HR Blog

Weblog Thierry Ternier, CEO Keytrade

The six shocks Geert Noels talks about in his book ‘Econoshock’ paint a clear picture of where we stand now and where we are going. I believe that the demographic changes Noels talks about are the most important factor: the upside-down age pyramid and our ageing population; apart from Asia and Japan, where the situation is reversed. This creates several huge global imbalances about which much more ink will flow and for which we must be prepared. Unfortunately we lack a sense of urgency. Politicians are elected for four years and never look beyond their term of office. It also takes a lot of courage to take drastic measures in this area. These issues cannot be resolved on a national basis – a European approach at least is needed. So, demographics will be the major issue for the next ten years.
Within my own sector, I have been struck by the many events associated with the financial crisis, which I see as an evolution rather than a real shock. A new form of capitalism will emerge once drastic intervention has taken place. The concept of capitalism as it now stands – based purely on the pursuit of fast profits – will have to be demolished. The enormous power of the banks will have to be curtailed, as will the credit culture, hedge funds,
excessively high salaries and mega-bonuses, which are often not linked to true long-term wealth creation. Everyone in the financial world should have seen this coming, but no one did. We didn't think this endless money merry-go-round would ever end.
The crisis was probably caused by greed, which is part of human nature, and the situation normally recurs sooner or later, when we have sorted things out a bit. The economy operates in cycles and people soon forget.

So-called 'toxic products' are rightly being blamed as one of the main culprits. To understand why, we need to know 2 things: firstly, toxic products arose at a time when interest rates were historically
low. Institutional investors such as insurance companies and pension funds have to pay their policyholders a minimum return each year, depending on actual market interest rates. So, when market rates are very low, these institutional investors are constantly looking for higher returns than risk-free market rates. Toxic products such as CDOs and ABSs offer the answer: these products combined high return (as much as 2 or 3 % higher than market rates) with a very high degree of security. In fact, many of these products were given a highly coveted AAA rating by rating agencies. Due to this rating, these products were considered to be safer than Belgian government bonds, for example. So, it was not surprising that institutional investors almost fought to invest in these securities. It is downright unbelievable that all these supposedly sophisticated investors cast aside one of the most elementary principles of economics (more return can only come through more risk).
Secondly, these products were designed by engineers and academics, not by bankers. They arrived at certain results that seemed phenomenal at first sight. These products were so complex that no one understood them properly, apart from those who designed them. Then you get a situation where people don't dare admit that they don't understand. That is only human. It's a fantastic product, designed by a leading academic, the rating agency have given it a high rating, so it looked right ... Or so it seemed, as everyone came a cropper. We discovered we shouldn't trust over-complicated formulae developed by leading academics 10 years ago when the 'successful' hedge fund LTCM went under when an external factor (the Ruble crisis) suddenly invalidated the formulae. Nevertheless, two Nobel Prize winners were in charge of LTCM.
Economists, whom you can hardly call fools. So, the main thing we learn is that we never learn. 'Keep it simple' is the message, don't buy or sell anything you don't understand. I firmly believe that you should aim for simplicity in all aspects of running a business. The structure of some businesses is like a tangled mess that it is impossible
to make head or tail of. I once read an interview with the CEO of a major Belgian bank who said that he spent half his time signing documents. When does a man like that deal with his core business?
Banks will have to go back to basics for a while: just taking in deposits and granting loans, without engaging in blind speculation. But within five years it will probably start again. After all, it's only human nature.
 

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