CHECKS & BALANCES AND CREDIT CREATION: THE BEST OF 2007
[Latest Global Dollar Liquidity measure: +12.7% annual growth rate; latest Endogenous Liquidity Index: -28.5%]
Years spent at emerging markets trading desks have taught me a lesson that I am not about to forget: the availability of credit depends crucially on the stability of property rights — which in turn depends on the existence of political ... checks and balances. In Iceland, the credit market is three times the size of the GDP; in Argentina, it barely reaches 12% of GDP. Iceland regularly features among the top-ten countries in terms of judicial independence, freedom of the press, connectivity and central bank autonomy (see data). Meanwhile, the quality of Argentina's governance ranks below that of stalwarts Pakistan, Nigeria and Madagascar. In order for credit to flourish, power needs to be fragmented. In that spirit, I have selected the 2007 events/firms/products that have made a positive contribution in terms of credit creation and checks & balances.
 Goldman Sachs. Financial Times reporters writing on the saga of Goldman Sachs have uncovered one of the key secrets of the firm: its governance structure, especially in terms of risk management. "The culture of partnership", writes John Plender, "which entails a high degree of mutual surveillance in the common interest, still survives in spite of Goldman's status as a listed company". The key phrase here is: mutual surveillance. That's the very definition of ... checks and balances! In another FT piece on Goldman, we learn that the back-office is considered a prestigious place to work. Insiders call it the Federation — yet another allusion to the notion of checks and balances. And if this wasn't enough, consider the recent Michael Skapinker piece on Chuck Prince and Stan O'Neal. These guys behaved in almost authoritarian ways, something that (presumably) will not happen at Goldman Sachs. [John Plender: "Market insight: Goldman offers example of governance", Financial Times] [Ben White: "Man in the News: David Viniar", Financial Times] [Michael Skapinker: "Silencing the dissenters can end your career", Financial Times]
 The euro. In a remarkable speech at the 2004 Bundesbank Lecture, former Fed chairman Alan Greenspan said: "... if other currencies, such as the euro, emerge to share the dollar's role as a global reserve currency, that process, too, is likely to be benign". The Maestro was alluding to the diffusion of "current imbalances", a.k.a the U.S. current account deficit. In other words: the euro acts as a check on the propensity of the United States to over-use the dollar as the key international reserve asset. Far from being a bearish factor in terms of global credit creation, the surging euro is a ... balancing factor! [Alan Greenspan: "Globalization", Bundesbank Lecture, 2004]
 Sovereign Wealth Funds. SWFs are increasingly acting as a key element in terms of the global credit markets. Let me quote, on this subject, Richard Gnodde, co-CEO of Goldman Sachs International: "We have one global economy, but it is increasingly powered by multiple engines, with multiple sources of demand and liquidity ... This emergence of new flows and new actors from new models of capitalism reflects a natural diversity of social and economic practices that is in no way incompatible with the process of globalisation". More diversity, less risk. [Richard Gnodde: "A role for new actors in the global economy", Financial Times]
 Islamic finance. "Islamic finance takes off", writes Thomas Barnett, in my view the top globalization expert. He adds: "An estimated 300 Islamic banks hold half a trillion in assets. About 7-8 years ago, when Malaysia started pushing this crazy notion, there was no Islamic finance to speak of. Now it grows at more than 10% a year, and you’ve got Citigroup, HBC, Deutsche Bank and Asian giants all chasing this pie". Again: more diversity, less risk. [Thomas P.M. Barnett: " Islamic finance takes off"]