March 08, 2013

McKinsey has fallen for the same groupthink as the Basel Committee and the Financial Stability Board.

Sir, I refer to the McKinsey report “Financial Globalization; retreat or reset?" March 2013 and on which Gillian Tett bases her comments in “Davos Man’s belief in globalization is being shaken” March 8.

As I see it that report, which measures the volumes of funds sloshing around the globe, lacks the information needed to comprehend not only the causes of the current crisis, but also what is keeping us from being able to work ourselves out of the current crisis.

I refer of course to the global capital controls so inconspicuously imposed by regulators on bank’s credit flows, by means of allowing these to leverage so much more the expected risk and cost adjusted net margins when lending to what is perceived as “absolutely safe” than when lending to what is perceived as “risky”.

If only the McKinsey had explored how, because of these regulations, the perceived safe-havens in the world have and keep on becoming dangerously overpopulated, while the perhaps more productive but more “risky” bays are not being sufficiently explored, that could have opened many eyes, including of course McKinsey’s own.

Instead it recommends staying firm on course implementing the regulatory reforms initiatives that are currently on the way, even though Basel III, by adding liquidity requirements based on perceived risk, could only increase the border controls and protectionism that separates “The Infallible” from “The Risky”.

And when the reports mentions “unlocking what could be a major source of stable, long-term capital and higher returns at lower risk for savers and investors” one can only wonder where on earth they intend to stock the risks of the real economy? Are they thinking about some risk-sink similar to what is used in carbon sequestration? Under which backyard are those toxic deposits to be deposited?

The report speaks about the importance for financial institutions and regulators to have access to better information about risks, like “more granular and timely information from market participants” and “standardized rating systems”. That is indeed important, but the problem is that when both financial institutions make use of the same information simultaneously, as they do now, the banks in the interest rates and amounts of exposure, and the regulators in the capital requirements, then the whole system overdoses on that information, and crashes.

And blithely ignoring what is most constraining the access to bank credit of “The Risky”, the “constrained borrowers”, like large investments projects, infrastructure and SMEs, the report suggests that their needs should be taken care by a full range of new “public-private lending institutions and innovations funds, infrastructure banks, small-business lending programs and peer to peer lending and investing platforms”, as “this can increase access to capital for underserved sectors”. In other words it says: “Keep those filthy “risky” away from our banks, these belong to the AAAristocracy.

Really, is that the way we want to go? Is that the way we the Western World became prosperous? No way Jose! God make us daring!

Sir, McKinsey seems to have been captured by the same groupthink that has captured the Basel Committee and the Financial Stability Board, and some other regulators and experts. And that groupthink, sadly, has our real economies stalling and falling, gasping for that oxygen that risk-taking signifies.