Don Russell, the global investment strategist of BNY Mellon Asset Management, has called for an end to the current investment ratings model while also warning against the potential for risk taking by Australian banks.
Russell, who was speaking at the Financial Planning Association national conference, called for the model of ratings agencies to change, claiming companies should no longer be allowed to pay for the ratings given to their products.
He also commented on the banking guarantee, which he said was necessary to give breathing space to the economy and prevent a freezing of credit by the big banks. He added, however, that the Government must prevent entrenching the distortion that banks could continue to take excessive risk because they believed they would always be covered by the bank guarantee.
Russell said investor fear is at record levels when compared with previous market volatility, even greater than during the 1930s stock market crash and depression.
Bubbles, or a boom and bust cycle, were almost part of the nature of economics, with a continuing cycle of “creative destruction” being espoused by certain economists, Russell said. Therefore, promising a boom and bust would not re-occur is futile. However, it is clear that the level of excessive gearing, and the sudden freezing of previously cheap credit, had affected this particular cycle more than others, affecting the world banking system and leading to fears the system may collapse, he said.
In the US, the level of leverage in investment banks became too high to control, with Bear Stearns famously being leveraged 33:1, and expanding credit default swaps compounded the problem, rising to a “crescendo” in September.
Russell also noted the failure of the experiment of self-regulation, once backed by Alan Greenspan, as a contributor to the economic crisis, and suggested there was a role for public scrutiny in the regulation sphere in the future.
While the state of the world economy would continue to worsen in the coming year, people were still talking about real growth in future years, reflecting optimism about the economy, Russell said. In previous boom and bust cycles, economies became shaky, and that then affected the financial sector. However, the current situation was the reverse, with the financial sector affecting a strong economy. Once the financial crisis had passed, the fundamental strengths of the economy would reassert itself, returning the economy to growth, Russell said.
