Читать книгу The Next Revolution in our Credit-Driven Economy - Schulte Paul - Страница 10

After 25 years of writing equity and fixed income research for a wide assortment of investment banks (Swiss, American, Dutch, Chinese, and Japanese), I became baffled by the way in which the vast majority of professional institutional investors who were my clients displayed a blind spot when it came to trends in credit. This is because they were fed volumes of analysis from economists who were almost all trained in the modern economics of the dynamic stochastic general equilibrium model. This is especially true for any economist who has worked for a central bank and then jumped ship to work for a bank. They assiduously look at inflation, valuations, capital formation, consumption trends, interbank rates, and the like.

This model adapted macroeconomics to microeconomics and tried first and foremost to discover where prices allow markets to clear from the point of view of the firm in a near-perfect world of pure competition. It assumed that all agents are identical. It assumed that markets are rational. It assumed that everyone is acting in their best interest and that this interest is best for all. It assumed that people essentially borrow from themselves.

There was no room for banking in this model. There was no room for Fannie Mae (which happens to control 50 percent of the mortgages in the country). There was no room for rationality. And as Nobel laureate Joseph Stiglitz pointed out, “Finance is uninteresting if the person can only borrow from himself… There can't be information asymmetries (apart from acute schizophrenia).”2 In other words, people do not borrow from themselves. They borrow from banks.

Alas, we are not the same. We are not rational. People do not behave the same way as a firm. Governments always create inefficient oligopolies that they can manipulate and control (i.e., telecom companies, defense contractors, banks, energy companies, port authorities, etc.). These oligopolies create distortions in wages, credit, growth, and the allocation of capital. Central banks are a great example of a government-manipulated oligopoly. And we borrow from others, often way too much.

The Error of Our Ways

So, we see that the model did not take into consideration credit excesses, the blind greed of bankers, irrationality, and behemoth mortgage entities like Fannie Mae. It did not take into consideration the many senior executives in banks who had no interest in the common welfare and were merely creating leverage in order to create revenue that they could turn into profits. It did not take into consideration the vast swell of frenzied irrationality that has persistently shown up in financial bubbles throughout history.

No wonder I was baffled in dealing with many economists who seemed blind to the dangers I saw coming over the horizon. I was looking at the world from the point of view of the banks and the financial system. Economists were looking at the world through the lens of income, output, inflation, and rationality. It was clear in my mind that the underlying capacity of a country's banking system to create credit is the cause of all the other variables mentioned above. These other variables are a mere outcome of the ability of governments and central banks to create credit.

This blind spot exhibited by so many money managers – and the erroneous information they received from the community of economists – made me wonder if I was wrong. And then I started to discuss the issue with very smart MBA students who had economics degrees. As I mentioned earlier, these discussions with economics majors in my MBA classes reinforced my suspicion that credit as a means for causing a structural shift in demand was absent not only from the formulas taught to economics majors but also from the investment process of most global investment houses.3

Why is this? It may come as a great surprise to many that, according to a recent paper by the IMF, “most (economic) models currently used for macroeconomic policy analysis…either exclude money or model money demand as entirely endogenous, thus precluding any causal role for reserves and money.”4 How can something as fundamental as the way in which credit and money interact be left out of economic models? This is a question that Joseph Stiglitz has been asking for the past several quarters. His point is that standard economic models provide a grossly insufficient model for anticipating credit crises because of “the lack of attention to credit and the institutions providing it.”5

To put a fine point on the failure of economics (in the crisis of 2008 and, in my experience, many other crises) because it ignored credit growth, Raghuram Rajan of the University of Chicago said:

The fault of the economics profession…was to ignore the plumbing. Economists could afford to do that…because the plumbing didn't back up. Now that the plumbing has backed up, you find that loans aren't really made in a pure, pristine market. Things can break down. 6

The Mechanics of Economics

And things did break down. Let's boil down the problem to its fundamental parts and see what caused the breakdown. Economics is a study of how markets clear. It is the study of the scarce allocation of resources by seeking out theorems and proofs about how the price of goods and services relates to the quantity to be produced at a given price. This equilibrium price determines how supply of goods meets demand for the same goods. These inputs try to model income, demographics, technology, tastes, money supply, leading economic indicators, and such to predict supply and demand, and voilà! Here's the problem. These modern models that try to predict a clearing price for goods and services in an economy do not take into consideration the way in which credit affects demand.

The field of economics only took into consideration a small subset of conditions and dynamics that affect demand. As a result, there was a large blind spot, which has been causing a wild overshoot of demand – and a resulting slingshot of collapsing demand in the aftermath of a credit downturn. This is the so-called black swan event, which seems to “come out of nowhere” and happens once in a blue moon. In this book, we will show that these black swan events:

1. Are predictable in that there are very definite and repeatable circumstances that can foretell credit crises

2. Happen like clockwork, in that there is a time line in which the behavior of bankers (local and international) brings about a chain reaction of events that affects multiple asset prices with similar patterns

3. Are a direct function of the credit cycle and have little to do with the concept of an economic cycle

4. Can be seen a mile away if credit conditions are given “primus inter pares” status with other traditional economic indicators

As an example, bank stock prices are a pretty good indicator of problems to come, yet these have never been included in any model. Take the case of Citi. Its stock price peaked in 2005 and was falling a full two years before the crisis became a full-blown meltdown. Similarly, Lehman Brothers peaked in 2006 and was falling for 18 months before the implosion. No one was talking about that. The equity market was giving us a very good signal of the coming problems, yet none of this was factored into any economic model.

If the reader is still in disbelief that so many of these models that were designed to predict dangers in the economy did not even consider credit as a central parameter, let's look at the analysis of Bill White, the chief economist for the Bank of International Settlements. Considered the sanctum sanctorum (the Holy of Holies) of the international banking community, Mr. White makes the case loud and clear that the model used by the Federal Reserve does “not see debt as a source of danger.” He goes further with a savage comment and says that “in most of these models, debt isn't even there.” He takes a swipe at the academic community (which presumably includes the Chicago School) and says that “in academic models, the financial sector isn't even there.”7

The growing groupthink was that if the “important” people say that it is not there, it must not be important. And if it is not there, it can't do any harm. This is like a child who put his hands over his face. What he can't see because his hands are over his face is not there. It is dangerously naïve, but this description is absolutely accurate in my 25 years of experience of being inside banks. This is a classic example of Rule #1 in leadership: Don't walk into water over your head! The psychological weaknesses of the human mind are as important as the mathematical issues are when it comes to debt-fueled bubbles and all their destructive power. (Please see Chapter 8, in which we explore the psychological weaknesses of humans and why we seem to get suckered into all kinds of absurd financial bubbles over and over again.)

This is precisely why it was understandable for then–Fed Chairman Greenspan to have said that we are in a glorious and everlasting “Great Moderation.” However, he forgot to look at the explosive growth in mortgage debt, which was funded with highly volatile offshore funding from German Landesbanks, central banks, and other large institutions that could pull their money at a moment's notice. And they did.

Economic Blinders

If you still find it unfathomable why many of the economic and policy elite failed to see the crisis of 2008 coming (or for that matter the Asian crisis of 1997, the Russian default in 1998, the meltdown in Turkey in 1999, etc.), there is more evidence. Not only did major economists and policymakers not see the oncoming crisis, but also they did not detect the recession that was already underway in 2007. One study by the IMF, for instance, shows that not one official economic forecast anticipated a recession in 2009. Yet there were recessions in 49 countries in 2009 – almost one in four countries in the world.8

In late 2007, there was even some noise from the Fed about inflation creeping back up. This is astonishing, since I was at Lehman Brothers in the Asian Research department and there was deep anxiety about the situation. By the end of 2007, anyone with half a brain in any investment bank knew the implications of the leverage unwind that was inevitable. In a book that he edited called Essays on the Great Depression, former Fed Chairman Bernanke said that the number-one cause of debt-fueled deflationary depressions is that policymakers do not understand or appreciate the very large levels of debt that lurk underneath an ostensibly healthy economy prior to the onset of the unpleasant deleveraging process. In this context, it is all the more surprising that he did not hit the five-alarm button to warn his colleagues of the coming problems.

By the middle of 2008, there was still a kind of delusional sense that we were out of the woods, and some in the Fed thought about actually raising interest rates just before the real collapse came a few months later. Some of the members were actually concerned about inflation. Dallas Fed Chairman Fisher was raising the alarm bells on inflation only a few months before the worst collapse in the banking system since the Great Depression in 1929.

The Greenbook, which came out in September 2008 when all the evidence of a coming meltdown was obvious, said growth in 2009 would be 2 percent and growth in 2010 would be 2.75 percent. This is all the more delusional when they could have picked up any research on credit from any of the Wall Street banks (including Lehman Brothers Credit Research, which was raising alarm bells all over the place) and seen that credit spreads were blowing out all over the place. They could have seen that (widely traded) credit default swap prices for auto loans, mortgages, corporate debt, high-yield debt, and commercial property had all collapsed to levels never before seen in modern financial history. Why didn't anyone at the Fed raise alarm bells on this?

To their credit, people like Governors Yellin, Bernanke, and Rosengarden thought that the economy could weaken more than people expected. But the overall consensus was for more growth and a possibility of inflation. Few if any thought of lowering rates below 2 percent in the summer of 2008.

Like a cup of scalding hot coffee being knocked off a table onto someone's lap, the financial crisis fell into the lap of the Fed with suddenness and pain. Fed Chairman Bernanke acted quickly by offering credit guarantees and the TARP program. By December – only three months after saying growth in 2009 would be 2 percent – the Fed Greenbook forecast a collapse in growth of 4.7 percent for 2009. All along policymakers consistently underestimated the pernicious effect of deleveraging throughout the economy. Banks had to call in loans for homes, cars, commercial office buildings, and businesses. Without liquidity and leverage, the economy could no nothing else but shrink.

Again, what is the core intellectual blind spot that caused all and sundry to get it wrong? Modern economics looks to a supply-and-demand curve that explains how markets clear at a certain price. They have as an assumption that credit (the right amount of credit for all occasions, by the way) is just there. Markets will clear because they are rational. But they do not take into account the fundamental notion that virtually all important choices in human life (when to marry, buy a home, go on vacation, go to university, expand a business, go to the hospital, have children) are predicated on the availability of credit. How can economics just leave this out? For decades, the science of economics has treated financial markets as a “harmless sideshow.”9 MIT economist Olivier Blanchard said, “We thought of financial regulation as outside the macroeconomic framework.”10

The Corporate Example

Credit creation can make or break the balance sheet of the corporate sector and, therefore, the income statement. We should call the income statement the “outcome” statement, as it is a derivative of underlying trends in credit. In this way, the price-to-earnings ratio (P/E) and earnings per share (EPS) of a stock are meaningless and tell us nothing (we will see later that they may be a contra-indicator for investment timing and cause people to lose money!). To focus on earnings and EPS without an eye on credit and the way that credit affects national liquidity and the balance sheet of a company is to miss the big picture. Furthermore, focusing on GDP data, money supply, leading economic indicators, and fiscal positions is a waste of time without proper attention to the extent to which an economy is stretched too thin when it comes to the availability of credit and the savings that funds that credit.

People borrow from a banking system whose capacity to lend is determined by how much these same people save. People go to banks to borrow their savings. Corporations do the same thing. Borrowings are loans (assets of a bank) and savings are deposits (liabilities of a bank). The savings of people and corporations create credit, and credit creates money supply. The ratio of bank loans to deposits (or savings) is the loan/deposit ratio (LDR). This can reach a low of 0.5 ($50 of loans for $100 of deposits) or so. This is the beginning of a credit cycle that makes for glorious asset price appreciation for a considerable period of time, usually for four to six years.

A country that has its foot on the accelerator and is allowing credit growth to far exceed savings growth is running large current account surpluses. Domestic liquidity is sloshing around at an accelerating rate. This country can gun the engine of growth with credit up to an LDR of about 1.1 or 1.2 until they encounter trouble because the growth in credit has far exceeded the growth in savings. Examples today of highly liquid banking systems are the Philippines, Thailand, Indonesia, Singapore, Hong Kong, China, and much of Africa.