The New Financial World

The financial crisis is a major analytical challenge that will keep economists occupied for years to come. In a report published in 2008, I looked forward to the future shape of the financial world. Here’s a short summary:

The new financial world – 14 themes that will shape it

  1. Tomorrow’s rules won’t be the same as today’s – full extent of damage caused by crisis has not yet been realised, so further surprises could prompt more change
  2. The law of unintended consequences -efforts to make system more robust, such as higher capital ratios, may make recovery harder in short term
  3. Back to Basics -financial sector will revert to more traditional conservative practices
  4. The market isn’t always right – financial markets lacked large numbers of fully informed buyers and seller required to produce viable prices and continuous trading, making ‘mark-to-market’ destabilising
  5. The Age of Frugality – thrift will become fashionable
  6. Trust will need to be rebuilt -financial institutions will have to regain consumers’ trust and respect
  7. Keep it simple – transparency and simplicity will lead to efforts to standardise products
  8. Politicians will have their say – politicians will have a crucial say in reshaping financial world
  9. The paradox of thrift – higher saving by the private sector will depress the economy, unless governments save less and borrow more
  10. Tougher discipline will be imposed – new regulations will focus on systemic stability, disclosure and consumer protection
  11. Central banks will pay more attention to asset prices -reconsider passive attitude to asset booms
  12. From globalisation to localisation – government is local, and greater self-reliance may rebalance the global economy
  13. A more competitive financial ecosystem – the long boom in financial sector profits is over
  14. The cycle still exists…there will be an upswing – savers will rebuild their wealth, and financial services in the emerging world still have structural growth potential

You can contact me by e-mailing Mark[at]


About markcliffe

Board Advisor and Thought Leader on the impact of disruptive change. Former Chief Economist of ING Group
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2 Responses to The New Financial World

  1. Arnon Ben-david says:

    Unfortunately nothing will change in the banking system, as long as extremely ‘leveraged’ products such as the repackaged mortgage debt and credit card debt will continue to float around the world. Not only have these derivatives distorted our ability to assess financial viability of institutions and whole countries, but in some cases, as in the case of Greece, the repackaging of sovereign debt was introduced by US brokerage houses as a systemic solution to low growth and increasing debt, bringing the sovereign system to a complete breakdown.

    The european solution to the crisis involved more aggressive intervention with the banks and greater transparency, as can be seen in the breaking up of ING by the European union and by the detailed reports of ING’s finances quarterly and otherwise.

    In the US on the other hand, when it became clear that many large banks cannot survive a full disclosure of their financial state, and nationalization seemed like the only remedy, someone or a group of someones (not necessarily the administration) have decided against nationalization (since these people are probably the ones who own many of the shares of said institutions) and instead we saw a few middle sized banks (such as Washington Mutual) being sold to other banks, and across the board no real disclosure of the state of the banks was performed – the solution, across the board, was simply to lie to the public and to the world and hide the realities of the insolvency of the banks.

    One of those banks is Capital One. Capital One found itself, at the beginning of the financial crisis with a growing amount of debt produced by the fact that Capital One was primarily a credit card company and not a retail bank. At the time credit card defaults were on the rise, and a careful estimate of outstanding debt owed to Capital One by credit card customers stood, I believe at 60 billion dollars. Capital One were aware of their growing weakness, and they purchased not long before the crisis broke a local New York Bank – Northfork Bank – a purchase that gave this big buble of credit card debt called a bank some legitimacy by adding to it a group of previously Northfork bank customers. But with all of that, still, had the administration decided to force the US banks to fully disclose their debt problems, I believe Capital One would have been nationalized immediately.

    Now we are living in the aftermath of the first dip of recession, and experiencing what looks like a smaller but nonetheless significant second dip (plagued by some more structural problems this time around). And peculiarly enough, ING, which was forced by the ECB to sell off ING Direct, as part of its public test of humility and down trimming, agreed to sell ING Direct to Capital One. How absurd! Since Capital One is far from being out of the waters of the financial crisis, it seems like an act of tragedy-comedy to let it acquire another successful retail bank – this time as an additional fig leaf to cover its naked back side.

    I have been a customer of ING Direct, Capital One, and previously of Northfork Bank, and I can testify that Capital One is run by a good-for-nothing bunch of money grabbers. One example, I believe would suffice: two or three years after Capital One took over Northfork Bank, they tried to convince customers to join the new Capital One checking with Rewards account. They forgot to mention to their customers that the new account would charge them $18 for new checks (and a few other ‘perks’ which were absent from the Northfork account). Two weeks ago I received a letter from Capital One urging me to switch to their new and exciting High Yield Free Checking (of course failing to mention that a mandatory minimum balance requirement of $5000 was part of the deal). In my book, a bank that produces within two years two campaigns for new checking accounts must be either desperate of stupid (the stupid part has to do with the clear indication that the people running the bank have little appreciation for the intelligence of their customers. And this is the bank that will ‘inherit’ our beloved ING Direct. what a shame!

    And as far as bankers’ arrogance is concerned, I must mention Chase Manhattan, as another bank that has not disclosed in real terms any of the real debts dragging it down. In Europe, it would seem, the problems of a great Dutch bank such as ING were perceived as ‘our’ problem by the dutch people and government, who acted accordingly and came to the rescue, all the while attempting to act transparently and with a ‘view’ to the public. In the US, once it became clear that the big banks have come close to insolvency, a decision was made, I believe, to lie about it: the acknowledgement that Chase Manhattan was not only too big to fail, but that Chase actually was the country, – this identification along the lines of ‘Letat ce moi’, which is a mark of non-democratic regems, seems to have become the directive in the case of Chase Manhattan. and the US has officially become, no longer a country with banks, but a bank (Chase) with a country (and accordingly, with ‘vassals’). Europe may be suffering right now, but these could be growing pains and the signs of a healthy future of personal accountability. America, at least in my book, is doomed. And of course, like any good financial problem, the key to a solution seems to belong to the moral and social realms. Banks are the product of societies, not the other way around.

    Let us hope for the best.

  2. Jan Hein van de Kaa says:

    Personally I beleef this men vision more then yours, Like I beleef JIm Rogers more then Nout wellink. The sound is more plausible – Er vanuit gaande dat u ook Nederlands leest, “eerst een paar wijze woorden in het engels en de rest in het Nederlands. (is uiteraard ook gepubliceerd in het engels – als hoofdbron)

    This is the end Beautiful friend This is the end My only friend, the end Of our elaborate plans

    Een politieke unie zal Europa niet uit het slop trekken. Sterker, het zal alleen maar nieuwe problemen opleveren, waarschuwt De Amerikaanse hoogleraar economie aan Harvard University Martin Feldstein.
    ‘Eén markt, één munt’. Met deze slogan verwierven voorstanders van de euro eind vorige eeuw steun voor een gezamenlijke munt. In de Verenigde Staten werkte het, dus moest het ook werken in Europa. Maar Europa verschilt op drie belangrijke onderdelen van de Verenigde Staten, stelt Feldstein. Daardoor klopte de vergelijking in het verleden niet, en daardoor zal die vergelijking ook bij een politieke unie mank blijven gaan, zo verwacht hij.

    Ten eerste kent de VS een arbeidsmarkt waar arbeidskrachten van gebieden met hoge werkloosheid verhuizen naar regio’s met een vacatureoverschot. In Europa gebeurt dit niet omdat “de nationale arbeidsmarkten gescheiden zijn door taal, cultuur, religie, vakbondslidmaatschap en sociale zekerheidssystemen.”

    Het tweede verschil is dat de VS een centraal fiscaal systeem heeft en de EU niet. Bedrijven en individuen betalen het merendeel van hun belasting aan de federale overheid in Washington in plaats van aan de staat waarin ze wonen. Gaat het in een staat economisch minder, dan dalen de belastingen aan Washington. Andersom stijgt de geldstroom van Washington naar de staten zodat regionale overheden uitkeringen kunnen betalen. Voor elke dollar die een staat verliest, keert vanuit de federale overheid 40 cent terug in de vorm van belastingvermindering of financiële steun, stelt Feldstein. Hij ziet in Europa geen vergelijkbare compensatie omdat alle belastingen, subsidies en andere fondsen via nationale overheden lopen.

    “Het Verdrag van Maastricht kent deze bevoegdheid van belasting innen en geld overmaken toe aan de lidstaten, een weerspiegeling van de Europese onwil om fondsen over te dragen aan mensen in andere landen zoals Amerikanen in verschillende staten dat wel doen.”

    Het derde verschil dat Feldstein noemt, is dat de afzonderlijke staten in Amerika wettelijk verplicht zijn om hun begrotingen in balans te brengen. Wat de hoogleraar vergeet te melden is dat de sterke eurolanden ook voor een dergelijke centrale begrotingsdiscipline pleiten, al is er weinig animo voor een echte federalistische toer. Dankzij de verplichte financiële discipline heeft “zelfs een staat zoals Californië, door velen gezien als een schoolvoorbeeld van fiscale losbandigheid, nu een jaarlijkse begrotingstekort van slechts 1 procent van het BBP”.

    Hoogleraar economie Arjo Klamer schreef vorig jaar al dat “Californië het kan redden, onder meer doordat het minder belasting afdraagt aan Washington dan normaal en meer inkomsten uit Washington ontvangt. Dat alles gaat min of meer automatisch.” Oftewel: In een Verenigde Staten van Europa hadden weinigen iets gemerkt van de crises in Griekenland, Portugal en Ierland omdat Duitsland de tekorten automatisch had afgedekt. 

    Feldstein gelooft er niet in. Een Europese politieke unie “zal niet centraal de inkomsten innen, zoals in de VS, want dan zouden Duitse belastingbetalers meer moeten betalen aan de financiering van buitenlandse overheidsprogramma’s.” Ook de barrières op de arbeidsmarkt met verschillende talen en culturen blijven volgens hem in een Verenigde Staten van Europa bestaan. Net als de problemen van een gemeenschappelijk monetair beleid in een gebied met verschillende conjuncturen. Daarnaast blijft het voor zwakke eurolanden die hun munt niet kunnen devalueren ook in een politieke unie lastig hun economische prestaties te verbeteren, stelt Feldstein.

    Hij verwacht dat in een politieke unie Duitsland de controle zal krijgen over begrotingen, belastingen en uitgaven van de andere lidstaten. “Deze formele overdracht van soevereiniteit zou alleen maar de spanningen en conflicten die nu al bestaan tussen Duitsland en andere EU-landen verergeren.”

    Klamer is eveneens sceptisch over de kans dat een politieke unie de euro kan redden. “De vraag is ook of zo’n groot Europa wenselijk is. Wat willen wij allemaal opgeven om de munt te behouden? Hoeveel zelfstandigheid bijvoorbeeld? Wordt het niet eens tijd voor een fundamentele herbezinning op wat wenselijk is? Is het niet belangrijk dat we een idee hebben wat we willen wanneer de euro valt?”

    Met vriendelijke groet, Jan Hein van de Kaa

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