Another crisis is more than just possible
Morality and business ethics were on the agenda at the closing session of the Qfinance global debates on the future of finance held in Doha.
Qfinance is a comprehensive website and reference work on finance and the future of finance, published by Bloomsbury Publishing and the Qatar Financial Center, which was officially launched in the Gulf emirate with a series of events last week.
Following a lively debate, delegates at the CNBC debate on the future of finance (“Same rules, same game?”) voted on four possible outcomes of the banking and financial crisis. Each proposition was advanced by a financial practitioner, adviser, or scholar.
In the end, the winning proposition of the debate, which was anchored by CNBC presenter Geoff Cutmore, was “There will be another crisis.” This outcome may seem unduly negative or pessimistic but given the government, regulatory and industry response to the crisis so far, the audience felt it was realistic. It’s also worth noting that none of the speakers at the event specified exactly when they expect this future disaster to occur.
In a heart-felt plea for a return to basics, Egyptian-born academic Dr Hatem El-Karanshawy, founding dean of the Qatar Faculty of Islamic Studies, said that finance is going to have to return to being a servant of the real economy rather acting like its master.
He added that unjustifiably-high returns, which until recently were available from convoluted and opaque financial instruments, meant that parts of the real economy were being starved of much-needed investment by the very industry that was supposed to be supporting it.
There will be another crisis says Hatem El-Karanshawy
El-Karanshawy, former professor of finance at the American University in Cairo and ex-director of the Central Bank of Egypt, said banking and finance had over-dosed on sophistication and become detached from its primary function — to facilitate productivity improvements in the real economy. Unless it remembers what it is there for, he warned that there are bound to be future bubbles and there will be another crisis.
El-Karanshawy was criticized for “sounding like an advocate for 1930s or 1960s central planning” by Sir John Stuttard, vice-chairman of “big four” accountancy firm PricewaterhouseCoopers, who was one of CNBC’s “VIP cross-examiners” at the debate. Yet according to a show of hands at the end of the debate in Doha, El-Karanshawy’s arguments carried the day.
Other possible outcomes put forward at the debate included: “There will be arbitrage” (proposed by former SEC commissioner Paul Atkins), “There will be acceleration East” (advanced by Philippa ‘Pippa’ Malmgren, president of advisory firm Canonbury Group), and “There will be a return to old values” (proposed by Robert Gray, chairman of debt finance at HSBC).
Malmgreen, a former economic adviser to President George W. Bush, said the cost of bank bailouts in Western economies is going to mean a rising tax burden in these places. She predicted capital and financial expertise will, as a result, migrate to lower tax regimes in the East, bringing exciting growth opportunities for financial centres in Singapore, Qatar, and elsewhere in Asia.
PwC’s Stuttard agreed with her thesis, but said he did not believe tax would be the driver. He said: “The real driver for financial services is centres of excellence and access to talent.”
Stuttard then added: “I applaud what Qatar is doing with Qfinance. These sorts of initiatives enable you to build a knowledge base from which you can build a centre of excellence and that’s where people will go for advice.” (For more on the theme of how the crisis will lead to a shift in economic and financial power from west to east, it’s worth reading the Qfinance Viewpoint written by commodities investor Jim Rogers.)
In his contribution, Atkins implied that the G20 is being naive in striving for “stability über alles.” He said: “You cannot outlaw fear, greed, and other emotions, and bureaucrats can never outsmart the marketplace.” Or indeed another crisis.
HSBC’s Gray agreed with El-Karanshawy that banks need to rediscover their former role of being “servants of the economy.”
In his view, they are already moving in the right direction, recognising that blindly following the herd into high-yielding asset classes and abusing leverage can be treacherous and once again realising it pays to “know their customers.”
Gray countered suggestions that a return to old-fashioned values would make innovation impossible, arguing that innovation will still happen but is more likely to have a social and economic purpose. But he said it would be impossible to return to a Glass-Steagall-esque division between investment and retail banking, as advocated by the UK economic thinker John Kay. “I’m afraid the genie is out of the bottle on that one.” (See: Separate the utilities from the casino.)
George Shehadeh, chief executive of Qatar-based investment bank Amwal — another of the VIP cross-examiners — rounded off the another crisis debate by saying that financial institutions in the Gulf are to an extent fortunate. This is because, in his view, they never really lost sight of old-fashioned values, and resisted the urge to get into the churning exotic derivatives, even at the height of the boom.
He said this means “They do not have to change their ways too much.”
The debate will be broadcast on CNBC from 12 October 2009.
This blog was written for Qfinance on 1 October 2009. Written by Ian Fraser as part of the “live blogging” of the Qfinance launch events at the Ritz-Carlton Doha.
Qfinance – The Ultimate Resource, a comprehensive website and reference work on finance and the future of finance published by Bloomsbury Publishing and the Qatar Financial Center Authority, was launched in Doha on 29 September 2009.