I am sorry for the length of this entry! If I had known from the beginning how long it would be I would never have started writing it....... I promise I will compensate you in the future, with shorter ones!
You cannot agree with everyone, and in this blog I will discuss how aligned my opinions seem to have been of lately with Lloyd Blankfein, the boss of Goldman Sachs, and how orthogonal my views seem to have been with those at the Swedish central bank who are setting Swedish policy rates!
Basically, what it seems to tell me, if I am a realist, is that I should stick to the things I am an ‘expert’ on (the architecture of the financial system) and keep out of things where I am not (monetary policy). Or alternatively, if I live in the dream world for a while, that the guys at the central bank have it all wrong and that I soon will be vindicated.
GOOSH, HOW WRONG I GOT IT!
Today the Riksbank lowered the interest rate 1%! From 2%!! A 50% cut!!! I did not expect that! Just like I didn’t expect the size of many of the other rate cuts seen over the last year. If you have read my blog entries called Höj räntan I to IX you know that in more cases than not I have been wrong-guessing the Riksbank.
OK, I still think that we have an inflation threat around the corner and I still think that the authorities try to inflate us out of this crisis (it is politics, basically). I therefore still think it is a mistake to lower the rate in this way and I therefore haven’t capitulated completely. It is also likely, if you ask me, that risky interest rates will remain elevated for a while. If you ask me, soon I prefer to put my money in a 0% interest rate account that noone can touch to a 0.5% rate account where the money is further lended to someone else. Face it, you spent your money and if you want my money, then you have to pay for it! It takes two to tango and if one part keeps stepping on the feet of the other part there is a risk that the dance eventually ends (on bad terms)!
If that scenario turns out to be right, then my only mistake was to believe that the Riksbank would act wisely and with independence and strength. By not buying foreign exchange I have then missed out on a nice trade.
If I was actually wrong, and inflation will turn negative, still, am I the only net-saver in Sweden? Or at least the only net-saver without all my wealth tied up in real estate? Probably, yes! As you might have read lately, less than a percentage of Swedish households are wealthy (above 5 Mkr or so) and most of them actually hold the wealth in their houses. OK, they have lost 20% of their wealth with the currency depreciation, but that is typically of no interest if you plan to stay in Sweden. And most of this people are 60+ and have no plans to leave Sweden.
So, the lesson: never belong to the minority in a democracy! It will never pay off! That’s the sad truth.
GOOSH, HOW RIGHT I GOT IT!
Lloyd Blankfein wrote quite a nice article in FT on Monday ’Do not destroy the essential catalyst of risk’. Read it! OK, there are many nice articles in that particular newspaper and the reason for me to bring up this particular piece is that it shows how similar his views are to my views! Or perhaps I should be humble enough to say ’ how my views seem to correspond quite well with his….’.
One should perhaps start out by stressing that (i) Goldman Sachs is the most prestigious of Wall Street firms, (ii) Goldman is one of the few large banks on Wall Street that hasn’t lost enough money to end up in serious trouble and, (iii) that being the boss of Goldman is pretty close to being at the pinnacle of the financial world.
In other words, if you agree with the CEO of Goldman, then you can’t be totally wrong, can you? And if you agreed, but a year or so in advance, then you should be even more certain that you are learning the name of the game, shouldn’t you? I think so and this helps me gain a bit more self confidence, which is so important for an investor.
OK, what am I talking about? First, Blankfein starts out by listing seven lessons from the crisis. Almost all of them can be found in my blog entries from 2007 and 2008! And not as lessons, but as predictions! Also, for those who have followed my more advanced courses at Lund University, you should recognize many ’käpphästar’ that I have been nagging about in my courses since at least 2005.
1) That too much reliance on historical time series is dangerous. I have stressed this in many of my articles, for instance this one that I have kept referring too on this blog lately The Age of Turbulence - Credit Derivatives Style.
2) That the over-reliance on rating agencies can be dangerous. Well, see my blog entries on Has the turn come to the CPDOs? and on A darker than black Tuesday? where I talk about the danger of equating high ratings with zero risk. It was also one of the main points in my, by now, over-referred to blog entry on Who listens to academics?
3) Well that one was a give away: I think everyone agrees on size mattering. No comments are needed here!
4) That the liquidity in the credit default swap market might dry up from time to time and create huge problems for those wanting to hedge themselves. Well, again, that was exactly one of the points in my notorious blog entry on Who listens to academics?
5) That risk models failed to capture the risk in off-balance sheet activities. Well, I admit that I didn’t know how large the off-balance sheet parts of banks’ activities were and I have therefore not really written on this. I know now however, and very well, how serious the problems in this segment of the financial system were.
6) Complexity got the better of us. Exactly, that was again (for the third time…) one of the points in my (good old) blog entry on Who listens to academics?
7) That if more institutions should have valued their assets more properly – fair value accounting – already at the outset of the crisis, then they would have suffered smaller losses. Now, I mentioned in I am soo disappointed! and in I am soo disappointed – Part II! that I think the best thing is for the problems to be let to work their way through the markets instead of just waiting with the write downs until it creates even more trouble.
If you continue reading Blankfein’s article you keep stumbling over my old ’käpphästar’; such as (i) how bonuses should be paid in equity, be deferred, and possible even clawed back if the gains are turned to losses Ansvar måste utkrävas (i Lundaekonomen 2008:4) and (ii) how supervision has to have a global focus since banks are so intertwined Lundaforskare: Konkurserna kommer snart att dugga tätt and Don’t blaim it all on the banks! and (iii) how regulation is needed Don’t blaim it all on the banks! but should not be overdone Who listens to academics?
So, the lesson: keep reading, listening and observing! Eventually, it will pay off!
