The Bankwatch

Tracking the consumer evolution of financial services

“I’ve a feeling we’re not in Kansas any more” | Future of Capitalism

The Financial Times has kicked of a series on The Future of Capitalism and of course quite a bit of that is devoted to banking, and the implications for banking.

The Introductory article from Senior Economist Martin Wolf sets the tone, and without making explicit predictions certainly suggests directionally where the near future may lie.  There are consequential implications captured in these snippets from the article.  It struck me as interesting and perverse that the thing I have been worrying about us losing is regarded as one of the causes for the collapse – innovation.

It should be clear that when I say innovation, I refer to innovation in services and service offerrings for customers.  The innovation referred to in the article is innovation in the wholesale markets, eg, SIV, CDS and other derivative products.  That distinction is important because it tests the concept that the direct consumer as a group is more likely to need to understand what they buy, and therefore less likely to purchase services that make no sense to them as did the banks.

The levels of debt for consumers which are at a level that suggest innovation in reducing debt, not increasing it, would be something to consider.  Finally for bankers personally, everyone is aware of the internal targets for ‘maximisation of shareholder value’.  What does that mean now with the large banks partially, and in some cases majority owned by government?  In a managed banking system leaning towards financial utilities as banks (most places except Canada for now), what does it mean for shareholder value as a target?

Seeds of its own destruction

How did the world arrive here? A big part of the answer is that the era of liberalisation contained seeds of its own downfall: this was also a period of massive growth in the scale and profitability of the financial sector, of frenetic financial innovation, of growing global macroeconomic imbalances, of huge household borrowing and of bubbles in asset prices.

Meanwhile, inside the US the ratio of household debt to GDP rose from 66 per cent in 1997 to 100 per cent a decade later. Even bigger jumps in household indebtedness occurred in the UK. These surges in household debt were supported, in turn, by highly elastic and innovative financial systems and, in the US, by government programmes.

Yet if the financial system has proved dysfunctional, how far can we rely on the maximisation of shareholder value as the way to guide business? The bulk of shareholdings is, after all, controlled by financial institutions. Events of the past 18 months must confirm the folly of this idea. It is better, many will conclude, to let managers determine the direction of their companies than let financial players or markets override them.

And some relevant quotes on general economic and future trends:

Remember what happened in the Great Depression of the 1930s. Unemployment rose to one-quarter of the labour force in important countries, including the US. This transformed capitalism and the role of government for half a century, even in the liberal democracies. It led to the collapse of liberal trade, fortified the credibility of socialism and communism and shifted many policymakers towards import substitution as a development strategy.

The search for security will strengthen political control over markets. A shift towards politics entails a shift towards the national, away from the global. This is already evident in finance. It is shown too in the determination to rescue national producers. But protectionist intervention is likely to extend well beyond the cases seen so far: these are still early days.

These changes will endanger the ability of the world not just to manage the global economy but also to cope with strategic challenges: fragile states, terrorism, climate change and the rise of new great powers. At the extreme, the integration of the global economy on which almost everybody now depends might be reversed. Globalisation is a choice. The integrated economy of the decades before the first world war collapsed. It could do so again.

Written by Colin Henderson

March 9, 2009 at 10:44

Posted in Uncategorized

Tagged with , , ,

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