02 March 2009
Reciprocity in Globalization
A major reason for the banking crisis is that the U.S. financial system has become utterly dependent on foreign sources of capital as the source of funds to relend to its customers. Globalization has made American banks and their credit professionals hostage to sovereign wealth funds that are less comfortable than domestic depositors and money managers with suspending disbelief in the continuing prosperity of the American consumer.
It was foolish for the U.S. banking system to depend on derivative credit instruments for what amounted to a dangerously predominant portion of its source of funds. Doubts began to grow among the foreign investors in those mortgage-backed securities and other collateralized debt obligations in 2007, raising the cost of funds, and reached a critical point in September 2008, forcing the collapse of Lehman Brothers, AIG, et al.
Reform of the country's financial system must include a better understaning of the psychology of global investors who will look to U.S. bankers fpr convincing returns on the use of their surplus funds. Those bankers have the best skills to produce those investment vehicles but must reduce their expectations of fast-paced returns. Maybe just as important will be reform of the attitudes of overseas investors. Globalization must be made to be more reciprocal, balancing our commitment to reliable foreign sources of labor with foreign investor commitment to keep providing the capital needed to fund economic growth.
A major reason for the banking crisis is that the U.S. financial system has become utterly dependent on foreign sources of capital as the source of funds to relend to its customers. Globalization has made American banks and their credit professionals hostage to sovereign wealth funds that are less comfortable than domestic depositors and money managers with suspending disbelief in the continuing prosperity of the American consumer.
It was foolish for the U.S. banking system to depend on derivative credit instruments for what amounted to a dangerously predominant portion of its source of funds. Doubts began to grow among the foreign investors in those mortgage-backed securities and other collateralized debt obligations in 2007, raising the cost of funds, and reached a critical point in September 2008, forcing the collapse of Lehman Brothers, AIG, et al.
Reform of the country's financial system must include a better understaning of the psychology of global investors who will look to U.S. bankers fpr convincing returns on the use of their surplus funds. Those bankers have the best skills to produce those investment vehicles but must reduce their expectations of fast-paced returns. Maybe just as important will be reform of the attitudes of overseas investors. Globalization must be made to be more reciprocal, balancing our commitment to reliable foreign sources of labor with foreign investor commitment to keep providing the capital needed to fund economic growth.
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