A Today How did we get here? Who should take some responsibility? - PowerPoint PPT Presentation

Observations & lessons from the 2008 meltdown Who, why, what was responsible? What will happen next? Michael Chamberlain www.aventine.co.nz February 2009 A

Today  How did we get here?  Who should take some responsibility?  Where do we go now?  Observations A

The innocence of a child “What we learn from history is that people don’t learn from history.” Warren Buffett A

How did we get here?  Money supply expanded – big time  It manifested in a housing bubble  The system encouraged the extension of credit to the poor  Bankers and investment bankers were particularly sharp in off-loading the bad credit  The bubble burst At the end  Demand collapsed of the day greed won  We live in a global world A

US money supply A

Who will put their hand up highest?  Central banks  Politicians  Regulators Let the innocent cast  The professionals the first stone − Rating agencies − Investment managers − Advisors − Accountants  The labourers − Bankers − Merchant bankers − Developers, real estate agents, mortgage brokers  Investors A

Where to?  The four problems: − Dysfunctional banking system − Decimated demand − A mountain of bad debt − Shattered confidence  One solution − Make the banks value their liabilities at true value − Have the taxpayers recapitalise the banks − Ultimately privatise the banks − Increase the demand short-term through fiscal policy − Address the imbalances in the world A

The simple model Economic activity - Cost of inputs (raw materials, services etc) - Rent - Interest costs - Wages - Tax = Residual profits A

Thoughts  Unlikely things happen − We need to understand and price risk − You can rearrange volatility but not remove it  Assets vs liabilities − Cost vs funding  Principles not rules − Sunshine should be the foundation of the regulatory system  Gaol is a good sanction A

The innocence of a child  Why do people say it is fair because it is common market practice? − When did someone decide that an ordinary CEO was worth $1m+ as a base salary? − Why does a New York investment banker earn $25m in bonuses? − Why do managers get paid more than the value they add? − Why are directors not accountable to the shareholders?  Why can’t I understand an investment statement? − Investment statements of no help, except to relieve the promoter of any liability or risk A

What will be the OCR on 24 March 2009? A. 3.5% (no change) B. Above 3.5% C. 3.0% D. 2.5% E. Something else Is it important now? F. A

Discussion “Giving money and power to government is like giving whiskey and car keys to teenage boys.” PJ O’Rourke A