Has Financial Globalization Peaked? A Leading Economics Journalist Offers a Look Behind the Curtain
Gross, Daniel, The International Economy
Wall Street is once again paying large bonuses, as hedge fund titans are hoovering up trophy assets. About 40 percent of recently minted Harvard MBAs rushed to the finance sector. In Europe, private-sector bondholders are bringing once-proud nations to their knees. Well-paid lobbyists in Washington are brazenly trying to weaken new financial regulations. Yes, at times it seems as if the Panic of 2008 never happened and that debt-fueled global finance is in the ascendance.
Or maybe not.
A look at the continuing public- and private-sector reaction to the chain of debacles of 2008-09, changing attitudes toward debt, and the current dynamics driving growth in the global economy yields a counter-narrative. Today, the global economy is growing at a decent clip (4.3 percent, according to the International Monetary Fund's most recent projection.) But it is far less reliant on banks, private-sector finance, and a cross-border willingness to extend credit recklessly than before.
There comes a time in every trend when the system and culture become so saturated that it has reached the height of its influence, utility, and relevance. Analysts have been talking about Peak Oil for nearly a generation. In the United States, muted consumer spending and the rise of e-commerce point to Peak Mall. With Facebook beginning to lose members in North America, wags are suggesting (hoping?) that we may soon encounter Peak Social Media. And while finance matters a great deal, there are hints that we may have reached Peak Global Financialization. Yes, global levels of credit, debt, and monetary interconnection are likely to continue to grow in absolute terms. But the assumption that the only way to get economic growth is for creditors to finance debt-ridden governments and consumers with unrelenting internal and cross-border capital flows is being put to the test.
Leverage is the force that lets you lift more than you could under your owl strength. And leverage has been--and is being driven out of big chunks of the global private financial system. In the United States, the species of unregulated investment bank, leveraged at 30-I and capable of amassing hundreds of billions of dollars in debt, has become extinct. Lehman and Bear Steams are gone, and the rest of the big five (Merrill Lynch, Goldman, and Morgan Stanley) have evolved into staid commercial banks via acquisition or regulatory shift. The publicly held debt vehicles launched on an unsuspecting public by private-equity outfits like KKR and the Carlyle Group, which borrowed $30 for every dollar in capital in order to buy debt assets, are likewise a bad memory. Citi, the bank formerly known as Citigroup, once sported a trillion-dollar balance sheet with a phyllo-thin equity layer. In its most recent report, Citi reported a Tier 1 capital ratio of 13.6 percent. According to the Federal Reserve, financial sector debt stood at $14.1 trillion in the first quarter of 2011, down 17 percent from $17.123 trillion in 2008.
In the United States, the epicenter of global financialization, finance today occupies a significantly smaller footprint in the culture, in the economy, and in the markets. As a percentage of the total value of the S&P 500, the financials are about half what they were at their peak. The Keefe, Bruyette & Woods bank index (BKX) trades at its August 1996 price.
The story is similar in Iceland, Ireland, and the United Kingdom, where banking sectors used international capital to swell to dangerously obese proportions. And there's much more to come. It's unclear what the end game will be in Europe, where public fiscal crises have translated into private banking crises in the afflicted countries, as well as in Germany and France. But all signs point to a European banking system that is (proportionally) smaller, less-leveraged and better capitalized, and less inclined to embark upon foreign adventures. Next, the new round of global banking regulatory standards will push banks in the United States, Europe, and all over the world to run with lower levels of leverage. …