to the easy money of the quantitative easing (QE) years and will likely pay the hangover when this new credit bubble bursts.
In those years between 2005 and 2008 few spoke of the housing bubble, and fewer still of the infrastructure bubble that went hand in hand with those ever-growing demand estimates: an excess in infrastructures that I discussed in my articles in the press. No one asked where the money would come from, let alone how it would be returned.
The sensible managers, those who warned of this wasteful spending spree, were removed from their posts for being party poopers. I was fortunate to learn and grow professionally alongside some of these prudent managers, with experience of how to deal with cycles and crises. So, like them, that optimism paid for with debt made me shudder.
The fact is that in 2008 we returned to the same pre-Argentina euphoria and I began to get the jitters. I had been making plans for a big change that I had spent years mulling over since I began to work in the investor relations office. I spent eight years doing this in the two companies I mentioned. My duties consisted of coordinating the company's communications and reporting and attending to the share and bond investors on a daily basis. This experience opened my eyes to the reality of the financial sector and the different operators working in it, from the investment banks to the ratings agencies, debt and equity investors, the competing companies and the different sectors. Above all, it gave me the opportunity to better grasp something that most people do not perceive: the true nature of the markets. How they think, what they seek, what their concerns are.
One of the first lessons of my experience was to understand the nature of the economic information that we receive. Most of the information that reaches market participants is reactive: it only explains what has happened. What's more, such information is belated, filtered, often massaged and sometimes tainted by politics and social relations.
It's no coincidence it's called “the market”.
The big question I'm often asked is “Who or what really are ‘the financial markets’?” The best definition I have ever found was given to me by my good friend Marc Garrigasait, a fund manager at Koala Capital. It is this: “Your mother's savings.” More precisely, the financial markets are the savings of the entire world's fathers and mothers, although the savings with the most sway belong to the fathers and mothers from countries that have the most assets and can loan them to, or invest them in, other countries. The pension funds, which are charged with ensuring that a lifetime's savings are not lost, invest the money they hold via the “financial markets” in bonds, stocks, commodities and currencies as core assets. The managers of these huge pension funds must ensure they get a reasonable annual return so that when families retire they receive the highest amount possible. So if they fear that the money loaned to (bonds), or invested (shares or stocks) in, a country or specific company may be lost, they immediately withdraw it and invest in or loan to another country or business that conveys more confidence and greater seriousness. Another part of the market are countries that hold vast sums of money as a result of their surpluses, such as China, India, Brazil, Russia or Norway, which invest astronomic sums in bonds and shares from the leading Western countries.
My son Daniel, upon learning that his grandmother was about to publish her first book, coined the slogan “Make my grandma happy: buy her novel.” This simple expression allowed me to fathom the soul of the market. It's a selling process and there are two parts to this business: the supplier and the customer. The seller appeals to our emotional instinct to win clients. Make my grandmother happy. Buy government bonds for the good of the country. Buy shares in company X for their contribution to society.
Companies, governments, investment banks and analysts are all sellers in this market. They sell their product to the buyers, that is investors and ordinary people, who are themselves consumers of the “goods” that these entities sell. It's very important to understand this, because failure to understand the selling nature of some agents can lead us to misinterpret or overestimate the information we receive.
In a shopping centre with many different displays, intermediaries and end customers, the seller always strives to showcase the best qualities of their product. The seller is optimistic and tends to offer us a positive outlook. Similarly, and though today we don't perceive it as such, the market functions according to positive impulses. It's something that stems from human nature itself, which needs both to believe in the long term in order to survive and to feel optimistic and receive encouraging news, even in the face of adverse events.
Therefore, the market, rather than trying to deceive, appeals to human nature's yearning for growth and betterment. So sellers put on their best face for their product, as people do for family snapshots where they always look happy, or in advertising, which always displays an attractive image. They are like the father who thinks his child is the brightest and the one who will go furthest in the world.
Between the sellers and buyers, there are a number of agents or intermediaries who facilitate financial trading operations. First, there are the brokers, agents who are charged with finding a counterparty for their clients. These agents are mere intermediaries who just match buy and sell orders and take a commission on both transactions. Brokers may be small firms or big banks. Then there are the dealers, or negotiators, who have a more active role in the process. These agents trade with their clients, that is they buy and sell securities. What they've bought from or sold to one client they can then sell to or buy from another. Brokers offer their clients liquidity, and run the risk that prices move against them before they are able to pass on their products.
Many of these intermediaries are concentrated in investment banks – the main ones being Goldman Sachs, JPMorgan, Bank of America, Merrill Lynch and Citigroup, yet they also operate in traditional banks like Santander, Barclays and HSBC. These banks also offer fixed income and equity analysis, economic studies and corporate assistance services to companies who want access to the markets in order to be able to issue shares and debt.
Inside this machinery, the banks act like oil for the engine. They are essential to ensure the financial system's smooth running. We forget about them when everything is going well, because we take for granted the liquidity and the instant access to financial transactions we enjoy. When a client decides to sell or buy, they never doubt they will find a counterparty. It is taken for granted.
Banks actually do a very difficult job. They put together the savings and deposits of participants with short- to medium-term liquidity needs and return expectations with the demand for credit from participants with longer-term requirements.
We forget the basic importance of the banks as intermediaries because we assume that liquidity is guaranteed and that it will always exist. We only remember the banks for the problems they cause, which of course must be recognised and solved. And we forget that the banking system is the most regulated of sectors.
Yes, the European financial crisis is not a crisis of deregulation or private banks; 50 % of European financial institutions were semi state-owned or controlled by politicians in 2006. There have been thousands of pages of regulations published every year since the creation of the European Union and the European Banking Authority (EBA). Regulation and supervision in Europe is enormous. Since 1999 and based on documents produced by the EBA, EU and European Central Bank (ECB), that's 180 new rules a week.
And as I will come on to argue, the crisis was born of an economic model too dependent on commercial banks with total assets that exceeded 320 % of the eurozone's combined gross domestic product (GDP) within a deeply integrated system. Excessive, complex and bureaucratic regulation has prolonged the agony of the industry for many years, instead of facilitating market conditions for the capital increases and asset sales needed.
Despite the detailed and complex regulation of the eurozone, between 2008 and 2011 Europe spent €4.5 trillion (37 % of the GDP of the EU) in aid to financial institutions, many of them public and highly regulated.
More regulation will not solve the
