Wednesday 29 August 2007


A very reasonable preoccupation around this and other commentaries is whether the global financial system is robust enough to absorb the forthcoming ‘correction’ without catastrophe. I particularly enjoy Bearwatch (Sackerson) and Angels in Marble (Hatfield Girl) [and a commendation is due for Discursive Monologue too - CU]

The seriousness of the present situation, and the potential for screw-ups by governments and financial authorities, are not in doubt. Ditto the scope for individual financial disasters.

But the overall resilience of the system may be greater than some fear. There is a huge amount of private-sector brainpower able to switch into restructuring mode with lightning rapidity – far quicker than any regulator or finance minister can react – as was demonstrated by the Far East crisis of the late 1990’s, for example. The profit motive has a way of sorting these things out: and the speed of modern communications ensures that price signals are transmitted widely and quickly. Almost any big shift represents an arbitrage opportunity for someone.

The disposition of wealth before and after a big shock is different, for sure. And, as airily as we may dismiss the Asian financial crisis a decade on, it needs to be recalled soberly that some Indonesian tribes reverted to cannibalism, so extreme was the resulting poverty for a while.

We may not need to wait long to find out whether I am right. In the meantime, on a personal level, as Sackerson has recently commented, diversification is the key.

My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate

Upon the fortune of this present year
(Merchant of Venice)

(Or invest in guns ’n gold, of course, if the Hitch is your preferred sage ...)



Anonymous said...

No matter what happens in the capital markets, something permanently bad will happen to the U.S. economy--bad politics.

Financial crises give those sneaky politicians in Washington an excuse for intervention and increased central planning (control).

I just hope that Jim Rogers is wrong when he says that the politicians will blame those wily foreigners. We already have too much anti-foreigner/protectionist sentiment all over the country, especially in Washington.

I'll start taking Madarin classes if another Smoot-Hawley comes about.

Nick Drew said...

Matt - not for us to comment on your politicians ...

I read your Wells Fargo piece with interest. Having something of, ahem, a ... perspective on Enron, I can imagine what they've been up to.

Mermaid of Moorgate said...

guns n gold... or just gold... still a good investment fella, just look at funds like the Blackrock Gold & General or JPMorgan's Natural Resources fund. Stonking! What the fuck am I gakking about? I can't get investment out of my head. I actually came here to ask how the baby was faring and whether you were getting enough sleep?

Anonymous said...

Nothing quite like guns for protecting your wealth - I guess that's why the Duke of Westminster is head of the territorial army!

I don't expect we will be eating each other in the street. We have learnt a lot from the Great Depression. In the end the real economy is still a powerhouse of food production, goods and services and a new government with a fresh start will start to re-couple real demand with real supply.

The only big problem is that getting a failed economy moving again usually means bailing out those that were responsibe for its failure. This is the "moral hazard" that Alan Greenspan likes to warn about, where the prudent are forced to bail out the reckless and learn a painful and unpleasant lesson as a result.

A bigger problem for the UK might then be that the middle-classes decide they have had enough of the UK and just get up and leave at the earliest opportunity.

Nick Drew said...

Anon - couldn't agree more on the moral hazard: we've blogged on this 'one-way bet' before.

The theory of Capital Adequacy is sound, and if the financial regulators were halfway up to the task, the reckless could be made to take far more responsibility for their actions.

The excesses of the unions in the '70s and '80s that CU has written about, required draconian actions to rein them in. I see a need for some adroit measures to restore discipline to capital as well. Nothing new - just enforce current regulations rigorously.

Nick Drew said...

Mermaid, you are back again ! CU will update you on the little Slicker, no doubt: but what are you doing swimming over here with your splendid tips ? We don't do poetry competitions: all a bit dry for you, I should say.

CityUnslicker said...

Little slicker is fine. That Blarock investment vehicle is well down since the 'correction'!

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