Tears over onions: Fruits of a many-layered economy

Despite being the world’s second largest producer of fruits and vegetables, our share in global trade of such produce is dismal




Savour the delicious irony or sniff at the pungent paradox. The two nations which drive us to tears over security are among the world’s biggest producers of onions. New Delhi is importing the bulb, masquerading as a vegetable, from Pakistan, which is the world’s second largest onion producer per capita (2 million tons annual) after Australia (4 million tons). The world’s largest producer, overall, with 20 million tons, is China, comfortably beating second-placed India’s output of around 9 million tons.
Considering the Chinese have overrun the world’s marketplace with their goods, can their produce be far behind? Although India has the world’s largest area (56 per cent) of arable (cultivable) land, and there has been a shift in cropping pattern in favour of horticulture vis-à-vis grain/cereals, China is kicking India’s butt in the fresh produce business while New Delhi sits on its haunches.
We have been lamenting for two decades that 30 per cent of our fruits and vegetables rot because of poor infrastructure, lack of cold chain etc, and done squat about it. Heck, we even waste biodegradable waste, unable or unwilling to use it to produce energy. Meanwhile, China, which cultivates 22 million hectares of vegetable crops out of a global total of 52 million hectares, is steaming ahead, trading in the billions. Should it be any surprise that onions in your local market may soon be marked ‘Grown in China’?
India has arrived, Barack Obama told us earlier this year. Where? Certainly not in the world’s fruit and vegetable marketplace. A produce expo scheduled for November 2011 in London shows registrations from countries such as Algeria, Ghana, and Pakistan, but not India. My local Fresh Field has produce from almost every part of the world, but little from India. Apparently, we eat what we produce, and what we can’t, we let it rot. Which is why, despite being the world’s second largest producer of fruits and vegetables, our share in global trade of such produce is dismal — little more than $1 billion.
Let’s look at some numbers. India produces 68 million tons of fruits and 129 million tons of vegetables annually. Of this, 59 million tons, which is almost as much as what is traded by the rest of the world, is wasted. Oh, just in case you didn’t know, we also have the world’s largest population of poor, sick, and malnourished people. Go figure.
For the longest time, the world’s largest traders of fruits and vegetables were high-income countries — the US, the EU, Canada etc. More recently, countries such as China, Mexico, Chile, Morocco, and even many African and Latin American countries have clambered on to this gravy train. Little Morocco exports $500 million worth of veggies, mostly tomatoes and beans, to the EU. Mexico is one of the giants of fresh vegetables, exporting about $3.5 billion worth of produce to the US annually — mostly tomatoes, peppers, cucumbers, onions, and asparagus; the US, in turn, exports nearly $2 billion of veggies, mostly lettuce, tomato, onions, and potatoes, to Mexico and Canada.
So the US imports tomatoes from Mexico and also exports them to Mexico? That’s where free trade kicks in. Free trade logistics is not just a question of demand and supply, but also geography. Pakistan is among the world’s largest producers of onions but still imported from India till last year (while exporting to the Gulf) because is easier to transport onions from Amritsar to Lahore (and vice-versa) than from Larkana to Lahore or Aurangabad to Amritsar.
Of course, free trade is a slippery path and one needs to tread carefully. The term Banana Republic, which means a politically unstable country, has its origins in US manipulation of the produce in its Latin American neighbourhood. But outside the politics of it, banana is now the world’s leading trade item in fruit, generating more than $6 billion in revenues. The ‘banana republics’ account for nearly 60 per cent of the market value in global banana exports. India’s share is negligible, a paltry few million. And guess who’s the leading banana producer in the world? India; which at 22 million metric tonnes, produces more banana than all the Latin American countries put together.
Same thing with mangoes. We are the world’s leading producer of mangoes (we really ought to be called Mango Republic) but our fresh mango exports to the US last year, after all the hoopla about mango diplomacy during the Bush years, was a paltry $600,000 ($6 million in pulp). Heck, we exported three times as much in alcoholic beverages to the US!
There’s plenty rotten in the Republic of India, fruits and veggies among then. Maybe our agriculture minister can explain some of these things, but he’s probably busy trading in cricket.

China’s Chances as An International Financial Hub

By drawing parallels between the established financial hubs of London and Frankfurt, Prof. Horst Loechel, Director of the German Centre of Banking and Finance at CEIBS, explores whether or not China’s goal is realistic and what it would take to achieve it.

1. Why has China made this goal of transforming Shanghai into a financial centre by 2020 such a priority? What are the advantages that will come with achieving this goal? Are there any downsides?
Horst Loechel: The plan to develop Shanghai into an international financial centre by 2020 is part of China’s overall development plan of as it moves towards becoming an advanced economy. Finance is a very, very important part of this plan – nationally as well as at the international level, because in order to become an advanced or developed economy, you need a full-fledged financial sector. And Shanghai is somehow the frontrunner to develop China’s financial sector into a modern banking and finance system, with sophisticated capital markets and international banks.

In order to develop Shanghai into an international financial centre, first of all you have to make the Chinese currency, the RMB, into an international currency. That means making the RMB convertible and increasing the flexibility of the exchange rate system. Otherwise you cannot have an international centre. That means there’s a lot riding on this development of Shanghai into an international financial centre.

The advantages are clear: a financial centre means higher incomes, more growth, more development, more sophistication, a better life. And also the advantage, for China, is to become an even more important player in the global financial architecture. We can see that after the global financial crisis, the shift from West to East – which was already underway – has become even more advanced now. And so it’s very important to position Shanghai as an international financial centre, as China’s global international flagship.

As always, there are two sides of a coin. For ordinary people living in a city like New York, London or Shanghai, there are also disadvantages, especially with regard to property prices and the overall cost of living. But overall, it’s the right move for China to develop Shanghai into an international financial centre.

2. How realistic is this goal? Can it really be done, and by 2020?
HL: In London, the process took about 25 years, and it took Frankfurt about 30 years. However, given the experience with China’s development in the past – financially and economically – I think their goal is realistic. It may not happen by 2020 – it may be 2023 or 2025. But what matters is the goal, not the exact date when you achieve this goal. Setting a goal is a kind of incentive, a locomotive for further progress with regards to convertibility of the RMB, with regards to opening up of the capital markets, and with regards to lifting the entry restrictions for international banks working in China. This is what matters.

In addition, this decision to transform Shanghai into an international financial centre by 2020 was made by the State Council of China: that means this is a move supported by the central government. The Shanghai government also has its recently-launched “93 Plan”, which describes, in detail, the things that must be done in order to develop Shanghai into a financial centre.

There’s a clear difference between London and Frankfurt – and also between London, Frankfurt and Shanghai. Frankfurt is a regional centre; that means for Continental Europe, Frankfurt is the financial hub. London is a truly global centre, which means for the entire world.

But Shanghai is not only competing with New York and London as a global centre, it is especially in competition – in Asia – with Hong Kong and Singapore. That means, from my point of view, it may be better for Shanghai to, first of all, develop into a regional hub to rival Hong Kong and Singapore (but especially Hong Kong) and then leverage that to become a global financial centre, or make this a parallel process of development. I think Shanghai is now, clearly, a domestic centre. In order to become global, perhaps an intermediate step to become a regional centre for Asia is the right approach..

3. What are China’s strengths and weaknesses, in achieving its goal, as compared to London and Frankfurt?
HL: Shanghai’s most important strength is China: its size, the pace of economic development. You can only become a global financial centre if the economy backing you is important somehow. And there’s probably no economy in the world more important than China right now. So this is Shanghai’s biggest asset: to be the economic and financial centre of the most important economy in the world.
The second strength is China’s unique approach to economic development. What we actually see in China is trial and error. They never put in changes to the entire system in one go; it’s a gradual process of trial and error. And this is the same approach being taken in Shanghai. I like this approach, it’s very successful.

And the third strength is the government. The central government and the local government are supporting this process and political support is vital in China, as it is in Asia and the world.
In terms of weaknesses, the first is its client level. Most of the important financial Chinese authorities like the People’s Bank of China (China’s central bank), and regulators like the China Banking Regulatory Commission, Chinese Securities Regulatory Commission or China Insurance Regulatory Commission, their headquarters are all in Beijing. This is a disadvantage. This is neither the case in Frankfurt nor London.

Also, a lot of Chinese banks, if not almost all of them, are headquartered in Beijing – not Shanghai. In addition, a lot of regional headquarters of international companies do not have their regional headquarters for Asia in Shanghai, but in Hong Kong or Singapore. On a client level, these are things that need to be addressed.

The second weakness is that the banking market and finance markets are still narrow in China. For example, there is only a limited range of products allowed here in China. This is an obstacle for further development. There needs to be a relaxation on new products in order to facilitate further development. But progress is already under way as the recent approval of short-selling deals shows.

Education is the third weakness. There is a clear bottleneck in Shanghai’s development: it's the human resources factor. In today’s global world, it’s not very difficult to find innovation and capital; it’s very simple – you buy it or invent it or copy it. But finding educated people, this is a challenge. Shanghai has already done a lot. All the big universities like Jiaotong, Fudan, SUFE, and CEIBS are making significant progress in human resources, in general business education but also specifically in financial education.

The government has shown its support for institutional efforts to offer the MBA and EMBA in finance and applied research. CEIBS is seeking to launch an MBA in finance, we have the CEIBS-Lujiazui International Finance Research Centre – an intellectual platform for the Chinese and foreign community – and we have just launched the German Centre of Banking and Finance here at CEIBS. So things are under way. But given the task, and the amount to achieve, there are a lot of things still to do – especially with regards to professional and executive education that’s specialised in banking and finance.

For a financial centre, you need an intellectual infrastructure, education and financial research. There are obviously still a lot of things to do in Shanghai.

4. What steps MUST China take in order to achieve its goal?
HL: First, convertibility of the RMB. This is the most important thing to do. Second: improve, upgrade, and leverage financial education, especially with regards to professional and executive education. And third: build up an international competitive environment including a competitive tax environment and a competitive regulatory environment for foreign companies – especially financial MNCs – working in China. I think these are the three most important things.

5. What pitfalls will it have to avoid?
HL: First of all, avoid financial crises; we just had the worst global financial crisis since the 1930s. Opening up the market means more risk; you cannot open up without more risk in the financial system – currency risk, debt risk, default risk. It has to be controlled. And one important point here is education: you need sophisticated risk management.

6. Any final thoughts?
HL: It’s unavoidable that Shanghai will become, sooner or later, a global financial centre (and not only Shanghai but also Mumbai, for example). I don’t know any scenario which, in the medium term, can stop this shift from West to East. Actually I see even more acceleration every day.

There was a questionnaire recently by a well-known research institution in London and they asked executives all over the world their thoughts on who will become the financial centres in the next 10 years. In ranking the top three, New York and Shanghai tied for number one, London was next. That means the executives, you can say the market, is expecting that Shanghai will do it. This is clear. So this development of Shanghai is somehow part of this unavoidable overall global shift from West to East. This is not a matter of discussion; it is a matter of fact.

4 Indian Americans among ‘coolest young entrepreneurs’

4 Indian Americans among ‘coolest young entrepreneurs’

BOSTON: Four Indian-Americans have been named among 30 of America’s “coolest young entrepreneurs” by monthly business magazine ‘Inc’ that describes its young achievers as people who are “building unique brands, making money along the way and changing the way we do business”.

Naveen Selvadurai, 28, co-founder of social networking app ‘Foursquare’, 26-year old Vikas Reddy who co-founded technology start-up ‘Occipital’, Sachin Agarwal, 30 of San Francisco-based start up ‘Posterous’ and 22-year old Stanford graduate Ooshma Gar g have been named in the ‘30 under 30’ 2010 list of ‘America’s Coolest Young Entrepreneurs’ by the New York based magazine.

“They are bringing innovation to market, building unique brands, nurturing trends, giving back and making money along the way,” Inc says of the young men and women on its list.

Selvadurai, a former software architect, co-founded Foursquare in 2009. Foursquare is a mobile application that is a “friend-finder, a social city guide as well as a game”.

With more than two million users, the business is currently valued at nearly $100 million. The start-up is still growing steadily by 100,000 new members a week, with plans for a big redesign soon.

“We are all obsessed with what we want to build and think about it all day long. If you are really excited about a redesign and only half way there, you go to sleep and dream about the rest of it,” says the New York based entrepreneur.

Inc says a “defining characteristic” of this generation of entrepreneurs is that they are highly likely to start companies with partners.

“For them, building a business is not a lone pursuit, but rather an extension of their social lives”. Another thing that stands out about this year’s young entrepreneurs is that their “generational fascination with all things social extends deeply into t heir entrepreneurial zeitgeist,” the magazine adds.

Reddy co-founded Occipital, a technology start-up in Colorado in 2008. The business has developed RedLaser, a best-selling iPhone app that lets users scan barcodes.

Since debuting in May 2009, RedLaser has been downloaded more than two million times, making it one of the most popular paid-iPhone apps in the market.

The company recently sold RedLaser to eBay and used the proceeds from the deal to hire three engineers who are now working on “developing more cool products”. In 2009, Occipital earned $1 million in revenues and is targeting $2.5 million this year. - PTI

How a 16-yo Kid Made His First Million Dollars

His name: Christian Owens. His age: 16. He made his first million dollars in two years, "inspired by Apple's CEO Steve Jobs". This is how he did it.

The British teen—who lives in Corby, Northamptonshire—got his first computer age seven. Three years later he got a Mac and taught himself web design. Four years later—at age 14, in 2008—he started his first company. It was a simple site that some of you may know: Mac Bundle Box. The site was pretty, rooted into Apple's own design guidelines and style, but actually was even closer to MacHeist, which has done the same package-bundling price plan for a while now.

How a 16-yo Kid Made His First Million Dollars Following His Hero, Steve JobsThe page sold a package of very neat Mac OS X applications for a discounted price and for a limited time. He would negotiate with the developers to get a discount deal on their apps. The resulting bundle had a combined retail value of around $400, but he would sell it for a tenth of that price. (You know, like MacHeist, which we've featured before.)

Not only that: If enough people bought the package, a new application would get unlocked for all buyers, which guaranteed very good word-of-mouth promotion. And to top it all, Owens dedicated a percentage of all sales to charity.

The idea did well. Very well, in fact: In its first two years, Mac Bundle Box made $1,000,000 (700,000 British Pounds).

Not happy with that success, Owens jumped into a new venture called Branchr, a pay-per-click advertising company that distributes 300 million ads per month on over 17,500 websites, iPhone, and Android applications. The company, which claims to deliver "contextual, behavioral, publisher-defined, and geographically" targeted ads in those platforms, has already made $800,000 in its first year and employs eight adults including his 43-year-old mother, Alison.

He doesn't know where he would be in 10 years, but the next thing he wants to do is to make one hundred million British pounds with Branchr. He seems to be on his way to success. He claims his business is growing strong—Branchr has already bought another company—and he reinvests all the money back into the company.

His secret to success? There's no secret, he says:

There is no magical formula to business, it takes hard work, determination and the drive to do something great.

Letting the Machines Decide - New Wave of Investment Firms Look to 'Artificial Intelligence' in Trade Decisions

Wall Street is notorious for not learning from its mistakes. Maybe machines can do better.

That is the hope of an increasing number of investors who are turning to the science of artificial intelligence to make investment decisions.

With artificial intelligence, programmers don't just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Most investors trying the approach are using "machine learning," a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future. It is used by tech companies such as Google Inc. to match Web searches with results and NetFlix Inc. to predict which movies users are likely to rent.

One upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks. Run by a small team of twentysomething math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor's 500-stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund. Like many hedge funds, its goal is to beat the broader market year after year.

"It's pretty clear that human beings aren't improving," said Spencer Greenberg, 27 years old and the brains behind Rebellion's AI system. "But computers and algorithms are only getting faster and more robust."

Some sophisticated hedge funds such as Renaissance Technologies LLC, based in East Setauket, N.Y., are said to have deployed AI to invest. But for years, these firms were the exception. Some firms that have dabbled in AI are skeptical it is anywhere close to working.

Rebellion is part of a new wave of firms using machine learning to trade. Cerebellum Capital, a San Francisco hedge fund with $10 million in assets, started using machine learning to invest in 2009. A number of high-frequency trading firms, such as RGM Advisors LLC in Austin, Texas, and Getco LLC in Chicago, are using machine learning to help their computer systems trade in and out of stocks efficiently, according to people familiar with the firms.

The programs are effective, advocates say, because they can crunch huge amounts of data in short periods, "learn" what works, and adjust their strategies on the fly. In contrast, the typical quantitative approach may employ a single strategy or even a combination of strategies at once, but may not move between them or modify them based on what the program determines works best.

"No human could do this," said Michael Kearns, a computer-science professor at the University of Pennsylvania who has used AI to invest at firms such as Lehman Brothers Holdings Inc. "Your head would blow off."

Rebellion has struggled to raise money, in part because investors since the credit crisis are dubious of opaque math-based strategies.

The firm has attracted at least one long-time "quant" skeptic: famed value investor Jean-Marie Eveillard, who recently invested several hundred thousand dollars of his own money into Rebellion. "My cup of tea is not quantitative investing," he said. "But I think they are serious investors, and I'm impressed by the fact that they don't have a high turnover…and don't use leverage."

Rebellion's Mr. Greenberg is no stranger to the investing world. His father, Glenn Greenberg, is an iconoclastic value investor and manager of Brave Warrior Advisors, who recently split from his partners at Chieftain Capital Management Inc. His grandfather, legendary baseball slugger "Hammerin' Hank" Greenberg, played for the Detroit Tigers in the 1930s and '40s.

Past success doesn't mean Rebellion will continue to beat the market. As with many quant strategies, its system could stop working if market fundamentals change in ways that trip up its computer program, known as "Star."

What makes Star intelligent, says Mr. Greenberg, is its ability to adjust its strategy based on shifting dynamics in the market and broader economy. The program isn't wed to any single investing approach. Under certain conditions, the fund will buy cheap stocks, in others it will favor stocks with swiftly rising prices—or both at the same time.

Unlike the high-frequency funds that use artificial intelligence to aid rapid trading, Rebellion tends to hold stocks for long periods—on average four months but in some instances more than two years. It also doesn't short stocks or use leverage, or borrowed money, which can amplify returns but also boost risks.

The program monitors about 30 factors that can affect a stock's performance, such as price-to-earnings ratios or interest rates.

The program regularly crunches more than a decade of historical market data and the latest market action to size up whether to buy or sell a stock. When certain strategies stop working, the program automatically incorporates that information, "learns," and adjusts the portfolio.

For instance, it may detect data indicating stocks with low price-to-earning ratios are likely to rise and load up on those stocks. Then, if the program later finds that the strategy is likely to lose steam, based on shifts in the factors it tracks, it will dump those stocks and buy stocks it deems more favorable.

Every morning, Star recommends a list of stocks to buy or sell—often it offers no changes at all. A human trader implements the moves. The firm says it never overrules the computer program, which is largely the same system they started with in 2007, with a few nips and tucks. Rebellion typically holds about 60 to 70 stocks at any time.

Mr. Greenberg started designing Star in mid-2005, soon after he graduated from Columbia University with an engineering degree. He was joined by Alexander Fleiss, a high-school friend with a background in finance and math, as well as Jonathan Sturges, who has a master's degree in music composition, and Jeremy Newton, a mathematician who helped design the AI program.

In January 2007, with $2 million in capital, the program started picking stocks. That spring, it started moving into defensive positions such as utilities. Rebellion gained 17% in 2007, compared with the 6.4% gain by the Dow Jones Industrial Average, according to people familiar with the fund.

It stayed defensive throughout most of 2008, holding gold, oil and utility stocks. Still, it lost money like most investors, sliding 26% but topping the 34% decline by the Dow industrials.

In early 2009, Star started to buy beaten-down stocks such as banks and insurers, which would benefit from a recovery. "He just loaded up on value stocks," said Mr. Fleiss, referring to the AI program. The fund gained 41% in 2009, more than doubling the Dow's 19% gain.

The firm's current portfolio is largely defensive. One of its biggest positions is in gold stocks, according to people familiar with the fund.

The defensive move at first worried Mr. Fleiss, who had grown bullish. But it has proven a smart move so far. "I've learned not to question the AI," he said.

Move over London,New York,Mumbais the place to cut deals

A New World Order May Upset Global Financial Top Rankings Forever: Experts

Don Durfee SAO PAULO


LONDON and New York are not about to lose their spots as the worlds leading financial centres but they are being challenged by emerging market upstarts in a potentially lucrative area: the management of funds moving between developing economies.
With developed economies struggling and emerging markets thriving,more and more financial deals are being cut well away from the traditional centres.Rising trade between emerging economies,cross-border mergers,acquisitions by Indian and Chinese companies and moves by developing world businesses to raise capital in each others markets will spur growth of financial centres in the fastest growing economies,according to industry experts who addressed the Reuters Emerging Markets Summit in Sao Paulo last week.
For the bankers,clustering in cities like Sao Paulo and Mumbai,the intra-emerging markets movement of funds represents an alluring chance to make money.We see flows between Africa and India,India and China,India and Korea being much bigger, said Neeraj Swaroop,CEO of Standard Chartereds India business.Not just big companies but also small- and medium-sized companies are making outbound investments.For banks like Standard Chartered,these are immense opportunities to pursue.
Stephen Jennings,CEO of Renaissance Capital,said he is already seeing a rapid integration of capital flows in emerging markets.In our M&A practice,80% of our deals dont have a western face.The same thing will happen with financial flows, he said.London cannot possibly retain its role as a primary capital markets centre for emerging markets ... I think it will be displaced totally over the next two to three years, he said,adding that high taxes,intensifying regulation and unfavourable immigration policies all work against the City.
While other industry experts expect New York and London to remain dominant for years to come,examples of the worlds changing investment flows abound.Chinese investment is surging in Africa,Latin America and Southeast Asia.Russian and central Asian resources companies are lining up to list shares in Hong Kong.Jennings says UC Rusals $2.2-billion IPO in Hong Kong in January was the tip of a massive iceberg.
Both New York and London have a long list of advantages over emerging market rivals,ranging from loose capital controls and the strong rule of law to sound infrastructure and high quality schools and universities.Jim ONeill,Goldman Sachs head of global economic research and the man who coined the term BRICs,says it will take many years before the traditional financial powerhouses are overtaken by emerging market rivals.
For any of these emerging markets to truly be an international financial centre,they have to do something about the basic ingredients,including the use of English and adopting very credible and acceptable rules of business law, he said.Without those two basic things,these countries have no chance. Nevertheless,some of the new centres may soon dominate lucrative niches.
Singapore is challenging Switzerland for the worlds wealth management business,Hong Kong which led the world in IPOs last year is becoming an equity hub for Asias growing resources companies and Shanghai,not New York,is coordinating the financial resources driving Chinas private sector.To Jennings,these are the seeds of a new model: one in which the savings of emerging markets no longer flow to the US and Europe,but rather to the areas with the highest growth rates.
In the last 10 years,emerging markets savings have,through the dollar as the reserve currency,been intermediated through the West, he said.But that capital is much more efficiently deployed in emerging markets because returns are higher and in some cases risk is lower.So those connections,the new financial plumbing,are being built now. Reuters

WINNERS CIRCLE



BRICS ACCOUNTED FOR



13.5% OF GLOBAL M&AS IN YR-TO-DATE



$41b IN IPOS IN H1 2010 vs $63.9 B IN 2009



$741m INFLOWS IN H1 2010



$17.4b INVESTMENTS IN GLOBAL EMERGING MARKET FUNDS

Get ready for the next Great Crash

DODD-FRANK ACT,IF PASSED,MIGHT HELP AVOID A 2008-LIKE CRISIS,BUT A CRASH SEEMS INEVITABLE

Andrew Ross Sorkin


The next Great Crash is coming.Guaranteed.Maybe not today and maybe not tomorrow.But,in all likelihood,sooner than we think.
How can I be so sure Because the history of modern markets is a story of meltdowns.The stock market crashed in 1987,the bond market in 1994.Mexico tanked in 1994,East Asia in 1997.Long-Term Capital Management blew up in 1998,Russia that same year.Dot-coms dotbombed in 2000.In 2007 well,you know the rest.
And that was just the last 20 years or so.The stagflation of the 1970s,the Depression of the 1930s,the panics in the 1900s ... and back and back and back it goes,all the way to the Dutch and their tulip bulbs.
In those giddy years before the Great Recession,it seemed as if wed grown accustomed to the wild ride.Wall Street certainly had.Jamie Dimon,the chairman and chief executive of JPMorgan Chase likes to say when his daughter came home from school one day and asked what a financial crisis was,he told her: Its the kind of thing that happens every 5-7 years.
No one should be surprised,Dimon insists,that booms go bust.Thats the way markets work.Most Americans probably find that answer unsatisfying,to put it politely.After all,millions have lost their homes,their jobs,their savings.Perhaps something is wrong if CEOs expect the markets to break down every half decade or so.
But now here comes the Dodd-Frank Act,which is supposed to ensure that we never repeat that 2008 finale of Wall Street Gone Wild.The bill,if signed into law,might help us avoid another sorry episode like that.But one thing it wont do is prevent another crisis if only because the next one probably wont be like the last one.
So amid all the back-and-forth over this bill,keep in mind that one of the most important aspects of the act: It would give Washington policy makers a powerful tool to mitigate the next too-big-to-fail blow-up,however that blow-up manifests itself.For the first time,Washington would have what is known as resolution authority,that is,the power to wind down a giant financial institution that runs into trouble.If policymakers had had that power during the tumultuous autumn of 2008,they might have averted the catastrophic failure of Lehman Brothers.They might have placed the teetering American International Group into conservatorship.And they might have taken over Bank of America and Citigroup,and possibly even Goldman Sachs and Morgan Stanley.Senior management would have been tossed out.
We will have a financial crisis again its just a question of the frequency, said the economist Kenneth Rogoff,who,with Carmen M Reinhart,wrote a terrific book titled This Time Is Different: Eight Centuries of Financial Folly.The title says it all.Weve been through this before and will go through it again.
While Dodd-Frank might avert another crisis in the short term,Rogoff says the legislation itself is less important than how regulators implement it and keep on implementing it over the years.Before World War II,banking crises were epidemic, Rogoff said.Then things settled down because regulation had become pretty draconian and laws were actually enforced.
But memories fade.Having a deep financial crisis is the best vaccination for another right away, Rogoff said.Down the road,a lot will depend on the regulators.Ten or 15 years after a crisis,and sometimes a lot less,watchdogs start to doze.Political winds change.Regulators loosen up.
Many on Capitol Hill insist Dodd-Frank means the end of too big to fail,period.Many on Wall Street insist it means the end of American finance.Bankers and their lobbyists argue that American businesses and consumers will ultimately suffer,since all these rules will end up throttling the vital flow of credit through the economy.
Dodd-Frank,whatever its pros and cons,helps prepare us for the next Big One whatever that might be.