Financial & Economic Blog

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It looks like we'll have to wait another few months to see if the economy is actually going to decline or just continue to muddle along with practically no growth.

What is the prognosis for the economy?
There are three fairly obvious possibilities:
Firstly, some people think that most of the problems for the financial services have happened and so are we are near to a turnaround. This sentiment is evidenced by the current vacillating of the share markets.
Secondly, other people think that the financial services have precipitated a wider economic recession and now that will take over to drag down the economy into a deeper hole. As the economy is enabled by financial services that could certainly be true and consumer spending is changing, showing increasingly parsimonious spending patterns.
Thirdly, others believe that recent activities by central banks have staved off a potentially deepening crisis. Certainly, making more credit available to banks reduces the risks of further banking problems, which would pique the lack of confidence. However, has enough been done and are there other techniques that could be employed.

Which View is Correct?
The fact that the financial services sector was jointly at the heart of creating the problems and the fact that they are vacillating now over its depth means that they don’t have a clear vision of if we are at an economic low point, even though they are the ‘experts’. Central bankers seem to be at least as much in the dark as the financial services gurus, because they didn’t see the problems coming either. They have made increasingly strong efforts to avert a cascading of the problems into the wider economy and this indicates they too don’t know how far this will go. A preponderance of others have commented that they expect things to get worse before they get better. It would seem that the ‘clever money’ would be on a deepening of the current macro economic problems, exasperated by falling property prices along with rising food and fuel prices.
The full effects of problems on this scale do take time to ripple through an economy, so it is likely that even if we have reached the nadir of the original problems for the bankers, they may yet be revisited by their wider effects. So although none seems to have a full understanding of this problem plexus, we can expect the shockwave to ripple through the economy for some time. An important question is: will the after shock feed back to the financials strongly enough to initiate a new vanguard of problems.
My own view is that this crisis will deepen. Lending is constricted by tightening positions in financial services leading to tighter loan conditions. Many people have become comfortable with living at the edge of financial solvency and have started to find their newly restricted position forces them to cutback hard. This pruning of expenditure will denude businesses at marginal operational viability, which in turn will feed costs to the economy through unemployment. Fortunately, the businesses that are least viable and able to ride out a slowdown will tend to be small and although there will be a constant flow of them, they will have less of a confidence damaging effect than mass employers making redundancies. Also, people love to buy stuff and have a short memory for problems. As soon as their positions stabilise they will be back with what credit they can get and there will be creditors with money to lend. Further, service dominated economies are quicker to respond to demand, so for example the US and UK economies should bounce quicker than manufacturing based economies. Therefore, although I expect things to worsen, I also expect that they will flip back quickly to growth. Financial stability and solvency are less of a concern for many today and that combined with faster and more free flowing information than ever will resolve to a faster turnaround in the economy. We will soon return to the consumer dream, not because I want it, or think it is a good idea, but because most people want it. Given the desire for something and the opportunity for others to make money from that desire, there will be a race to make sure they get it, as soon as possible.

What should central bankers do?
Firstly, they must restore confidence. Confidence is the most important factor for a healthy financial services sector and central banks have moved to improve it. So much of the economic success of a country now depends upon its financial services sector that it must be unencumbered. Therefore, improving the stability of financial institutions with government backed loans is a possible scheme. However, this tardy tactic is essentially printing money and hence inflationary. Central banks know that the excessive valuations placed on residential property must be normalised. Price growth has exceeded wage growth and that leads to a bubble that draws in a disproportionate percentage of overall income to service that debt. This is not good balance and balance, after confidence, is most important. The central bankers should be encouraging the rapid normalisation of this over valuation to quickly restore parity. Drawing out normalisation will only delay the return to a balanced growing economy and I am concerned that a government statement about preventing people from losing their homes could do just that. They have not detailed how they plan to do this and it could be empty rhetoric, but if not and they start to intervene at this point they could stifle recovery for some time. An interventional strategy would have been much better to prevent the bubble. Intervention now should be to encourage a property market decline.
Secondly, they must address the root causes of the original crisis. They are manifold, but two stand out as significant: Excessive speculation using residential property, especially by people who do not understand investment markets. A poor pension system which encourages people to look for other ‘stable’ savings vehicles, in this case property investment was used.

What can we do as individuals?
As a general strategy, buck the trend. Be a saver when all about are spending big. The best time to spend big is when everyone else is not, you get the best deals then. Particularly, you should be looking at the big things: buying a house or moving to a better one, buying shares and a nice car at a bargain price. So, property will soon be a much better deal, shares already are, but will probably become better still and slightly used luxury cars will soon be everywhere at great prices. Simple really, just difficult to do.

I have been quiet in the blog for a bit too long for my taste, and as April ends here in NYC (and it is a beautiful day here, BTW) I am sitting at my desk reflecting on a lot of things. That led me back to my blog editor, MarsEdit and this post.

A chapter is ending today for me and my team. BSG Alliance has become nGenera in the past week, and around the change in name is a refocusing of my team's work and some changes to our staffing. Friends and partners of mine are going in different directions. Some are staying with nGenera and are dedicated to taking the nGenera message to financial services. Others are moving on, and I hold out the hope and belief that we will continue to work together, but now as external collaborators instead of as internal partners. These changes have brought on this melancholy, and I'm sure the recent rains in NY (while much needed) did not help.

However, as I look forward to May I am very excited and energized about nGenera. The BSG Alliance I joined almost a year ago has transformed itself in more than just name. As nGenera we are truly something unique and new. We are no longer primarily a services company but rather a product company which collaborates with our customers to co-create their platform for business innovation. We have deep thoughtful research, and an incredible team led by Don Tapscott. We have strong capabilities in our nGen Talent, nGen Customer, and nGen Leadership product sets. We offer expertise on demand for our customers through our network of internal and external collaborators and partners. We have a collaboration platform that we leverage for foster innovation with our customers. We have specific industry focus for financial services, energy, and utilities. Finally, we have partners who bring their software to our customers through SaaS delivery via our innovation platform.

While as a blogger, I have no true idea who has interest in what I put out there, I have decided to rename and rededicate this blog today. I have changed the name from "Tom Steinthal's Financial Services IT Blog" to "Innovation and Collaboration in Financial Services". Further, I will use this forum to discuss issues related to nGen's in Financial Services. Thank you for joining me on this journey.

Read full story for latest details.

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Stocks futures edged lower early Wednesday as investors awaited a rate decision from the Federal Reserve and a flurry of corporate earnings.

Stocks futures edged lower early Wednesday as investors awaited a rate decision from the Federal Reserve and a flurry of corporate earnings and economic reports.

Read full story for latest details.

Read full story for latest details.