December 5, 2008
Lou Jiwei of China Comments: A Must Read for All Pundits
Lou Jiwei is the head of China's sovereign-wealth fund, a fund awash in dollars (over $200 billion) seeking to invest. Our current Secretary of State, Hank Paulson, went to China to encourage China to invest in the United States financial system. Lou Jiwei said no, bluntly. Why? He has "lost confidence" in the United States government due to its lack of consistency in its actions and plans. He will wait. There are two very, very important lessons here. First, the United States government cannot itself bailout out or restart our economy -- the government's goal is to encourage voluntary private investment to come back. This simple point is lost on my colleagues at work, journalists who write about the market, and many, many economists who write editorials. The governments job is to get private investment up and running -- not to be the primary investor itself. The government can solve the problem only if it is not the the sole investor, only if it is a stimulant to the private markets. Second, our government has deterred voluntarily private investment from reentering the markets; its actions are doomed and silly. The most important three means of encouragement - certainty, more certainty, and maximum certainty. Our government is doing the opposite -- backtracking, lurching, and sputtering. Wise people with cash will wait our zany government out -- until it has exhausted itself and admitted defeat-- and becomes predictable -- then they will get in.
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I agree with you, the aim of any good government should be to create the conditions to allow businesses to thrive. The providing the right conditions will naturally draw in the investors.
Posted by: Ayo | Dec 7, 2008 2:23:15 AM
You offer the opinion that, "The governments job is to get private investment up and running -- not to be the primary investor itself."
Respectfully, there is no evidence that this is true and more than some evidence to the contrary, under present circumstances.
Your theory rests on the assumption that those who control private investment will act in certain ways. As Greenspan testified earlier this year, this is at present a wholly false assumption. We have had a systematic failure because those in control of private capital have acted, in the words of the Financial Times, criminally.
No credible theory exists for correcting that behavior; no super dose of shareholder democracy will cure what ails the patient.
Moreover, real arguments exist that the recent events undercut the assumptions on which our securities laws are built---that meaningful disclosure or transparency is possible or can be applied by investors.
I would offer a different hypothesis. All we can say for sure about the present is that the past did not work. Take just the investment banking business,now gone. In the process, a very few people, without risk of their own funds, became immensely wealth. In doing such, they left everyone else at the party--customers, borrowers, lenders, and the tax payer, broke. The famous title, Where are the Customers' Yachts? does no justice to the carnage.
You seem to want to hand the keys to the family station wagon back to the drunk 16 year old, who wreaked the family sedan last night.
I would argue that we need to rethink all our assumptions.
Posted by: John Davidson | Dec 13, 2008 10:04:59 AM
I don't care what fun phrases the Financial Times uses to sell newspapers but the financial firms (barring Madoff) have NOT acted criminally. They have, in fact, complied with every regulation set out for them by all of their various governing bodies.
It was not the financial institutions who kept interest rates too low. That was government. It was not the financial institutions that forced compliance with the CRA instead of a real credit check. That was government's idea. It wasn't financial institutions but legislators - both state and federal - who implemented laws and regulations that skewed incentives toward buying real estate above other assets. It wasn't financial firms but government that removed the ban on buying non-conforming loans and encouraged Fan & Fred to buy sub-prime, zero-down and liar loans. It was government that decided to subsidize and encourage borrowing by people who would never pay it back. It wasn't private industry but government which outsourced the credit analysis to an oligopoly of credit rating agencies. With these guarantees in hand, the ultimate lender - the buyer of the MBS - felt sure that he he was not buying mere junk. After all, the government assured him that it wasn't and if the borrower didn't pay, there is an implicit government guarantee.
If there is a failure, the failure is mostly government. And I agree with you that what we were doing in the past - inflicting constant government meddling - indeed does not work. It didn't work in Europe, Russia, Korea, Central Europe or any other place it was tried. Central planning always screws everything up and ends in disaster because it is almost impossible to plan on behalf of a party of ten with a single end, let alone for a 300 million person with 300 million ends and a $13 Trillion economy. It's ever so much easier with less than 100 million people and a few billion dollar economy, which is where you're headed with your foolhardy desire for government to save you from the randomness of life.
Meaningful disclosure and transparency are not possible with or without the SEC because those who wish to conceal will always outsmart the SEC and will conceal. If you replace the private system with government functionaries, you will get even worse corruption but by government officials instead of private companies. And even if meaningful disclosures are available, most people don't know what to do with them. You will never achieve perfection. There will never be utopia.
The investment banking business is most certainly not gone. There are plenty of smaller investment banks around. You just don't hear about them because they didn't step into the same pile of dung as the big I-banks. But even the big I-banks are around. They're just part of commercial banks now.
As for the bellyaching over people becoming immensely wealthy without risk to their own funds, that's just nonsense. How many entrepreneurs can start a business with largely their own funds? Almost every entrepreneur in this country risked almost none of his own funds on his way to becoming immensely wealthy. Why no outrage about that? Why only single out fund managers who have a skill other people are willing to pay for? Their investors are adults who are fully capable of deciding who to invest in and under what terms without your help or the help of the SEC. If they can't, they should abstain. If they won't abstain, they deserve what they get. And if you're specifically talking about investment bankers and not hedge fund managers (who have received no bailouts), then you should know that most of the compensation received by these people is in the form of the stock of their own companies. That stock is pretty worthless now, so they definitely lost and lost big. As it should be. And just to cut you off at the pass, I think the bailouts of the financial companies is an unmitigated disaster. If the industry is so fragile that everyone is to big to fail, then we need to let the whole thing fail and start over.
You believe that allowing adults to make decisions for themselves instead of letting a posse of ignorant half-wits in congress make it for them is akin to allowing a irresponsible teenager behind the wheel of a car? That's absurd. Do you honestly believe that any politician can make better decisions for you than you can yourself? You've let the drug-addled 16 year olds screw with the economy from capital hill long enough. Time to send them to rehab and let the rest of us get on with it.
Posted by: Methinks | Dec 23, 2008 8:47:35 AM