This too shall pass,” King Solomon’s advisers told him to engrave on a ring, and refer to it whenever he felt depressed. Or so the legend goes.
Not a bad idea for bankers beset by still more dodgy paper to write off, for shareholders at loss-making Lehman Bros. and ailing Morgan Stanley (first-quarter earnings down 42 percent year-on-year), and for homeowners as they watch the equity in their homes evaporate, or disappear. Some of our current crises will indeed pass.
But it would be a mistake to believe that once the current crises are over, the world will be as it once was. It won’t. For one thing, the entire system of regulation to which investment banks are subjected will be different.
The Bear Stearns debacle put paid to the notion that if a big investment bank fails, the next day will be just another day at the office for those who trade withit. So the Fed and the Treasury now in effect are throwing taxpayer money into the pot to assure against the collapse of any big investment bank.
Take the government’s guarantee against failure, and you are the government’s man; Too interconnected to fail, and the government will regulate how you do business.
That won’t pass. One highly knowledgeable observer tells me that the days of 30 percent and 40 percent returns on equity in the investment banking business are over.
No longer will these institutions be allowed to leverage themselves as highly as they did in the past —too risky for the taste of the Fed regulators. Investors will have to satisfy themselves with a 20 percent return on their equity, which, as they say in New York, ain’t chopped liver.
Nor will the dependence of America’s banks on foreign investors pass. We are witnessing a massive transfer of wealth from American consumers to oil producers.
The sovereign wealth funds set up by producers have more cash than they can reasonably invest in skyscrapers in their own cities.
Their investments in America’s financial institutions have proved a costly adventure so far, but these are long-term investors, and so will remain key players in American financial markets.
The world of banking is not the only one that will never again be the same. The troubles of entire American industries will not pass, and they will be unrecognizable only a few years hence. The most obvious are the auto and airline industries.
Oil prices might come down a bit, but General Motors’ four shuttered sport utility vehicle plants will not reopen. Chrysler says it plans to “break some of the old paradigms,” and Ford speaks of a “transformation.” Read, downsizing.
As for the airlines, they cannot even hope that their present difficulties will eventually pass, leaving them unchanged. Their business model is broken.
Nothing they are doing or can do will stop the shift from flying to teleconferencing, from hopping on a once-cheap flight on grandma’s birthday to a congratulatory telephone call or family video conference. Yes, there will still be airlines a decade from now, but they won’t look anything like the ones limping through America’s skies in the days of $40 or even $80 oil.
Businesses are not the only institutions that will be changed forever by the current flow of billions from the treasuries of Western countries to oil producers and to the emerging Chinese and Indian nations.
Governments also will have to adjust. Taxing already hard-pressed consumers will become more difficult. So will taxing footloose corporations. Even politicians of the left have learned that lesson witness the fact that tax-and-spend Barack Obama says he is considering lowering corporate tax rates.
There will be more unpleasantnesses that will not pass. It will take the wisdom of a Solomon to predict just how to cope with them.
The emergence of richer Chinese and Indians as competitors for the world’s resources will mean a gradual decline in American and Western living standards as more food, oil, iron, coal and other resources head for Asia and the Middle East. Unless ….
Unless the Western industrialized countries can raise their games. Workers will have to produce more every hour, which means that their governments will have to provide some substitute for the current, failed state-run education systems and turn out better-educated workers.
Western countries will have to improve their transportation facilities so that goods can move more cheaply. They will have to change their tax systems to encourage investment and discourage consumption. And America will have to figure out how to maximize use of its principal asset — its entrepreneurial spirit.
Unfortunately, the number of Solomons serving in our Congress is quite limited. So the outlook is less than bright.