries, notably Japan, to open themselves to globalised capital markets doomed them to fall behind, at least in the intellectual sense. Maybe they are happy about it and maybe they are better off for having missed out on both the boom and bust, but the objective fact is that Japan and the Japanese played virtually no role in the financial era just ended; compare that with India, for example.
In the post-crash environment that is just beginning to emerge in the US, and that will take clearer shape in the November elections and during 2009-2010, the financial sector will not be allowed to recover its lost glory. On the contrary, Main Street is likely to demand and receive far greater protection from the Wall Street whizz kids who, at the end of the day, did well for their employers, very well for themselves, and a great deal of ill for the general public. So the financial sector will shrink and will not bounce back, except in the narrow cyclical and accounting senses.
By extension, the best and the brightest will not flock to the big Wall Street firms, or their equivalents in countries around the world. It won’t be possible to make bloated salaries any more and the halo surrounding the financial world will be replaced with a degree of stigma. However, the good news is that the world will not come to an end as a result. On the contrary: if the best and brightest turn their talents and minds to technology (not to make an exit via Nasdaq, but to actually create useful and successful companies) or to medicine and healthcare, or even – ya gotta be jokin’ – to public service, the world might even become a better place.