Global Agenda: Simple as alpha beta

If all goes well, the imbalances in the global economy will sort themselves out gently.

By PINCHAS LANDAU
If all goes well, the imbalances in the global economy will sort themselves out gently, as demand in Europe and Japan rises, growth in China and other industrializing countries in Asia becomes more domestically led instead of export-led, and the American economy cools off without slumping into recession. In this wonderful scenario, everybody adjusts gradually, there are no nasty crises in the financial markets, hedge funds don't blow up and big banks don't go bust. This outcome is not impossible, of course, it's just unlikely, because things rarely develop smoothly, gradually and gently - rather the opposite. If there are shocks and crises, then unpleasant things could happen to specific companies and financial institutions, to national economies and to investors around the increasingly interlinked world of global asset management. So what's news? Nothing much, except the rising level of disbelief among even mainstream economists as to the chances of the current low-risk and low-volatility environment in financial markets persisting. Few jobs are more Establishment than that of Director of Research of the International Monetary Fund, so if the holder of this post, Raghuram G. Rajan, goes out of his way to express his concerns in a luncheon address to a conference organized by the Federal Reserve Bank of Chicago, it's as well to pay attention to what he has to say. The speech is available at the IMF site, but since it's long and represents one top-flight economist talking to a bunch of other economists, it's indigestible to anyone lacking full command of macro-economic jargon - as, indeed, it was intended to be. The dummy's summary of the speech boils down to this: yes, everything is hunky-dory right now and the big problems in the global economy could sort themselves out without a major disaster (see above). Why, then, do people like me (and you, the audience) feel so uncomfortable - increasingly so, over time? Basically, because we see critical issues being swept under the carpet, because they are so radioactive. For instance, the state of affairs where poor countries (China) save massively and send their money to rich countries (America) to enable the well-off to consume more is illogical and ultimately unsustainable. But that problem could be sorted out if we tried hard. Much more worrying is the dynamics of the global financial markets. These are very complex, but the net result is that the people who manage our money are steadily taking larger risks with it. If they knew what they were doing and why, this would be less bad, but in practice they are a bunch of sheep who follow each other and the latest fads - usually buying the wrong stuff at the wrong time, so that they miss the big gains but get saddled with the big risks. Not only is this dangerous and undesirable for us, but if and when there is a financial crisis in which some big institutions incur huge losses, this may trigger a political backlash against the whole structure of liberalized global markets, which have done so much to facilitate the strong growth in the global economy in recent years. America, in particular, is vulnerable to this relapse into financial isolationism, which would inevitably spread across the world. This is serious stuff from Mr. Rajan, by any standards, let alone the typically neutered mumblings of IMF officials. However, he goes further and says - almost in these words - that there is a real problem with the fees charged by the money managers. These people pretend they are producing "alpha" for their clients - industry jargon for the extra yield achieved by the skill, acumen and sheer genius of the entity managing the money - when, in fact, most of their so-called alpha is just "beta," namely the yield any monkey would get by investing in the markets, without any added value that might justify extra fees, let alone the profit sharing model employed by hedge funds. Indeed, kol hakavod to Rajan, he even refers to "greedy" managers, but he puts the G-word in inverted commas, to pretend that he is presenting the view - mistaken and distorted as we know it to be, wink, wink - of the general public or of populist politicians. Of course, it's much more pleasant to sit back and enjoy the year-end rally underway virtually around the world. But it's worth noting that concerns that were taboo in mainstream circles not long ago are now being voiced openly and in the nearest that IMF people can get to plain talk. landaup@netvision.net.il