Time: 6:30 - 8:00 pm
This LSE public lecture was held at the Sheikh Zayed Theatre in the new academic building of the college. Sheikh Zayed was the late President of the UAE (1971-2004).
The speaker was Mohamed A El-Erian, co-CEO and co-CIO of PIMCO, the world's largest bond investor company. He is a widely respected financial analyst of Egyptian origin an
d has just published a book called 'When Markets Collide: Investment Strategies for the Age of Global Economic Change' in May 2008.
The theatre's capacity of 500 people was nearly filled by the time Mohamed El-Erian arrived. He started with a brief introduction of himself and went straight to the topic with a statement, ''We are witnessing a historic event, one which our grandchildren will talk about later''. I knew that the lecture will contain elements that are beyond my grasp, but fuelled by the basic understanding of what led to the present day financial collapse (thanks to Sandeep, an economist friend), I sat and listened.
He stated that the present crises is because the market & financial system have been hit right at the centre. It has become a crises of the system rather than within the system - the crises is truly global, truly indiscriminate and truly consequential. Big words for a big crises! He went on to say that the crises started with the cardiac arrest of the US financial system on September 12th this year, and that the unthinkable has become thinkable.
WHY this crises?
The financial development and transaction that the world has gone through, especially within the last few years, has led to a creation of new facts on the ground that has altered the institutions - their relationship with the financial system; the balance between the private and public relations - and this has also brought in unpredictable and volatile feedback into the institutions and to the system. By new facts, I understood them as being the different financial instruments and mechanisms that institutions like banks, investment firms, governments, etc. have developed over the years to reap more profits.
With regards to this present crises, he says that every policy response due to it will involve collateral damage (that means the governments will protect some institutions and let others be swept away and drown). Of course some will not drown but will be completely altered (merged), and along with them the entire system will alter to an extent that a reset will be impossible but rather resulting in the system reaching a new destination altogether. He gave the sandhill analogy to depict the current global financial system as a sand hill but having structural weaknesses, one of them being the disequilibrium that seemed stable.
This disequilibrium or imbalance has been magnified by the failure of risk management at every level in the global financial system, failure of the ratings agencies and failure of the regulatory bodies. And so the sandhill crumbled. Whoa!! thats a big failure. Things like structured finance are some of the instruments that contributed to this failure, resulting (for example) in people taking mortgages they cannot afford! And obviously, housing is linked to the stock market which in turn is linked to feedback loops (unpredictable and volatile). So for those people who were using the house as an ATM the sudden realisation that the party is over was a bitter shock.
When the Lehman Brothers went bust, with it, the trust (that most valuable component in banking) it has built for so long was destroyed. A big big OUCH!! So what happens next is the financial sector started to cut loans, sell assets and businesses...people's incomes suffer, there is credit loss, there is no spending...the system undergoes arrest!!
WHY care?
The crise is changing the rules for investors, policy makers and business strategic positions to navigate through this bumpy journey to reach the new destination. The investor can no longer depend on history for asset allocation. For policy makers it is a seriously difficult position to be in - on September 15th the global crises spilled, on October 10th there was a policy paradigm shift (eg. the US$ 700 billion rescue package in the US). But then there is no perfect policy response. As Gordon Brown said its now WIT (Whatever It Takes) policy response.
Imperfect data flow, blunt instruments, collateral damage, political checks and balances, clash of political and financial worlds and blame game all play a part in this crises.
Positioning and Retooling are essential to reach global rebalancing of the financial system. - a financial system with less institutions. He says retooling will not be easy,; it will not be automatic (as some institutions will not like to leave in a hurry what they has always been doing) and and it will involve risks. He also mentioned about the emerging markets which have experienced some financial problem between 1997 - 2002 and have begun to build self-insurance that has led them to have a high level of international return, low indebtednes and fiscal surplus. This part I didn't understand!! Will have to talk to Sandeep about this.
He felt that protectionism would be a major policy mistake at this juncture. He says that those with the will and wallet are in a position to clean up the massive liquidy in the system.
The speaker was Mohamed A El-Erian, co-CEO and co-CIO of PIMCO, the world's largest bond investor company. He is a widely respected financial analyst of Egyptian origin an
d has just published a book called 'When Markets Collide: Investment Strategies for the Age of Global Economic Change' in May 2008.The theatre's capacity of 500 people was nearly filled by the time Mohamed El-Erian arrived. He started with a brief introduction of himself and went straight to the topic with a statement, ''We are witnessing a historic event, one which our grandchildren will talk about later''. I knew that the lecture will contain elements that are beyond my grasp, but fuelled by the basic understanding of what led to the present day financial collapse (thanks to Sandeep, an economist friend), I sat and listened.
He stated that the present crises is because the market & financial system have been hit right at the centre. It has become a crises of the system rather than within the system - the crises is truly global, truly indiscriminate and truly consequential. Big words for a big crises! He went on to say that the crises started with the cardiac arrest of the US financial system on September 12th this year, and that the unthinkable has become thinkable.
WHY this crises?
The financial development and transaction that the world has gone through, especially within the last few years, has led to a creation of new facts on the ground that has altered the institutions - their relationship with the financial system; the balance between the private and public relations - and this has also brought in unpredictable and volatile feedback into the institutions and to the system. By new facts, I understood them as being the different financial instruments and mechanisms that institutions like banks, investment firms, governments, etc. have developed over the years to reap more profits.
With regards to this present crises, he says that every policy response due to it will involve collateral damage (that means the governments will protect some institutions and let others be swept away and drown). Of course some will not drown but will be completely altered (merged), and along with them the entire system will alter to an extent that a reset will be impossible but rather resulting in the system reaching a new destination altogether. He gave the sandhill analogy to depict the current global financial system as a sand hill but having structural weaknesses, one of them being the disequilibrium that seemed stable.
This disequilibrium or imbalance has been magnified by the failure of risk management at every level in the global financial system, failure of the ratings agencies and failure of the regulatory bodies. And so the sandhill crumbled. Whoa!! thats a big failure. Things like structured finance are some of the instruments that contributed to this failure, resulting (for example) in people taking mortgages they cannot afford! And obviously, housing is linked to the stock market which in turn is linked to feedback loops (unpredictable and volatile). So for those people who were using the house as an ATM the sudden realisation that the party is over was a bitter shock.
When the Lehman Brothers went bust, with it, the trust (that most valuable component in banking) it has built for so long was destroyed. A big big OUCH!! So what happens next is the financial sector started to cut loans, sell assets and businesses...people's incomes suffer, there is credit loss, there is no spending...the system undergoes arrest!!
WHY care?
The crise is changing the rules for investors, policy makers and business strategic positions to navigate through this bumpy journey to reach the new destination. The investor can no longer depend on history for asset allocation. For policy makers it is a seriously difficult position to be in - on September 15th the global crises spilled, on October 10th there was a policy paradigm shift (eg. the US$ 700 billion rescue package in the US). But then there is no perfect policy response. As Gordon Brown said its now WIT (Whatever It Takes) policy response.
Imperfect data flow, blunt instruments, collateral damage, political checks and balances, clash of political and financial worlds and blame game all play a part in this crises.
Positioning and Retooling are essential to reach global rebalancing of the financial system. - a financial system with less institutions. He says retooling will not be easy,; it will not be automatic (as some institutions will not like to leave in a hurry what they has always been doing) and and it will involve risks. He also mentioned about the emerging markets which have experienced some financial problem between 1997 - 2002 and have begun to build self-insurance that has led them to have a high level of international return, low indebtednes and fiscal surplus. This part I didn't understand!! Will have to talk to Sandeep about this.
He felt that protectionism would be a major policy mistake at this juncture. He says that those with the will and wallet are in a position to clean up the massive liquidy in the system.
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