Thursday, May 23, 2013

Dutch Economist Arnoud Boot on Economic Landscape

Serge Melki/Wikimedia Commons
Earlier this week I attended a talk in Amsterdam by leading Dutch economist Arnoud Boot, professor at the University of Amsterdam and also influential in policy making as member of the advisory council of the Dutch Central Bank and of the (Dutch) Social Economic Council, an advisory body to the Dutch government and parliament. This talk was part of the University of Amsterdam's Food for Thought series, and I will just highlight a few tidbits, which indeed could offer some food for thought on the current economic landscape viewed from a Dutch perspective.

Professor Boot sees two fundamental developments as causes of the ongoing financial crisis and global economic uncertainty: new technology, which has enabled financial institutions to package and trade securities at a pace and in a manner not seen previously, and no longer being able to be fully monitored by regulators. Secondly, the role of China as a production base for the U.S., while keeping the current imbalances in place by investing the proceeds of its exports to the U.S. (and the rest of the world) in U.S. treasuries, rather than investing it in its own country and becoming an independent and wealthy economy. Professor Boot reminded us that over 200 years ago China was seven times richer than the UK, which is clearly not yet the case at the moment. See also about the decline of Imperial China between 1800-1912. He expects the U.S. to remain the leading economy for the next 15 years.

I was surprised that........

Professor Boot didn't refer to two causes I do believe have played a major role as well in the financial crisis: "incompetence", with a small "i", of many regulators and managers in banks and financial institutions - who either didn't know or should have known better when things got out of control during the last decade; and "corruption", not just the obvious corruption of Enron, Worldcom, Tyco, Bernie Madoff and others in the U.S and similar although smaller fraud cases such as  Bouwfonds, Vestia, SNS Reaal and Ahold in the Netherlands  (which all have been or are being prosecuted), but also the grey area of greed, conflict of interest, and corruption which has seeped through the mortgage and real estate industry, accounting firms, rating agencies and investmentbanks foremost in the U.S. but pretty much throughout Europe.

Boot also spoke about the Euro-crisis, as that is obviously of ongoing concern in Europe. Even though the Anglo-saxon world doesn't believe in the Euro and even though it is not a viable model based purely on economic arguments, Boot believes the Euro will remain in place, as this has been a political decision from its inception and still has the political support of Germany and the other leading nations- but maybe not the democratic legitimacy -. He also believed that establishing a European bank union could offer a solution, because once that's in place it would offer room to let go of underperforming Euro-zone members in a more orderly manner without the chaos and risks it would currently entail. He ended his talk by saying that the current financial instability could take one to two decades to resolve itself before there will be a sustainable financial system, whereby the public and private nature of banks will become clearer.

All in all, truly some food for thought: technology, which has no reason to diminish its role in finance; China, which seems happy to remain U.S.'s production base; a Euro crisis, which will linger on for a while and a financial system, which could take decades before it's sustainable. This may be a realistic forecast, but doesn't bode well for the coming years.

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