Hockey moms and capital markets
October 7, 2008
Why do Asian investors depend on American capital markets? Given the near breakdown of key sectors of the American market, one might expect Asians to bring their money home. Quite the opposite has happened: Asian currencies have fallen sharply against the American dollar.
On my desk is a draft paper by a prominent Asian politician, sent to me privately for comment. It calls on Asians to take charge of their own financial destiny and invest their money in Asian markets rather than into the maelstrom of American markets. Privately, I advised the leader in question not to publish it. It will do no good. Asian capital markets cannot absorb Asia's savings.
What does America have that Asia doesn't have? The answer is, Sarah Palin - not Sarah Palin the vice presidential candidate, but Sarah Palin the "hockey mom" turned small-town mayor and reforming Alaska governor. All the PhDs and MBAs in the world can't make a capital market work, but ordinary people like Sarah Palin can. Laws depend on the will of the people to enforce them. It is the initiative of ordinary people that makes America's political system the world's most reliable.
America is the heir to a long tradition of Anglo-Saxon law that began with jury trial and the Magna Carta and continued through the English Revolution of the 17th century and the American Revolution of the 18th. Ordinary people like Palin are the bearers of this tradition.
Outside of the United States, the young governor of Alaska has become a figure of ridicule - someone who did not own a passport until last year and who quaintly believes that her state's proximity to Russia gives her insights on foreign policy. How, my European friends ask, was it possible for such an an ignorant bumpkin to become a candidate for America's second-highest office? They don't understand America.
Provincial America depends on the initiative of ordinary people to get through the day. America has something like an Education Ministry, but it has little money to dispense. Americans pay for most of their school costs out of local taxes, and levy those taxes on themselves. In small towns, many public agencies, including fire protection and emergency medical assistance, depend almost entirely on volunteers. People who tax themselves, and give their own time and money for services on which communities depend, are not easily cowed by the federal government or by large corporations.
Palin's career may look like a poor imitation of a Preston Sturges script, but films such as Hail the Conquering Hero (1944) struck a chord with Americans precisely because the character type of the ordinary man or woman who takes on entrenched interests is instantly recognizable in America.
Palin really did take on the American oil companies and turn the scoundrels out of office. Her predecessor, Frank Murkowski, appointed her to the state oil and gas commission in the apparent belief that a small-town mayor and former beauty queen would rubber-stamp corrupt deals between the state and the Big Oil companies.
Shades of Jimmy Stewart in Mr Smith Goes to Washington, Palin ran against Murkowski and took his job. That does not qualify her to be president, to be sure, but it does show cunning and strength of character. Palin is qualified for high office by temperament if not by education, and is preferable to candidates whose education has made no improvement on their characters.
The fact that ordinary people safeguard their rights and have the means to challenge established interests does not exclude the possibility of fraud on a grand scale.
Asian investors were cheated by a conspiracy of the financial industry and the ratings agencies, which sold them ostensibly low-risk securities that turned out to be toxic. The just-approved US$700 billion support package for American banks sets America back to a regime of oligarchy, according to New York Times columnist David Brooks. Despite this fraud and its attendant humiliation, and despite the deterioration of governance in American markets, Asian investors are putting more rather than less money into America, judging from the decline of Asian currencies against the dollar in the course of the crisis.
One doesn't see demonstrations by wronged peasants in the small towns of America. There never were peasants - American farmers always were entrepreneurs - and the locals avenge injury by taking over their local governments, which have sufficient authority to make a difference. At the capillary level, school boards, the Parent Teachers' Association, self-administered religious organizations and volunteer organizations incubate a political class entirely different from anything to be found in Asia. There are tens of thousands of Sarah Palins lurking in the minor leagues of American politics, and they are the guarantors of market probity.
"Hockey Moms," to be sure, may not be the optimal promoters of America's future. One for one, the "Piano Moms" of China are cleverer people and produce smarter offspring. China's 30 million students of classical piano are one of the two great popular movements in the world today: the other is the House Church movement in Chinese Christianity. Children who play hockey will grow up to get coffee for children who study piano. As a pool of talent, nothing compares with the educated segment of the East Asian population that has embraced and mastered Western culture. Nonetheless, Asia still can't invest its own money at home, and seems farther than ever from that objective.
It is true that Asian economies depend on American consumers and an American recession is bad for Asian currencies. But why don't Asians consume what they produce at home? The trouble is that rich Asians don't lend to poor Asians in their own countries. Capital markets don't work in the developing world because it is too easy to steal money. Subprime mortgages in the US have suffered from poor documentation. What kind of documentation does one encounter in countries where everyone from the clerk at the records office to the secretary who hands you a form requires a small bribe? America is litigious to a fault, but its courts are fair and hard to corrupt.
Asians are reluctant to lend money to each other under the circumstances; they would rather lend money in places where a hockey mom can get involved in local politics and, on encountering graft and corruption, run a successful campaign to turn the scoundrels out. You do not need PhDs and MBAs for that. You need ordinary people who care sufficiently about the places in which they live to take control of their own towns and states when required. And, yes, it doesn't hurt if they own guns. Popular gun ownership places a limit on the abuse of state power.
Proposals to expand Asian financial markets have been circulating for 20 years. In 1996, the old print edition of Asia Times (which ceased operations during the 1997 financial crisis) published an excellent little booklet on the subject of Asian fixed income markets, sponsored by Lehman Brothers, which also has ceased operations. The East Asia Pacific central banks launched flagship local currency bond funds in 2003 and 2004 with considerable fanfare.
Several months ago, the Asian Development Bank (ADB) reported, "With the credit squeeze in the United States imposing limits on many borrowers' access to the market, some foreign companies are beginning to issue bonds within the Asia region ... in February 2008, Lehman Brothers issued a S$250 million [US$171 million) five-year bond. It is the largest foreign issue in the Singapore market to date." Lending money to the now-defunct Lehman Brothers was the one capital markets coup the ADB had to brag about in early 2008.
Asian capital markets never lost their baby teeth. By way of comparison, US fixed income markets at the end of 2007 had $30.146 trillion outstanding, or 220% of gross domestic product (GDP). East Asia's fixed income markets, reports the Asian Development Bank, were only 46% of GDP. Asia's fixed income markets are a quarter as America's relative to GDP. That is why Asia's retirement money must look for a home overseas.
Perhaps America's fixed income markets expanded too fast. Mortgage-backed securities, for example, jumped from $2.36 trillion to $7.27 trillion during the decade through 2007, while Treasury debt only rose from $3.66 billion to $4.86 trillion. More than $2 trillion of the mortgage expansion occurred in the subprime or "alternative documentation" categories, which have lost roughly half their market value in the past 15 months.
The trouble, as I argued in May, is that the sausages - the derivative securities created out of the inedible scraps of the mortgage market - were subject to monstrously large demand from a world of aging savers (see The monster and the sausages, Asia Times Online, May 20, 2008).
This will only get worse. Twenty-eight percent of China's population falls in the age cohort of 39-64 years, when individuals must put away most of their retirement savings. By 2025, the proportion will rise to 35%. (By contrast, America has 32% of its population in the 39-64 cohort today, but it will fall to 30% by 2025).