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 think the
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,
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 -
China’s alone are greater than that, with
Asian total reserves about $7tn dollars, and a global figure
closer to $10trn.
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
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
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
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 years because,
"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 perspective.
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
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
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 funded?’
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.