The Great Debate

Did the financial system blow up because it was built and largely operated by people with many of the characteristics of a mild form of autism called Asperger’s syndrome?

As explanations for the crisis go, it’s on the extreme side but forms an interesting counterpoint to the “blame the looting bankers” story line.

People with Asperger’s, a mild form of autism, are characterized by, among other things, a deficit of “theory of mind,” essentially the ability to understand that other people have different beliefs or knowledge than themselves. Nicholas Nassim Taleb, author of The Black Swan, has written that a lack of theory of mind left many in positions of responsibility without the ability to conceive of and guard against black swans, which are rare, high-impact and hard to predict events.

There were, after all, a remarkable number of people blaming “hundred-year storms” for the crisis, which was at least in substantial part caused by an over-reliance on risk management controls and models that proved to be far too narrow.

There was a love of data and a refusal to conceive of the data being not wrong, but incomplete, which led many to cling to their models of how the world was working even as it fell around them. Remember all of those reassurances that problems in subprime were “contained”?

- Don Drummond is Chief Economist at TD Bank Financial Group. The opinions expressed are his own. -

The Great Recession is over in North America.  But repair will be a slow work in progress and great risks remain.  Many of these risks are centred on policy matters.  The recession shook our understanding of some policy matters to the core, leaving more questions than answers.

The Great Recession produced deep output and employment losses in many countries, certainly including Britain and the U.S., but also an unprecedented degree of synchronization around the globe. 

-David Kuo is director at the Motley Fool. The opinions expressed are his own.-

If you thought 2009 was as bad as things will get, then think again: 2010 could be worse. It is likely to be a year of enforced austerity with both the government and households making obligatory cuts to their budgets.

High on the government’s agenda will be reducing the Budget deficit, if the UK is to avoid the embarrassment of having its sovereign debt rating cut by rating agencies. This will have a knock-on effect on households, which could see their disposable incomes slashed by hikes in both direct and indirect taxes.

There are two possible ways for the government to reduce the Budget deficit. The first is to increase tax revenues and the second will be to slash expenditure – both of which will have an adverse impact on the economy. There is a third, which is to raise revenue through the sale of state assets. These may include the Royal Mint, the nations stake in part-nationalised banks, and anything else the Chancellor might find lurking at the back of the wardrobe.

- Jane Foley is research director at Forex.com. The opinions expressed are her own. -

At the height of the financial crisis few argued against the need for a huge fiscal and monetary policy response.  As a result the global economy has moved away from the precipice.  For many governments 2010 will bring a different kind of precipice, this will be the year in which many electorates will be made to start paying for their governments’ huge fiscal binges.

Certain countries will enter this process severely disadvantaged.  Earlier this year UK debt was singled out by S&P for a possible downgrade.  This week Moody’s commented that UK debt along with that of the US will test the boundaries of its top AAA rating.

Amid the turmoil of the 2008 financial crisis a myriad of events unfolded that the general public knew nothing about, writes New York Times reporter Andrew Ross Sorkin in a new book titled "Too Big to Fail."

Wall Street fell from the dizzying heights of good fortune to calamity in a matter of months. To a large degree it's still to early to tell whether financiers and politicians involved made the right choices.

"At its core 'Too Big to Fail' is a chronicle of failure -- a failure that brought the world to its knees and raised questions about the very nature of capitalism," writes Sorkin in his behind-the-scenes account.

British economist and author John Kay argues in "Narrow Banking: the reform of banking legislation" that the financial services industry should be restructured to ensure that regulation serves the interests of the public.

"A competitive marketplace is one in which well run businesses earn profits through domestic and international competition, and badly run businesses go to the wall," he says.

"That is the process by which the market system promotes innovation and economic progress, and suppression of that process damages innovation and economic progress."

(James Saft is a Reuters columnist. The opinions expressed are his own)

There are encouraging signs that shareholders are becoming more assertive in defending their interests.

The Financial Times reported on Monday that some of Britain’s largest institutional shareholders – including Standard Life, Legal & General and M&G – are working on a plan to bypass investment banks by creating a club to underwrite new issues of equity by small and medium-sized British companies, a move that could save hugely on fees.

What, you may wonder, took them so long?

Second only to taxpayers, investors have been the great patsies of the financial crisis, paying massive costs to a financial services industry which has, to put it mildly, not served them well.

Problems sparked by the financial crisis have not gone away, but have been transferred to the public sector, economist Roger Bootle posits in his new book.In "The Trouble With Markets: Saving Capitalism from Itself" Bootle argues that in large measure, the underlying cause of the financial crisis was the result of an idea that markets work, and that governments do not."Despite the trillions of dollars lost, and despite the worries of millions of people, more than this -- much, much more -- is at stake," Bootle writes. "For this crisis has delivered the killer blow to an idea that has underpinned the structure of society, framed the political debate, and moulded international relations for decades."Bootle, director of Capital Economics and an economic advisor to business accountancy firm Deloitte, reflects on the pitfalls of the corporate system and puts forth his ideas on the future of capitalism.He discussed his book and his economic predictions with Reuters at his London office.

It just won’t go away, this needling worry about the U.S. dollar losing its coveted top-dog status.

No matter that there are plenty of reasonable arguments to support the dollar as the world reserve currency — namely there’s just no alternative — for perhaps decades to come.

Yet, in a world where once-rock-solid assumptions quickly turn to dust, investors should keep an eye on the dollar since changing perceptions are chipping away at its cherished status as currency to the world.

- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -

Brendan Wood International tracks the competitive position of investment bankers in global and regional markets. It also compiles the confidence rankings of hundreds of global shareholders in corporate investments, including those in the world’s leading banks. As of mid-2009, the Brendan Wood Investor Panel found a mixture of sharp criticism, but also some occasional strong praise for these “newly refurbished” financial behemoths.

First, the bad news: while all the banks have by now somewhat improved their situation from what it was earlier in the year – repaying $68 billion in government assistance, raising new equity, and carrying out a number of boardroom shuffles – their improving news and modest profit reports have not led to any total absolution from the Brendan Wood Panel for the worst falls from grace when the credit crisis exploded.