Being in Washington DC in the midst of the financial crisis provided me with a unique opportunity to experience it as it occurred. This report contains my analysis and comments on the financial crisis as I saw it.
I arrived in Washington during the weekend that Paulson announced his rescue packages, and the news was discussed continuously on TV and in the street. On the way back home the rescue package was launched.
The crisis will have a major effect on future infrastructure developments, and I spent some time discussing this with some of the local experts during my visit
Even the experts don’t know
While everybody has an opinion about the financial crisis, it is clear that nobody really has a full understanding of all the reasons for it – not even the endless army of financial experts which is rolled out on the Hill.
Similar to the dotcom bust, the financial analysts obviously didn’t anticipate the current dilemma and, even with their combined financial knowledge, they were unable to do anything to prevent it happening.
I have kept an email from a financial analyst who criticised me (because I was a business analyst and therefore not qualified to comment on financial affairs!) for commenting on financial greed during the dotcom crisis.
Selling to individuals who cannot pay
From the very start, the practice of selling mortgages to people who could not afford to repay their debt, and then securing investment packages world-wide to back that debt, was a recipe for disaster.
The same can be said for credit companies which handed out AAA credit ratings left, right and centre. This created an enormous imbalance between the commercial credit companies, stock exchanges and other so-called controlling institutions. In the process, they all earned an enormous amount of money by supporting a system which is in dire need of fundamental change.
In addition, financial research companies are dependent upon the advice they give to their financial advisors who, in turn, are dependent upon the commissions they earn from the clients they provide financial advice to.
Government failed to govern
Independent commentators and journalists have questioned some of the financial schemes which were developed, but the financial analysts continued to create more complex schemes while they paid themselves tens of millions of dollars worth of bonuses each year. While many people in the rest of the world looked on in disbelief, nothing was done about it.
Because it was not considered necessary, the financial analysts requested Congress not to regulate certain speculative schemes. So, in the name of free marketeering, year after year the US Government allowed them to experiment with more new and complex schemes.
Quick action needed to avoid panic
Resolution of the crisis requires quick, astute and decisive action. Unfortunately the people who were responsible for the crisis – and who, only a few short weeks ago, were still proclaiming that the economic system was stable – are also the same highly compromised people who are now attempting to rescue the US from the morass they have created. I must say this is not a very comfortable feeling.
It was Milton Friedman who once said that the best way to avoid corporate greed is to have a capitalist system. This may or may not be true, because it is this very system which created the current greed crisis and will now need to recover. And at what cost? If no further damage is done we may have a lucky escape and not slide into a severe recession.
Restructuring the USA
I am not a financial analyst so I am not able to assess what is needed to bail the country out, but it may involve recapitalisation of the American banking system. During the week that I was there more and more ‘experts’ were questioning the current process, which is something akin to a social welfare plan for arrogant and greedy investors.
I could not help being reminded of the Asian financial crisis less than a decade ago when the USA violently opposed any requests from the Asian governments to bail out some of its financial institutions. The USA clearly has a set of double standards (as was made obvious by its policy on torture), and is happy to compromise its own principles if it suits. Unfortunately this attitude does not gain international credibility.
I am also concerned that a bailout which does not address far-reaching changes to the overall economic and political system in the USA, is not going to be a successful long-term solution. Fundamental social and economic changes are required – not a quick bandaid fix.
A strong financial market needs less debt and more capital – something which has been sadly lacking in our modern-day financial climate.
I also feel that those responsible for contributing to this financial disaster should be taken to account.
Further damage to US international standing
I also sensed some shame and damaged self confidence in Washington, particularly at a business and government level – and the financial analysts were obvious by their absence. Not surprisingly, President Bush has not initiated any real leadership role in the current crisis, and this was commented on in the Washington Post: “it is better that he keeps out of the debate, otherwise he would link this to al Qaeda and WMD”.
There is no doubt in some minds that the US has lost more credibility on the international scene, particularly after the Iraq debacle, and there is even talk about the end of the Century of the USA.
However, the longer we wait for a solution, the closer we get to reactions of panic – a scenario reminiscent of the Great Depression which needs to be avoided.
I also had a very interesting experience, in light of both the financial crisis and the upcoming elections, when I met with one of the advisors to Barack Obama. He commented that whoever wins the election will not be happy with the enormous financial mess he has inherited.
There is no doubt that the leading financial capitals of the world, London and New York, are the hardest hit by the crisis. It does of course affect all international financial institutions and it clearly shows our dependence on each other.
This is a good thing because it means that nobody can use the crisis for their own political gain.
There could also be some benefits in Asia, especially, as the Financial Times reported, because it may speed up overdue banking reforms in China.
In addition, over the last few decades financial centres such as Dubai, Singapore and Hong Kong have sprung to the fore. Because these financial centres are more strictly regulated, they may attract and benefit from many of the more well-managed and less speculative international financial institutions which still form a major part of the industry.
So there is still hope for infrastructure projects to get off the ground – especially those in emerging markets and which require the investment needed to deploy their new projects. Yes we will have to tighten our belts until the crisis is over, but all is not lost.
Recently I wrote a report on the need to divert speculative investment to investments aimed at actual deployment of infrastructure Global – Investing in the Communications Revolution. An early observation in that report is that the financial market in Australia is more similar to the Asian market than to the American and European markets.
Less ideology on infrastructure issues
Perhaps the debate on the government involvement in providing basic infrastructure will be less ideological from now on. In particular, it is to be hoped that this will also apply to the rhetoric vented on these issues by the American management of Telstra in Australia, under the leadership of Sol Trujillo.
When in New York recently, the Australian Prime Minister Kevin Rudd stated: “Governments, not speculators, should be responsible how markets worked”. While Telstra cannot be referred to as a speculator, I would say that the arrogance displayed by Sol Trujillo and his team in relation to Australian telecoms laws would surpass the level of arrogance that has been displayed by his counterparts in the American financial market. Telstra places greed above the national interest, as is indicated by the very generous pay packages handed out to their executives. Telstra shareholders’ objections were also treated with the same arrogance from the greedy team.
I imagine that Telstra’s credibility on issues like this has been severely dented by the financial crisis, and I expect that those looking at national economic and social benefits will see the crisis as possibly being a good thing to further their cause.
While this situation is rather topical in Australia, the same issue has also hampered progress in some of the European countries. Recently the city of Amsterdam was sued twice by American companies when the city announced that it would actively support a city-wide FttH network.
While Sol Trujillo was CEO of US West, he also sued municipalities left, right and centre when they launched their own municipality networks.
Infrastructure separation discussion
During my telco discussions in Washington I wanted to test my analyses that the US will eventually face some structural changes to its telco/cable infrastructure. My argument for the last three or four years has been that FttH will be the ultimate infrastructure and not the HFC network. Cable companies will also need to eventually install FttH. So sooner or later the cable companies will have to face that situation, and when they do it would make sense to start looking at using the FttH infrastructure that is already in place, which I believe will result in some form of separation in order to safeguard competition.
In a recent analysis of the municipality broadband market (Global – Broadband – Infrastructure Trends & Developments) I mentioned the success of this development. In my discussions in Washington it was mentioned that this development could eventually have a major impact on FttH infrastructure developments in the USA. It certainly is something that I would take on board in my further analyses of infrastructure developments, not only in the USA but also in other countries with strong municipality developments such as Canada, Sweden and the Netherlands.
With more focus on proper governing, BuddeComm predicts that issues of governance and regulations for the infrastructure needed to operate a successful society and economy will become more acceptable.