Sunday, January 29, 2012

18 Nobel-Worthy Insights from My Conversation with Dr. Joseph Stiglitz: Asian Financial Forum 2012, Part 2


Photo courtesy of Val Roque
Well, if you want to be strict about it, it wasn't really a conversation, although I'd like to think of it as one.

Dr. Joseph E. Stiglitz is a Professor of Economics at Columbia University and former Chief Economist of the World Bank. In 2001, he received the Nobel Prize for Economics for his pioneering work on the consequences of information asymmetries (the basis of a popular capital structure theory, if my finance students would recall). He was the keynote speaker for the second day of the 2012 Asian Financial Forum, where he talked about a diverse range of topics--from how the "slower" growth of China in 2011 is not really so bad if you think about it to the Occupy Wall Street movement and inequality in the US. After his address, there was a one hour "open dialogue," which was basically just a Q&A, where I got to have "a conversation" with him (I fielded the first question from my front row seat :)). In this post, I will share some Nobel-worthy insights from Dr. Stiglitz, ideas that are definitely worth hearing and will hopefully make us think deeper about things that are going on around us.

1. Everyone's spooked because China's growth in 2011 was just 8% to 9%. Thirty years ago, people didn't even think that that kind of growth was possible. Get a grip, people, there's no need to worry. First of all, a big part of that "decrease" in growth was just caused by a change in the way things are measured, so it's not really a decrease. And even if China's growth has indeed slowed, it's all well and good because at least now this growth is more sustainable.

2. All eyes on Asia. In the 1820's, Asia's share of global GDP was 45%. Since then, with the onset of colonialism and unfair trade agreements, that share plummeted to under 10%. So we can just interpret the recent rise of Asian economies as a "rectification" of a 200-year anomaly.

3. What a 0% savings rate really means. Yeah, so that's the current average savings rate in the US. But take note that that's an average figure, and that rich Americans--the so-called "1%"--actually do get to save a bit, somewhere around 5% of their income. So how do we get to zero? The gap is accounted for by how the "bottom" 60% of Americans spend 110% of their income, which is basically a savings rate of negative 10%. That means around 190 million Americans spend more than they earn and live off debt, which may make sense if you take into account that debt in the US is actually very cheap (at least up to 2014, if the Fed is to be believed). Sadly, that "cheap" debt is actually financed by the savings of hardworking Chinese and other Asians...

4. What is saved in Asia should stay in Asia. The average savings rate in China is 50%. China is the world's largest saver and second biggest economy. Doesn't it make sense then that we manage these funds in Asia instead of anywhere else? Before 2008, Asian savings were "transferred" to the US and Europe and placed in the care of big multinational financial institutions for professional risk management, and just transferred back to Asia whenever there's a need for the funds (at a hefty commission, of course). 2008 happened, and everyone now knows how good these US and European institutions are at managing risk. Not.

5. What "savings glut"? That's what the Fed says, that's its explanation for what's been happening since 2008. But how could there be a savings glut when we see a lot of savings needs around the world, particularly in Asia. If you want to point fingers, point to how these these funds were mismanaged, particularly at how Asian savings were basically just used to finance a housing crisis and two expensive wars in the past decade.

6. Breaking something that ain't broke. For four decades after the Great Depression, financial regulation worked in the US. Then these geniuses who were supposed to overlook financial institutions for the general public came up with the idea of deregulating financial markets. So all the finance talent focused on developing "innovative" financial products that made a lot of money, yes, but led to no real productivity whatsoever.

7. A case of diversification making things worse. Diversification is supposed to make things safer by spreading risk among many "baskets": when one basket falls, at least there will still be some eggs left. Maybe this was the rationale behind letting financial institutions spread their reach to various continents around the world. Unfortunately, instead of spreading risk among a bunch of baskets and making things safer, everything just became connected to everything else, forming one global electric grid where if one part fails, everything goes out.

8. The problem with too-big-to-fail banks is that they are too big to fail, and everyone knows it. And this distorts financial markets since everyone now would bend over backwards to accommodate these banks, even if their demands are unreasonable or at least not supported by market forces.

9. The reason why we still haven't achieved transparency for complex financial products like credit default swaps and other financial derivatives is that that is how these people make money from these things: by making everyone, sometimes even themselves, completely ignorant and unaware of what's really going on.

I still have pages and pages of notes to make sense of, so I guess insights 10 to 18 will have to wait till Part 3 on Tuesday.

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