For Global Investor/isf 's 25th anniversary, senior
figures who have worked in the financial sector for at least a
quarter of century are giving their views on key developments
over this period. First up is State Street Global Advisors,
John Nugee. Now a managing director at the firm, and head of
its official institutions group, his career has included
high-level positions at the Bank of England and The Hong Kong
Monetary Authority, giving him a unique perspective on the
global economy's last 25 years.
Global Investor/isf: What has been the most
significant market crash of the last 25 years?
John Nugee: It's not the most obvious answer but I
Asian financial crisis of 1997/98 is the most important
market fall in that time, due to the impact the IMF's harsh
bailout terms had on subsequent economic policy in the
region. When the Asian countries faced challenges they
turned to the IMF for help on the basis that it's the common
insurers of countries and central banks. The IMF responded with
terms which were harsh to the extent of being unpalatable,
causing those Asian states to say, 'if that's the price of
common insurance, we'll self-insure'.
They did this by
building up levels of foreign reserves beyond a level the world
has ever seen before. It's worth remembering in 1998 total
central bank reserves were about $1.3tn - today,
China's alone are greater than that, with Asian total
reserves about $7tn dollars, and a global figure closer to
This has been achieved by managing their currencies, and
implementing a strong, export-driven, mercantilist, national
economic policy, leading to ongoing surpluses, global
imbalances, and the great consumer explosion of debt which we
now dealing with.
So Bernanke was right that the recent crisis was a
result of some
countries saving too much?
I don't agree 100% with Bernanke that it is the savings
glut which has led to the consumer crisis in the indebted West,
but the 1997/98 financial crisis was a seminal moment for Asian
states, leading them down a path which created the current
global trade imbalance. This asymmetry can't be cannot be
brought under control when the surplus countries don't appear
to be interested in reducing their surpluses.
The problem is debtor currencies have natural constraints, both
moral and from the market, against borrowing too much - but
there are no constraints against saving too much.
You would assume as these surplus countries get richer it will
create a more consumerist society but this is very long-term
process. There is no short-term lever that either world
opinion, or markets, can use to dissuade a country from ramping
its surplus any higher.
Would the London market have turned into a financial
backwater if it hadn't been for the Big Bang in 1986?
London's success as an international financial centre is not
solely due to the Big
Bang and it wouldn't necessarily have became a complete
backwater had we not done something. But it would certainly be
less vibrant and smaller.
There are three things that can kill a financial centre's
ambitions to become international: if it's too bureaucratic, if
it's very idiosyncratic, and if it's too domestically focussed.
London is none of those things - but contrast it with Tokyo.
It's a huge financial centre, the Japanese economy is bigger
than the UK's, it stands alone as the leading economy of Asia
and yet it is clearly not an international financial
centre. It's too bureaucratic and with such immense
domestic potential it doesn't need to look outside.
Shanghai may well find unless it address these three
things its ambitions will take longer to be fulfilled they
it might hope.
Was Paul Volcker right when he said the ATM was the
banking sector's only contribution to society in the past 25
"at least it was useful"?
Clearly he said that for effect - but I think he is
right in the sense that the banking sector needs to remember
it's a service industry, and one of the things to emerge out of
the crisis is that it had lost sight of this. Things were
done in financial engineering on the basis of, 'if it can be
done, it should be done'. But sometimes it's important to
ask, 'does anyone actually benefit from this?'
And in this context, if you look around at what the banking
industry has done in recent years the ATM is something that has
really revolutionised the man in the street's life from his
That doesn't mean, however, it is the only useful innovation
from the banking sector.
The man in the street doesn't understand that mortgages are
easier to obtain - or at least were easier to obtain in the
early 2000s, than previously. One remembers mortgage rationing,
one remembers the mortgage queue. Even though the banking
system isn't still working properly mortgages are more
available than they were 25 years ago because of the greater
innovation in the financial sector.
So to say nothing else has been of any use is clearly an
exaggeration, however, the statement hones in on the idea
that the banking sector is a service sector, and it must
Has the recent crisis ended the discussion over whether
there should be a separation of monetary and supervisory
It looks as though the experiment of separating the FSA
didn't work. But you have to be careful when you say
the FSA didn't work, because what you are actually saying is,
'had the Bank of England been in charge throughout then the UK
system would not have got into this crisis'.
I think that is a strong statement that's not possible to make.
You can have good regulation done in separate bodies and bad
regulation done in combined bodies.
Is the growth of leverage the most important financial
development of the last 25 years?
It's an answer that will be easier to give in five years time
because leverage throughout the industry is being rapidly
reduced. Recapitalising the banking sector is simply another
way of saying it's reducing its leverage. But it's clear
that leverage in all forms - by banks, by investors, and
financial instruments - certainly enabled the financial sector
to grow more rapidly than the economy that it served.
Should the regulators have intervened earlier?
I don't think you want the regulator to say, 'you are growing
too fast, don't'. I think it is entitled to ask, 'is there an
end user demand for what you're doing, is it well
I do wonder if historians in 50 or 100 years time will look
back on the period form 1998 to 2008 and ask, 'did nobody
notice the real economy was growing at 5% nominal, and the
financial sector which supported it was growing at 15%
nominal?' It's as if restaurants were growing at three times
the rate of people eating at them.