Monday, December 15, 2008

Changing times



A sign of the times. Dubai, the UAE in general, isn't isolated from the economic problems of the world.

I'm sure we won't be hit as badly as many other countries. In fact to me the world seems to be dividing into two...countries such as the US, UK, the Euro zone into deep recession while others such as China, India, UAE, even perhaps Australia, will see a slowdown but their economies will still grow.

I'm sure the recession hit areas will have a long deep recession and the massive government borrowing to fund their injections of capital will take a long long time to pay off. They'll be affected for many years to come, in fact may never be the same again.

It makes you wonder why in the decades - hundreds of years in many cases - they were the world's economic powerhouses they didn't create sovereign wealth funds.

Only a few months ago they were ranting about SWFs, how they were A Bad Thing, how they had to be controlled, dangerous foreigners buying up their assets. Now they're pleading for handouts from them, and I bet they're wishing they had their own to call on.

What an astonishing lack of good business and good government over the decades. All that wealth generated, from the Industrial Revolution to the European empires plundering wealth from so many colonies and on into the post colonial era when they were still the big economic powers, and they didn't save a cent. Didn't think to establish a Sovereign Wealth Fund.

I find it quite amazing that governments such as the US and UK actually don't have any money. They don't have the trillions of dollars they're throwing into their economies, they're having to borrow it. To be repaid by future taxpayers of course.

We're very much part of the global economy so naturally we're being affected here. Money's tight, jobs are disappearing, projects are being delayed and I'm sure some will be cancelled. The talk is all about real estate jobs and projects but it's much wider than that. Jobs will disappear in all kinds of businesses because a recession affects the entire economy across the board. In fact I'm hearing about job losses in all kinds of companies already.

There's always a ripple effect from any action and economic problems are no different. People in Europe are losing their jobs, they buy less goods so manufacturing is hit in China. They travel less so airlines, hotels and tour operators in the UAE are hit. Hotels have less guests which means they buy less food, have less laundry to be done, and that hits small local businesses.

But if you think it's bad here just check out the situation 'back home' and you'll realise we're actually not too badly off.

In fact as I said in a recent post, I think it's a blessing in disguise for Dubai. A slowdown, a chance to stop and think, a chance to plan properly, a chance for infrastructure and laws to catch up with what's already happened.

It's also an opportunity to get back to sensible buiness practices. And that applies not only to Dubai but to the world in general.

People here are complaining that banks have introduced new lending criteria, such as a minimum salary of Dh20,000 a month and giving mortgages of only 50% or 60% of the purchase price. In fact that's good, sensible business. We wouldn't be in the mess we're now in had basic good business rules been followed over the last fifteen or twenty years.

Remember the dot.com bubble burst? It was inevitable. We were putting a share portfiolio together then and we wouldn't touch dot.com companies with a bargepole. The supersmart new kids on the block were ridiculing the 'old world' saying this was a whole new world we didn't understand, the old rules simply didn't apply.

They did. They always do and they always will.

Stupid people believed the hype, poured billions into companies with no assets, no turnover, no profit. The companies spent a lot of the money running multi-million dollar advertising campaigns which said nothing whatsoever. I kept looking at them and asking what they were selling. The answer was of course nohing, because they had nothing to sell. The rest of the investors' money they used to buy other dot.com companies which also had no assets, no turnover, no profit.

One day it all just disappeared. The great dot.com bubble burst because the basic rules of business were ignored.


More than a few of us were predicting the implosion of the world financial system five or six years ago. It was unsustainable and was obviously so. We were in a spiral of ever increasing debt, personal and government, that one day would have to be paid. In Australia we had motor dealers offering new cars at no deposit, no interest and nothing to pay for two years. White goods retailers had similar offers.

Money was being thrown at people by the banks, with very little checking on the creditworthiness of the borrowers. Salesmen on commission for granting loans or giving out credit cards were earning fortunes.

The government of John Howard was buying votes by giving regular handouts from the budget surplus to voters, instead of investing in much-needed infrastructure - or even setting up a Sovereign Wealth Fund.

The trouble was that no-one was thinking about the day when the bills would have to be paid.

So this crisis is also hopefully the end of unfettered capitalism of the style of the American right, with no government regulation or oversight and total reliance on self-regulation.

It's as extreme as communism and can only end in the same way.

Neither extreme takes into account human nature, so neither can work in the long term.

It started as far as I'm concerned with Thatchernomics and Reaganomics. Give the markets complete freedom, remove oversight, sell off essential services such as water and power generation to private enterprise. Trust 'the markets', which means people, to do the right thing.

Astonishing naivete. People do not do the right thing. People don't think ahead. People do what is good for them in the short term.

Alan Greenspan, who is as responsible as anyone for the disaster we now have, admitted at a Senate hearing that he hadn't taken human nature into account when he formulated his disastrous policies.

He believed that people in the financial markets, in business, would do the right thing, the honest thing. They'd think about the long term viability of their companies, run things in a professional businesslike way.

What they actually did was think only of their own immediate future. That was entirely predictable because it's what people do. They gave no thought to the long-term health of their companies but simply created short term profits and share price increases - often by creating worthless 'assets' - so that they could pay themselves vast bonuses. Wall Street bonuses amounted to, literally, billions of dollars a year, and other financial centres such as London, and even Sydney, paid multi-million dollar bonuses.

The thinking is still with us unfortunately. Almost weekly we're getting stories of huge bonuses being paid or having been promised by banks, including those already bailed out with taxpayers' money.

We had the Big 3 car company bosses flying to Washington to plead for money in their private jets. That's another example of bad business - badly managed companies with overpaid greedy workers, overpaid greedy management, producing badly designed products which are poorly made. They had to hit the wall sooner or later.

But the dinosaurs will have to change because surely the world has changed. After two or three decades of reducing regulation, reducing oversight, governments surely cannot afford to continue with the experiment. It's costing trillions of dollars already and who knows how much more is to come. Those trillions are a debt which has to be paid by future generations.

I'm sure that not only do we have to have a completely new model for the world financial system, the power of the players will change too. A report a few weeks ago said that the G7, who set themselves up as the all-important financial arbiters, actually have only 20% of the world's currency reserves. BRIC countries, Brazil, Russia, India, China, have 40%. The Middle East can no longer be ignored either.

So there's another change coming, surely. The west is asking countries such as Saudi Arabia and the UAE to put more money from their SWFs into organisations such as the World Bank and the IMF. But they were set up by and run for the benefit of the western countries. Surely no-one expects developing countries to simply hand over money without being offered a say in how it's used, without being offered a seat at the table.

BRIC and ME countries will be expecting involvement in all the world organisations I'm sure. Not only the financial institutions but the UN Security Council will be on the agenda, and long overdue in my opinion.

So we're living in momentous times. There will have to be huge changes to the way our world works and to the relative influence of the players.

And it was caused by the excesses of the last twenty or thirty years. The USSR tried extreme left wing politics and that collapsed. The west has tried extreme right wing capitalism and that's collapsed.

In just about anything I can think of the middle road is the one that works. A mixture of freedom and regulation. We accept it as necessary in many aspects of our daily life and areas such as business or the financial markets also need it.

We have, because we need them, road rules, speed limits, consumer protection laws, criminal laws. We need them because of human nature. Remove regulation and oversight and you have anarchy.

Ignore human nature and you create a disaster. We did and we have.

14 comments:

Dubai Guy said...

I agree with each & every sentence you wrote. The way things were moving, the mess we find ourselves now was inevitable. And as you said, this slowdown should bring people & governments to their senses and help them change for the better.

alexander... said...

Reasoned analysis. Which, with all due respect, isn't as fun to watch as all-out blind panic.

But I get the definite feeling that much of Dubai is still doing the fingers in the ear and shout lalala! thing...

the real nick said...

By and large I agree with you, but not on the subject of 'sovereign wealth funds'.
Contrary to Saudi or the puny little UAE, Western (European) countries do have public healthcare, state schools and higher education, public transport, benefits, subsidized housing programmes, motorways, trains etc etc - all to be maintained and invested in from tax revenue.
It's fricking easy to have a 'wealth fund' if you have oil and are not accountable.

Seabee said...

Yes, agreed Nick, but those social facilities you mention - education, universal health care, public housing, social security - are new things relative to the hundreds of years over which wealth was accumulated by those countries. For most of the time the wealth was pouring in those things simply didn't exist, they're a product of the 20th century, even the second half of the 20t century.

The early public transport, trains, was privately developed and owned. In the UK for example the railway was only nationalised in 1948, which is the same year the National Health Service began.

Don't you think that just a percentage of the wealth over the centuries could have been put into a SWF?

Jones. Bridget Jones. said...

Is it okay to just LOL @ Alexander's words, or does Bridget have to contribute some serious-as-a-heart-attack comment..? ;)

Ta for the insight Seabee!

Jan said...

Only a few months ago they were ranting about SWFs, how they were A Bad Thing, how they had to be controlled, dangerous foreigners buying up their assets. Now they're pleading for handouts from them, and I bet they're wishing they had their own to call on

Really? Apart from Nicolas Sarkozy, I have not seen many western governments expressing regret at to the lack of local SWFs.

What an astonishing lack of good business and good government over the decades. All that wealth generated, from the Industrial Revolution to the European empires plundering wealth from so many colonies and on into the post colonial era when they were still the big economic powers, and they didn't save a cent. Didn't think to establish a Sovereign Wealth Fund.

It appears from your statement that you think it might have been a good thing for western governments over the years and decades to have taken a portion of tax payers' money and placed it into funds or similar arrangements and procured that those funds invested in certain specified sectors of the economy? Can you construe such arrangements in principle from the policies pursued by many western governments to nationalize many key industries in western countries in the mid twentieth century? Do you think such heavy state involvement was beneficial for those sectors and the economy as a whole? In essence, are you not suggesting that politicians rather than private businessmen would be better qualified to make investment decisions and would have greater success in doing so?

I would be interested to read your thoughts on this; perhaps you think the SWF model will differ in some way from older models of state involvement in commercial sector?

Bush Mechanic said...

Oh there are some examples of Western ventures into SWF. There was WA Inc. Aka, the WA Inc royal commission and to a period between 1983 and 1991 in Western Australia when a succession of state governments colluded in major business dealings with private businessmen including Alan Bond and Laurie Connell. The outcome was a disastrous loss of public money, estimated at a minimum of $600 million and the insolvency of several large corporations. Bond and Connell were major contributors to the party in government, the Australian Labor Party and its fund-raising structure, the Curtin Foundation. The premier for most of that time was Brian Burke. His successor Peter Dowding was also responsible for certain major transactions, including the rescue of Rothwells. In 1991, political scientist Patrick O'Brien identified the four Labor leaders most associated with WA Inc deals as premier Dowding, deputy premier David Parker, minister for industrial development Julian Grill and attorney-general Joe Berinson—known collectively as the gang of four.
Remember also WA pension money diverted into failing banks, money that was lost when the bank went under.

Seabee said...

Jan, i was talking about SWFs not nationalisation. The two things are not connected. A SWF is simply a fund of national wealth which is invested, either locally or internationally, to produce more wealth.

Neither SWFs nor nationalised industries have to be run by politicians and I didn't suggest that they should be. They should be run by qualified business people on purely business lines. Ownership is a separate issue - publicly listed companies are not run by the owners, the shareholders, but by appointed executives and a Board of Directors. A nationalised industry or a SWF should not be any different.

BM, I remember the WA fiasco well. The problem wasn't the setting up of a SWF but the fact that it was set up by, run by and for the personal benefit of a bunch of incompetent crooks.

Jan said...

Neither SWFs nor nationalised industries have to be run by politicians and I didn't suggest that they should be. They should be run by qualified business people on purely business lines. Ownership is a separate issue - publicly listed companies are not run by the owners, the shareholders, but by appointed executives and a Board of Directors. A nationalised industry or a SWF should not be any different.

Ahhh Seebee, you are such an idealist. Your use of the word “should” in the last two sentences of your comment above gives you away. But I‘ll come back to this in a moment.

Okay, so if it is your contention that ownership is irrelevant, please explain how SWFs are any different from the insurance funds, pension funds and other private funds (let’s define them as “private funds”), which have so dominated the private sectors of many western countries over the past few decades. Why do you think it was an astonishing lack of good business and good government over the decades for western governments not to have set up SWFs? Their economies, particularly those in the Anglo Saxon west, have been dominated by private funds with substantial benefits – I don’t see how the lack of a few SWFs has made any difference?
Your whole argument seems to me to be that SWFs are somehow different, maybe superior, to all the other types of funds existing in western countries? The only reason I could think that you would conclude this was if you were of the opinion that politicians and/or civil servants are better than business people at making investment decisions and directing the management of such investments (and this being so that you might be advocating a policy not dissimilar to one of nationalizing industries). This does not appear to be the case from your response to my comment, so I am confused and cannot see how SWFs differ in anyway from other private funds.

Perhaps there is some other characteristic of SWFs that makes them stand apart? Maybe you don’t think they are any different from private funds but rather you think the tax take in western countries should have been hitherto much higher and the resulting increased income diverted into SWFs? Or maybe you think other public spending should have been reduced (defense budgets will no doubt be a favorite?) and the resulting savings invested instead in SWFs? But if this were the case, wouldn’t it be simpler for governments to simply invest part of their tax revenue in private funds rather than set up SWFs which are otherwise indistinguishable from private funds? No, I am definitely overlooking something.

Now, back to your idealism: I think you are mistaken to believe that government might be completely passive with regard to the investment decisions relating to its assets and that it would never interfere (other than in its regulatory or legal oversight functions) with the business people appointed to run/operate/manage government investments. Not in the real world! You won’t be surprised from the forgoing and my previous comment that I highly doubt that any SWF outside of Norway (and I am sceptical even in that case) is immune to extensive political meddling. Furthermore, you’ll be less surprised to learn that I think such meddling will be extremely detrimental to the long-term profitability of SWFs and the wider economy. I am also of the opinion that taxing people/business to provide funds to be given to SWFs to invest is not good policy (I’ll make my own investment decisions thank you!). So in conclusion, it won’t surprise you to learn that I think that SWFs are a bad idea for most western countries both now and in the past (I have not even touched upon the undoubted anti-trust issues they might cause) and this is why I take issue with your assertion that it was a lack of good business and good government over the decades not for western governments to have established SWFs.

Seabee said...

Jan, the SWF reference in my post was just one small part in a long bit of thinking out loud rambling.

First you seemed to confuse SWFs with nationalisation, now you confuse them with private investment funds.

How are they different from private funds? Ownership of course. The whole point is that they are national investment funds, owned by the country, not by a company, and are used to create more long-term wealth for that country, not for an individual company's limited number of shareholders.

They don't need extra taxation to create. Singapore for example has invested the majority of the wealth it's generated over the past few decades into its own infrastructure. But it has also put a percentage into its SWF, which it largely invests overseas. The earnings on those investments bring more foreign exchange into Singapore and add to the budget the government has at its disposal to do the things it needs to do.

That's what SWFs are, funds which invest money earned by a country to generate more for the country in the future.

You think that's a bad idea, I think it's simple, basic good business.

...economies, particularly those in the Anglo Saxon west, have been dominated by private funds with substantial benefits – I don’t see how the lack of a few SWFs has made any difference?
How can you not see the difference? They are two totally different things because of ownership. The principle of investing funds to generate additional income is the same. Who benefits from the investment is the difference. Private funds are private funds used to benefit their shareholders. A SWF is owned by the country and used to benefit the entire country.

I am also of the opinion that taxing people/business to provide funds to be given to SWFs to invest is not good policy (I’ll make my own investment decisions thank you!)
You do make your own investment decisions for your own money, but you have no influence on how your government invests its income. Surely you're not suggesting that you have any influence over their decisions because they don't have a SWF? They raise income and decide how to spend or invest it, you're not involved in the decision whether they have a SWF or not.

You think that using a percentage of income to create a fund which generates foreign exchange and adds to the country's budget is a bad idea. I think it's a good idea.

Jan said...

dJan, the SWF reference in my post was just one small part in a long bit of thinking out loud rambling.

Sure – there was much else to disagree with in you post but I thought to alight upon SWFs would be most fun.

First you seemed to confuse SWFs with nationalisation, now you confuse them with private investment funds.

Not at all. My view is that politicians will be unable to avoid the temptation to involve themselves in the underlying investments of a SWF. As a result, the acquisition of a business by a SWF is effectively the same as nationalizing such business. Where a SWF only makes minority investments across a wide range of companies, I grant you that this won’t result in classic nationalization, but instead will bring state interference across entire markets equivalent to that of the institutional funds and this, in my opinion, would have largely adverse consequences.

If you are able to ensure that politicians are not able to meddle in SWFs (impossible in my opinion) then you have created something little different from any of the large private investment funds, just with public ownership. This appears to be what you are advocating but as I have already noted I doubt this is possible (politicians can’t resist meddling) and even if you can achieve this I don’t think it is beneficial to a developed economy or its inhabitants to have the state, in addition to its regulatory responsibilities, competing with the private sector in the economy (who regulates the regulator?).

How are they different from private funds? Ownership of course. The whole point is that they are national investment funds, owned by the country, not by a company, and are used to create more long-term wealth for that country, not for an individual company's limited number of shareholders.

Again you are being idealistic. I shudder to think of funds owned by a state. State involvement in the commercial sector is nearly always a disaster. There will be very little or no accountability by the state to it ‘shareholders’ (i.e. citizens); investment losses will be covered up or buried in some opaque structure, no one is holding the SWF fund mangers to proper account (a civil servant dishing out tax payers money will not have the same incentives to monitor investment return as an individual investing is own money). The man on the street won’t care whether the SWF is in profit or loss and even if he does he won’t be able to do anything about it. Opportunities for graft and corruption abound. Nah, it’s better for a state to divert any funds that might otherwise earmark for a SWF to lowering taxes or reducing national debt and letting people have the freedom to invest their own money as they please. Let people make their own investment decisions but ensure that the markets/products etc. in which they make those investments are fair and transparent. Governments regulate markets; they shouldn’t participate in them.

They don't need extra taxation to create.

Of course they do, unless you advocate a cut in government spending in some other area to free up funds to invest or increased government borrowing. Where else would they get the money (unless they invade another country)?

Singapore for example has invested the majority of the wealth it's generated over the past few decades into its own infrastructure. But it has also put a percentage into its SWF, which it largely invests overseas. The earnings on those investments bring more foreign exchange into Singapore and add to the budget the government has at its disposal to do the things it needs to do.

I don’t know much about Singapore, but I gather that it is an authoritarian, albeit well run, city state which has generated large surpluses (due to its relatively small size, advantageous geography, etc.). Instead of returning those surpluses to its population through lower taxes etc. it appears to have created SWFs and invested the funds on their behalf. No doubt there are special circumstances which relate to Singapore which might justify such a ‘nannying’ attitude by its government, but I’ll need to be educated on this.

That's what SWFs are, funds which invest money earned by a country to generate more for the country in the future.

You think that's a bad idea, I think it's simple, basic good business.

You are right – I think it is a very bad idea, the very antithesis of simple, basic good business! The state shouldn’t be in business, even passively. It generally is a very bad investor. Better to use any surpluses generated by a successful economy to have lower taxes while at the same time developing a liberal and flexible legal and regulatory regime to permit investors at home and from abroad to invest in that economy at low cost with confidence as to their property rights and with access to efficient, equitable and predictable justice.

Honestly Seebee, do you really think that over the last 30 years, had the US, European or Australian governments set up SWFs, that they would have been able to resist the temptation to raid such funds to pay off debts, support further public spending, boost employment? Do you seriously think such funds would still exist in those countries, untouched, inviolate quietly working away to further increase national wealth? And, pray do tell, when is the “future”? What is the test for when some politician can justifiably sell SWF assets to raise funds to use for some other public good? Perhaps after such a politician has followed some disastrous fiscal/economic policy that results in the state needing to be bailed out? You make it sound all very nice in principle with your idealism. The reality, as we have seen time and time again, is very different.

The best way to ensure that an economy grows successfully over time is to allow private citizens and companies the freedom to invest their own funds with only minimal but effective state oversight and regulation. Not, as you appear to advocate, to get the state to compete with such private investors – that will only end in disaster. This is a fundamental axiom and remains as true today as it did before the credit crunch ……. but I risk leading us into another debate entirely.

Seabee said...

Jan we're just going round in circles. You believe one thing, I believe another and neither of us will be convinced to change our view.

nzm said...

Seabee: I saw a post on Peter Cooper's blog that said that the real estate sale advertised in your image didn't sell a single property.

here

Seabee said...

NZM, that isn't a surprise.

Like everywhere, people are losing their jobs and there's no confidence for long term employment, so that deters people from buying. It also means banks are not keen to lend - whole sectors such as real estate are on the banks' blacklist for loans.

Then, sensibly, the banks are not lending money to anyone who walks in but are putting minimum salary conditions and credit checks in place.

Also, with currencies such as Sterling and Euro at such a good rate to the AED, people are taking advantage and sending as much as they can back home. (Sterling was recently at 7.5, now is 5.4 for example).

They also have rock-bottom prices for property 'back home' so if they're going to buy that's where they're more likely to do it.

Owners are still asking silly prices though. A couple of examples are featured in today's Biz247. There's an 8 bedroom villa in Emirates Hills for AED133.9 million (£24 million - think what you could buy for that in England!) and a 5 bedroom in The Lakes at AED10 million.

Rules are now coming into place to stop 'flipping' by speculators, who were on-selling a property at 100% mark-up, or more, before they'd even payed their first mortgage instalment. And investors are worth much less than they were a few months ago, so finding millions to spend is harder for them, even if they had the confidence to do it.

It'll all settle down in due course.