Stronger regulations may not have stopped the 2008 financial meltdown but hopefully would help contain future crises to more manageable levels, Anthony Fell, corporate director and former chairman and chief executive of RBC capital markets told the Investment Industry Association of Canada 2010 conference today.
He laid much of the blame for the 2008 market shocks at the feet of credit rating agencies, saying the high ratings they “handed out like confetti” lured investors and created a false sense of security.
The situation, though, can’t improve unless the ratings agencies fundamentally change their business models.
“Having the issuer pay means they can call the shots,” he says. “Why should a buyer of bonds rely on a rating paid for by the seller? Current proposals are just tinkering at the edges. You have to change the model.”
He added institutional investors have outsourced this rating work at their peril. “No ratings would be better than misleading ones,” Fell says.
One way to take the bias out of the process would be to create one, or two independent rating models that are funded by taxes. It won’t happen, though, he asserts because there’s too much inertia within the system.
A move to a national regulator could kick start some of the needed change, but Fell notes the 15-to20 years so far spent talking about the creation of such a regulator is “typical of the small time, parochial thinking in Canada that is holding this country back.”
Climbing out of debt
Fell also expressed concerns about how countries affected by the crisis will work their way out of debt. Hopefully, he says, consumers will enter a new age of thrift and asserts policy makers should be encouraging consumers to save.
But the apparent intention of governments to spread the major pain from the debt super-cycle out over the next decade means people will be living with the consequences of the 2008 shock for a long time. In that light, the coming years will be marked by high unemployment, sub-par economic growth and sub-par equity returns.
“A 20-year party financed with accumulated debt is over. It was quite a generational experience but now we’ll pay for it on the installment plan over the next decade,” Fell says.
While the central banks have been worried about inflation for some time, Fell notes the major, and unpopular, inflation-fighting policy decisions don’t get made until there’s a crisis. “We are in totally uncharted waters,” he says. “No one on the face of the planet knows how it will play out.”
The price of gold, which serves as the canary in the coal mine for the state of an economy, since it moves inversely to the level of confidence, suggests the worst isn’t over. And, he says, gold bullion is the benchmark against which all fiat paper money should be judged, since it’s the only thing not encumbered by high levels of national debt.
In recent times, central banks were net sellers of gold but Fell points out that’s changing. China, India and many Middle Eastern countries are now adding to their gold reserves.
On the bright side, says Fell, 25 years from now, this crisis will be ancient history. Our current financial system has been around for 1,000 years. And it will adapt. “It will just take longer this time,” he says.
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