Hedge Funds, Historians Are Winners of Recession: Matthew Lynn
2009-09-21 22:01:00.0 GMT
Commentary by Matthew Lynn
Sept. 22 (Bloomberg) -- That’s it, then. The global
recession is over. At least that’s what Federal Reserve Chairman
Ben Bernanke says.
Answering questions last week, the world’s most powerful
central banker said the U.S. recession was “very likely over at
this point.” Much the same story is being played out in the
rest of the world, with the German, French and even U.K.
economies gradually recovering from their own slumps.
And yet the biggest shock to the global financial system
since the 1930s won’t just leave us with a legacy of lost output
and higher unemployment. The recession will reshape the way we
think about the economy for a generation. Over time, we will see
that the credit crunch caused shifts of power and influence
between industries, professions and countries.
So who are the winners and losers from the recession? Here
are five places to start: Historians have triumphed over
economists; hedge funds over bankers; Germany over Britain; the
right over the left; and the frugal over the spendthrift.
One: Historians won out over economists. No single group of
professionals took a worse battering during the economic slump
than economists. Not even bankers. A science that has
disappeared up a mathematical dead end couldn’t see the crisis
coming, couldn’t explain it to anyone once it broke, and
couldn’t come up with a way forward after it happened.
Lessons of History
Instead, people turned to lessons of history to make sense
of it all. Niall Ferguson, a history professor at Harvard
University in Cambridge, Massachusetts, is now listened to on
economic issues. Likewise Nassim Taleb, a professor of risk
engineering whose book “The Black Swan” dipped into the
history of rare, high-impact events to describe how we didn’t
see this storm brewing. At this rate, investment banks will be
building small, dusty libraries in the basement, and filling
them with in-house historians. It will be a long time before
economists are listened to again.
Two: Hedge funds over bankers. If Lehman Brothers Holdings
Inc. had a dollar for every time someone warned that hedge funds
would bring the financial system to its knees, the bank wouldn’t
have gone bust. While hedge funds took plenty of criticism, and
are still facing calls or more regulation, the simple fact
remains that they didn’t blow up the way many predicted. It was
the mainstream banks that caused the crisis. That will influence
regulators and investors for many years. Whatever people say
now, it’s the banks that will face more scrutiny, not hedge
funds. The result? The lightly regulated, cash-rich hedge funds
will grow in importance, while the tightly controlled, capital-
constrained banks stagnate.
Baseless Fears
Three: Germany over Britain. For much of the past decade,
the fast-growing U.K. was gaining on Germany for the role of
Europe’s most influential nation. Almost 20 years after
reunification, fears of a resurgent Germany turned out to be
baseless. It was Britain, with its financial center, that was
emerging as the leading European nation. The credit crunch will
throw that into reverse. The U.K. is condemned to a decade of
struggling with a fiscal mess, while Germany should bounce back
quickly from the recession with an export-led recovery.
Four: The right over the left. The credit crunch was
probably the perfect moment for left-wing, anti-capitalist and
anti-globalization movements to make their mark. After all, if
this wasn’t a failure of capitalism, it is hard to imagine what
might be. Vladimir Lenin would have led the overthrow of a dozen
governments presented with an opportunity like this. But his
heirs on the left failed to advance any cogent arguments. Nor
did they develop any alternatives to free-market, finance-led
capitalism. The plate was empty, but the anti-globalization
movement failed to step up to it.
Running on Empty
The result? The left looks like it is running on empty
tanks. Center-right parties will remain in power, as in Germany
or France, or recapture it, as in Britain. And it will stay that
way for a long time.
Five: Frugality over extravagance: The nub of the credit
crunch was an attempt to load more and more debt onto people --
mainly in the U.S. and U.K. -- whose real wages were stagnant or
growing very modestly. That will be thrown into reverse, and for
the next decade, people will be paying down debt rather than
accumulating it. House prices will be subdued as finance remains
scarce, and household budgets will be tight. The result will be
that companies will thrive if they offer value, drive down
costs, and make themselves the lowest-cost supplier. Anything
that smacks of luxury will suffer. Think about McDonald’s Corp.
triumphing over Starbucks Corp. -- and then multiply that effect
a thousand times over.
The Great Depression of the 1930s dominated the way people
thought about the economy for the next 50 years. The great
recession of 2008 and 2009 may not have such a long-lasting
impact. But in those five ways, it will dominate policy for at
least a decade.
(Matthew Lynn is a Bloomberg News columnist. The opinions
expressed are his own.)
