McKinsey report on debt and deleveraging
Couple days ago McKinsey came out with this interesting report on debt and deleveraging. I have couple of problems with it. Please consider the executive summary:
The deleveraging process that began in 2008 is proving to be long and painful, just as historical experience suggested it would be. Two years ago, the McKinsey Global Institute published a report that examined the global credit bubble and provided in-depth analysis of the 32 episodes of debt reduction following financial crises since the 1930s.1 The eurozone’s debt crisis is just the latest reminder of how damaging the consequences are when countries have too much debt and too little growth.
That is an interesting statement when you compare it to the year old WEF report also by McKinsey. I mean this one.
New York, USA, 18 January 2011 – Credit levels will need to double over the next 10 years, growing by US$ 103 trillion, to support consensus-projected economic growth. This doubling of credit could be achieved without increasing the risk of major crisis, finds More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit, a report released by the World Economic Forum in collaboration with McKinsey & Company. The study develops a detailed global credit model using historical credit volumes and forecasting potential credit demand to 2020 across 79 countries, representing 99% of world credit volume. The study applies a sustainability methodology to the projected credit demand, using newly developed metrics to answer the following two questions: Will credit growth be sufficient to meet demand? Is there a risk of future credit crises and, if so, where?
Holding both of these positions at the same time must induce some cognitive dissonance. However, I will take this report as an admission from McKinsey that the WEF report was BS just as I have pointed out previously and now I can mostly agree with their view.
MIT Professor Holmström’s economic idiocy
MIT economics professor Bengt Holmström had some disturbing notes in today’s Kauppalehti. He was holding a lecture in Helsinki on financial markets and had the following to say according to Kauppalehti (freely, but honestly translated):
When you are seeking transparency in financial markets, you are doing the exact wrong thing. You cannot add liquidity with information. When we return ignorance to the markets, the liquidity will come back.
I could not disagree with him more. This is precisely the kind of utter stupidity that got us into this mess. Consider the example of rating agencies and sub-prime mortgages. Who the hell benefited from the market being completely ignorant of their true value? I think it would be probably time for the science and engineering schools of MIT to kick the economics department away as it is destroying the value of MIT diploma. Interestingly the WEF report I mentioned above also had this to say:
The report concludes with eight recommendations that financial institutions, regulators and policy-makers can follow today to ensure sustainable credit levels for the future:
1. Integrate the concepts of sustainable credit into the regulatory agenda
2. Create standardized government accounting practices to increase transparency and accurately assess sovereign finances
3. Encourage responsible borrowing through financial education
4. Encourage financing of local “coldspots” through targeted mechanisms
5. Task a single agency with monitoring global credit levels and system-wide credit sustainability
6. Align banks’ risk appetite with sustainable credit criteria
7. Drive innovation by financial institutions, developing new mechanisms that can safely meet future global credit needs
8. Establish goals for efficient and deep capital markets by 2020 in developing economies
What has happened over the last 5 years could absolutely positively have been avoided. Unfortunately, though, people like professor Holmström keep pounding that we must do everything that was done wrong and we must do it again and again. No. This is even more obvious than the fact that we need deleveraging not massively more debt. The only purpose of hiding information is to deliberately defraud others. That is the precise opposite of what we should do.
I know that there is a theory behind Holmström’s statement and it has its logic, but it is precisely this kind of dogmatic belief in concepts that are nowhere near as robust as the preachers claim they are that cause financial crises and we will not be able to understand their dynamics if the world keeps idolizing this type of economic thinking.
Addendum: This sort of explains why Ivy League students are arranging walk-outs from economics classes (in this case Mankiw’s).
Finland’s unemployment edges back up as expected
Statistics Finland today reported the latest unemployment figures and they edged up quite a bit, 1.2 percentage points in real terms and 0.2 percentage points in seasonally adjusted terms, much like I expected to happen when the previous report came out. The unemployment rate (seasonally adjusted) now stands at 7.5 per cent while the employment rate is at 68.9. In the last year unemployment has dropped by 12,000, employment has increased by 14,000 and people on payroll have increased only by 1,000. Not a particularly great track record and I don’t see anything that would make this situation materially better while PIIGS undergo a depression, EU is in a recession, US muddling through, same with Japan and China is clearly slowing down as evidenced by the collapsing Baltic Dry Index (at least that is my interpretation). Latest unemployment and employment rates below:
In the next chart, have highlighted the differences between the official unemployed count and the actual number of unemployed job seekers as per the Ministry of Employment and the Economy. The difference should converge over the next few months.