Concerns of a Harvard don
Cheong Suk Wai interviewed Harvard business administration professor Robert Pozen on his take of the world financial system. The professor was an advisor to George Bush and also chairman of MFS Investment Management, a mutual fund of US$200 billion in assets. The professor came under criticism for recommending that Fannie Mae and Freddy Mac ‘be given a good shake up’. When asked by Suk Wai on ‘What should we be focusing on to prevent, or at least anticipate, future financial fallouts’, these are his replies. 1. When there are very high levels of leverage in the system, that means everyone is running for the exit at the same time.(Spelt derivatives) 2. When you have foreign money supporting a real estate boom, that creates fragility because such money is always hotter than local money. (Be prepare for a quick cash out and a run on the property market) 3. Mismatches between assets and liabilities: If your financing is highly dependent on short term financing against long term assets, you’re vulnerable to liquidity crises. (Careful when taking big loans on properties and depending on salaries to pay) 4. Beware of financial innovations that grow extremely rapidly without proper supervision.(Spelt property bubbles, derivatives, CDOs, toxic products) 5. If you have fixed exchange rate, lots of pressure will build up to make it disintegrate in a short time as opposed to a flexible exchange rate, which goes up and down. The professor also commented on the need for truly independent and professional directors and that at most one should sit in 3 boards to be effective. The concerns of the professor are nothing new as the professionals, govt and academics are all privy to the indiscretions and the flaws existing in the current system. Our little system in paradise is also exposed to the same flaws and risks and it is just a matter of time before they explode in our faces. Do we have the political will and ethical responsibility to clean up the mess before it is too big to do anything about it? The only thing I disagree with the professor is point 5 on fixed exchange rate. The pressure building up is caused by the manipulation of speculative funds and govts like the US who are thrashing it to hide the weaknesses in their own system. A fixed exchange rate under the present condition is much safer and stable and would not be attacked by unscrupulous big funds. It also allows govts to manage the exchange rates purposefully and orderly.